The toughest part of retirement can often be the transition from diligent saver to savvy spender. That’s why on this episode, John shares financial strategies, mindset shifts and practical tips to help you embrace the thrill of spending in order to enjoy a more fulfilling retirement journey. (1:30) Plus, John breaks down exactly what’s going on with the rising wave of Nvidia and the stock market (8:21) before exploring the ins and outs of Medicare (including planning, timelines and common questions). (12:45)
Episode Notes:
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to he Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, I’ll discuss what in the world is going on with Nvidia and more importantly, the broad takeaways for you. We’ll talk Medicare and bonds and yeah, don’t worry, I’ll keep both of them interesting. I know you’re skeptical, but I promise it’s going to be good. Also, why the stock market is nothing like the casino as many contend. In fact, it is exactly the opposite. Now, join me as I help you rethink your money. Earlier this year I read a book titled Into Thin Air. This book was about an Everest climb where he himself, the author who is also a mountain climber, he survived, many of his fellow climbers did not, and it was an unbelievable book about courage and teamwork and accomplishment, and of course, great tragedy as well.
As a famous mountaineer once said, it’s not the mountain we conquer, but it’s ourselves. So much of all of our success is about pushing through and overcoming obstacles. The whole goal of these mountain climbers was to reach the summit, but here’s the thing, getting up the mountain is only half the battle. In fact, it’s less than half the battle because most people perish on their way down, not on the way up. Getting down the mountain safely requires a different set of skills. The same goes for our financial journey. Consider the way that you accumulate wealth. You take risks, you stay optimistic, you work hard, and most importantly, you save money. You spend less than you make, but what happens once you reach the peak?
Success then requires managing risks and spending money. Yeah, that’s right. Saving a whole bunch of money and then never touching it isn’t success in retirement. Here at Creative Planning, we’ve been helping families since 1987. We work with over 50,000 families across all 50 states in over 75 countries around the world. I personally have met with thousands of prospective clients and current clients, and I can tell you, you will be or are if you’re in retirement faced with an entirely different set of challenges, and the toughest pivot is to go from saving money for decades to spending, because increasing your net worth was basically the measuring stick of progress before, but in retirement, growing your net worth honestly might be a sign that you’re not spending and giving enough each year.
It’s not just the psychological challenges that are hard once we’re in that descent with our money. There are technical differences just like mountain climbing that you have to confront as well, and the biggest lies in the impact of volatility in down markets because during the accumulation stage, when the focus is on growing wealth and you are a buyer, volatility doesn’t hurt. In fact, you’re rooting for down markets all the way up until the moment you start selling. However, once you hit the summit and you enter that withdrawal phase of retirement, the exact opposite is true. You want high prices and volatility, that fluctuation of price can have a significant impact on your financial wellbeing.
This highlights the importance of having what I call a defined distribution plan. Your income plan must manage sequence of returns risk. Poor investment performance early in retirement can crush the longevity of your savings. Someone who retired in 2010 and then, had 10 plus years of mostly positive investment returns had a very different retirement projection than the person who had the exact same amount of money, was invested exactly the same, but simply happened to be 10 years older. They retired in the year 2000 and then, had the lost decade as it’s been dubbed for US large stocks. They weren’t dumber. That person’s strategy wasn’t worse, their timing was.
The key is simply creating a buffer from your stocks with more stable investments and those help you bridge any bad periods in the market, which by the way are going to come multiple times throughout your retirement. Think of yourself like Noah. You’re building this ark. It’s like, “Hey, if the world floods for 40 days, I need to have somewhere where I can be dry and my family can be okay and I don’t die.” Then eventually, the sun comes out, the rainbow appears. You step onto dry land. You don’t need to live in the boat for the rest of your life. You just have it there when needed, but thankfully, and here’s the rainbow if you will, every bear market has given way to a new bull market.
Up markets happen about three times as often as down markets when you look at calendar years and your odds of being positive over a 10-year period in a globally diversified portfolio are 98% since the 1940s. So in summer, you should expect to have to weather more than one storm during your withdrawal years and your plan’s going to need to account for that. If you are in retirement or you’re within 10 years or so of retirement and you don’t have a defined distribution plan, I want to make it simple for you to get that and have clarity around the potential for your retirement.
Why not give your wealth a second look by visiting creativeplanning.com/radio now, to schedule your visit with one of our local financial advisors just like myself. That’s creativeplanning.com/radio. What are some practical ways that you can spend freely once in retirement? I want to give you a few tips here because nothing is quite as discouraging as meeting with someone who has more than enough money and they tell me that they’d like to have the check to the morgue bounce ideally that they really want to spend this. That’s why they saved it, and because of fear and not really having a great plan, they end up dying with a bunch of money.
So first things first, create a concrete spending plan. Now, what I’m not talking about is a budget. Okay, just figure out what you want to spend and then, let’s work backward and see if it’s going to work. We can cut from there. A few areas that I’ve seen people find great fulfillment when it comes to spending in are experiences with an expiration date. Those experiences that only come around once or during certain times of your life, spend during your active years of retirement. We all know that every day is a blessing. Tomorrow is not guaranteed, but when you’re early in retirement and you are healthy, take advantage of the opportunities in case you or if you’re married, maybe it’s your spouse has a decline in health and is no longer able to enjoy some of those things that you dreamt about.
Also, making charitable impacts during your lifetime giving with a warm hand rather than a cold one. It’s far better. Also, helping family members. You don’t want to enable children, but if you already know that your plan at death is going to leave a chunk of money for kids or grandkids and you see them being responsible now, but maybe needing help with the down payment on a home or getting through college, remember, you don’t want to just pass down your valuables, but you want to pass down your values. So helping others in need, whether it be family members or charities, can be a great way to model that for future generations. Another practical tip for spending freely in retirement is knowing your retirement number.
How much money do you need to retire? Now, you can only figure that out by having a detailed, measurable, documented financial plan. By the way, this retirement number, it needs to be there even once you are retired. Do you still have enough? How much do you need now that you’re 71 to accomplish all of your future goals and to ensure that your plan is sufficiently built for new tax laws, new estate laws, and certainly changes in your life? Be mindful of the saying, what got you here won’t get you there because this holds true not just in climbing mountains, but also in the realm of retirement planning. The skills and strategies that helped you accumulate wealth will often not be the same ones that will sustain you in retirement.
If you’ve got questions, visit us at creativeplanning.com/radio to speak with a local advisor. Well, I’ve been following this Nvidia rampage, I don’t know if you have been. Nvidia was already the number one performing stock in the S&P 500 and then a little over a week ago went up 26% in one day. The company’s market value rose more than 200 billion dollars, which is the biggest one day rise in history, beating Apple’s 191 billion pop in November of 2022, and what Nvidia basically signaled was, “Hey folks, we’ve entered the age of artificial intelligence.” They beat their estimates, get this, by a whopping 670 million dollars, but it was the guidance that really ripped the stock higher. Wall Street was looking for seven billion. Nvidia is expecting 11 billion in revenues next quarter.
That’s a four billion dollar beat on expectations, and it’s because demand has never been stronger. Google and Amazon are racing to build out their AI driven cloud services and to do so, they need a bunch of Nvidia’s GPUs to power those AI cloud services. So you’ve got some really big players who need what Nvidia manufacturers to leap ahead in this AI battle. Altogether, AI stocks added about 300 billion dollars in market value in about an hour a little over a week ago. For context, that’s more than the entire market value of Coca-Cola, which was founded in 1893. It spent 131 years trying to create 300 billion dollars in economic value, and AI stocks created that much value in an hour.
This boom of artificial intelligence has arrived and it does not appear to be going anywhere anytime soon. So what does any of this mean for you? I think we learn a bit from the past with even this brand new exciting emerging technology. This is how the tech sector’s always worked. It runs up as a whole when new tech hits because everyone is out fishing for the next winter and then, all except for a small percentage lose the majority of their value. The internet was supposed to be a battle between Yahoo and AOL and both essentially went to zero. You say, “Well, John, those are … you cherry-pick the worst.” Well, even if you look at who ended up being victorious, look at Microsoft, second largest company only to Apple right now.
They make up 7% of the S&P 500 index, a massive 2.5 trillion dollars of market cap, but it made a new high in December of 1999 that wasn’t challenged again for 16 years. I’m not saying Nvidia is going to have a similar run. In fact, it almost certainly won’t, but it’s at 95 times earnings right now. So the broad lesson for you and I still holds true and that is … I know this is going to be boring and repetitive, but diversification remains the best way to ensure you don’t blow up your plan, as well as the reminder that concentration only provides the chance that you hit it big. It’s not that if I take more risk and if I concentrate, then I’m likely to get higher returns. No, you’re still likely to underperform because only 4% of publicly traded stocks the past 100 years have accounted for all the growth and nearly 50% aren’t even here, they’re gone.
The stocks don’t exist, and that’s why even professionals, over 80% of active fund managers in 2022 lost to their benchmarks according to a recent study. So as tempting as it may be to hear these stories about Nvidia or similar companies, investing and speculating are two totally different things in the market, can stay irrational a whole lot longer than you can stay solvent. Markets are mostly efficient, meaning the current price of Nvidia reflects the huge AI potential, only now new and unknowable information will move it higher down the road, and I’m not telling you that it won’t, I’m not saying that it will, I have no idea, but making solid returns for the longest period of time is what wins. Durability of your returns so that they can compound over decades.
And as Charlie Munger famously said, never interrupt compound interest unnecessarily. That is the easiest and most likely path for you to accomplish your goals. The only way to ensure that you don’t miss out on Nvidia or the next Nvidia that none of us are even aware of yet is by being broadly diversified. In my experience, nothing causes quite as much confusion as the ins and outs of Medicare, and that is why I’ve asked my special guest, Jameson Moulder, the lead of our Medicare advisor team here at Creative Planning to join me today and walk you through key aspects that you should be aware of when it comes to strategizing your medical coverage. Jameson Moulder, welcome to Rethink Your Money.
Jameson Moulder: Thank you for having me, John. I’m excited to be here.
John: I’m looking forward to this conversation because it’s an area even for myself, as a wealth manager, certified financial planner, I lean on your team’s expertise because there’s a lot of nuance and people need to get it right and they’ve never done it before when they hit that age where it’s time to figure this out. Let’s start with the basics. What is Medicare?
Jameson: So Medicare is insurance that’s provided by the federal government. It’s for primarily individuals that are 65 or older. There are a few situations where someone can get Medicare before 65, whether they have a really tough illness or they’re on disability for a certain period of time, but in a nutshell, it’s individual coverage provided by the government 65 years or older.
John: So let’s say someone is now in their early 60s, when do you recommend someone starts planning for Medicare? What are some of the enrollment timelines that we should be aware of?
Jameson: We’ve tried to focus on meeting with clients around six months before their 65th birthday month. So it’s easy to find that runway because it’s based on date of birth. The reason we target six months is during that six month period, those individuals are the most targeted demographic for solicitations and advertisement of anyone. I think the statistic is over 10,000 people per day, turns 65. So these insurance companies see opportunity. Not only do they see opportunity, there’s a natural timeline of when these individuals need to make decisions. So six months is what we recommend because you can’t even move forward with step one of enrolling into Medicare, until you’re three months out.
So about six months out, meet with someone that’s in this field, that’s a professional, that can walk you through the different enrollment timelines, the processes, started figuring out what coverages make sense for your situation. So that way once you’re within that three month window, you’re smoothly executing a game plan, but you don’t have to go onto Medicare at 65. If you have group insurance through yourself or a spouse who’s actively working, you can defer Medicare and you can defer that for as long as you want, as long as you continuously have group coverage. So that six month period, even if you are working, is a good touch point. Just to make sure I understand those rules
John: Well. So how do you make sure that you’re not penalized if you like to defer? Obviously, I have a lot of clients who are still working, have good health insurance, they choose not to go on Medicare obviously at 65. What do they need to be aware of in terms of ensuring that they don’t have any negative consequences?
Jameson: Right, in terms of a late enrollment penalty aspect, it’s really just down to do you have group coverage through yourself or a spouse and they have to be actively working. So retiree coverage would not be applicable. That would be risk of being penalized for late enrollment, but then, does the company that’s providing the group coverage have 20 or more employees? That’s a huge question that needs to be addressed because if it’s more than 20, then it makes sense to defer Medicare. Now, let’s say it’s under 20. Well, if you keep your coverage and enroll into Medicare, the Medicare becomes primary group coverage, becomes secondary. So if you don’t enroll into Medicare and it’s under 20 employees, it’s not a penalty risk.
It’s a coverage structure compromise risk because let’s play out a scenario. Let’s say you don’t enroll into Medicare and you have less than 20 employees to keep group coverage and let’s say there’s a large claim. Well, any private insurance company is going to do some due diligence if they’re about to pay out a large claim, they will see, “Well, your company has less than 20 people.” Medicare should be a primary and they could potentially not pick up all the costs. So that would be a huge compromise.
John: My guess is people are listening and their head is spinning a little bit and going, “Whoa, there’s a lot to understand here and you can see just in a few minutes of our conversation, primary, secondary, should I defer?” So I want to pause for a moment and just say, if you are confused, if you’re listening going, “Whoa, this is a lot. I’m 64 and I need to figure this out,” go to creativeplanning.com/radio. You can contact us, we’ll help walk you through this or find a team like us that can help because there’s a lot of nuance and you don’t want to wake up one day and say, “Wait, I got penalized because I didn’t even realize what was going on here?”
I mean even the differences between supplements and advantage, which we’ll talk about here in a little bit that I’ve seen can be very confusing and people in some cases receive bad advice and then, they’re not able to qualify after the fact because they went advantage first. So continuing on with this topic, let’s talk a little bit about what IRMAA is and then how income levels affect Medicare premiums.
Jameson: So what IRMAA stands for, it’s an acronym, it’s Income Related Monthly Adjustment Amount, and I’ll address that here in a moment, but to start, Medicare part A is for hospital insurance. Most individuals do not pay for Part A if they paid in a social security tax for 10 years or more. That’s covered. Part B is the medical portion of Medicare and there is a standard premium of $164.90. That’s what most people pay their own Medicare, but then there’s the IRMAA dynamic. This is reassessed every calendar year. It’s based on a two year ago lookback. So anyone that’s on Medicare in 2023, they’re reviewing your IRS tax return from 2021, they’re going to pull it from 2021, to be clear.
Correct, you look back at 2021 currently in the year of 2023 and there’s a couple thresholds. If you file single, it’s 97,000 or less, you don’t have to worry about IRMAA. If you’re above 97,000 on your adjusted gross income, there’s brackets you could fall onto, and if you file jointly, that threshold is 194,000. So for a lot of creative planning clients, that’s very applicable. We need to explain, “Hey, you’re going to be paying additional surcharges on your Medicare and here’s why.” And a lot of times it can be thousands of dollars more per year based on how your income is.
John: It’s why you need to do tax planning along with your investment planning because I’ve seen people do a Roth conversion, which makes all sorts of sense because the market’s down in value and they’re in a low tax bracket temporarily and they haven’t turned on social security. I mean, shoot, we don’t even remember often what we ate for breakfast two days ago and then, two years later you get your first social security check if you’re on it and more is deducted because this IRMAA took effect or you just get a bill for more money for your Medicare and you go, “Well, what happened?” It’s like, “Oh, two years ago you did a Roth conversion that accelerated your income above these limits,” and in some cases you hope this isn’t the case, but the advisor never really looked at that.
They just in a vacuum said, this conversion makes sense. So it doesn’t mean you shouldn’t convert and you should never means test yourself, but you want to run the math and really identify some of the peripheral impacts of anytime you’re accelerating income, because it will increase the cost of some of these things.
Jameson: Right, and just to piggyback off that, John, a big differentiator at Creative Planning on having an in-house team that handles Medicare is a lot of times they’ll meet with clients and they either have a family friend or a broker they’ve used in the past. Most of those individuals aren’t aware of IRMAA, don’t know how to navigate it, don’t even bring it up. So if someone was meeting with someone that didn’t have the financial planning arena around them, they would not address the IRMAA and there’s appeal opportunities. So IRMAA on its own, it’s going to self calibrate over time.
Every new calendar year, it’s looking two years ago at a different tax year, so it could go down over time, but if you’ve had a life-changing event, the most common or either work stoppage or work reduction, so retirement or maybe a lesser role, if that results in a lower adjusted gross income enough to lower you down a tax bracket or two or remove it, well, versus waiting two more years for it to self calibrate, there’s a process in the form that we walk clients through where we can get this thing appealed immediately, and there’s been some examples where that’s some significant thousands of dollars of less premium that that individual would’ve been paying unless they appealed it.
John: I’m sure. To your point, it speaks to the comprehensive component, none of these, whether it’d be taxes, Medicare, your risk management, your investments, your income planning, social security, they all impact one another and need to be looked at comprehensively. I think that’s a great point. I’m speaking with Jameson Moulder, director of our Medicare advisor team here at Creative Planning. Let’s transition Jameson over to supplements versus advantage plans because that’s one of the first things people are confronted with. Can you speak to the differences, pros and cons of each?
Jameson: Very common conversation we have with all clients? Anyone getting ready to be onto Medicare, it needs to go over both options because they’re very different. If someone has Medicare supplement that’s working as a secondary to Medicare, so Medicare becomes primary, private insurance, which is supplement becomes secondary. So that’s that’s a different coverage structure versus Medicare Advantage, you still pay for Medicare, but now private insurance, the Medicare Advantage plan becomes primary. So this really changes the structure of your coverage. So why do people look at Medicare Advantage plans? What are the benefits? It’s all in one, so it replaces everything you need for Medicare.
So you’ve got your medical, you’ve got your hospital, you’ve got your prescription drug coverage. It throws in things like dental, vision, that does make things easy, having it all in one coverage.
John: And you don’t have to pay anything on a monthly basis, right?
Jameson: Correct. Most advantage plans, there’s not an additional premium to their Medicare. Now that does come with a few catches in terms of the out-of-pocket liability, but from a fixed cost monthly premium standpoint, yeah, there isn’t an additional premium usually.
John: How does that contrast with the Medicare supplement plan?
Jameson: Far different with the supplement. So we primarily for clients recommend the supplement. It’s not that the advantage plan is bad coverage by any means because it isn’t, it’s just there’s limitations attached to it. With supplements, there’s a lot of certainty and predictability. So what are the benefits of supplement? Well, number one, it travels all over the United States. So any client that has multiple houses, travels a lot, they don’t have to worry about those network restrictions attached to the Medicare.
John: Yeah, that’s pretty much like “Hey, I’ve got two houses in different states. Okay, forget the advantage plan.”
Jameson: Correct, because yeah, let’s say someone lives in Florida and lives in Arizona. Well, they might find an advantage plan that really cooperates with their doctors in Florida, but that other half of the year when they’re in Arizona, it doesn’t work as well. So the Medicare and the supplement removes that dynamic. You also don’t need referrals. Yes, there’s an additional premium for the supplement, but you are protecting and removing almost all out of pocket liability. So to me, yes, I would rather have no premium than an additional premium, but I want things to be predictable, and anytime, you’re planning for a retirement, no one likes surprises.
I want predictable cost and with supplement, very, very predictable because of the out-of-pocket protection and those coverages don’t change from year to year. You can keep the same supplement plan if you wish your entire time on Medicare. One of the great unknowns with those advantage plans is they’re subject to change every year. So every open enrollment, I got to remake decisions, make sure this is the best plan, I’m still in the best networks. That’s all removed with supplement just makes life much easier for that retirement insurance.
John: This has been a great conversation, it’s such an important piece of a good plan, medical expenses. We know the data, they go through the roof as you move throughout retirement, I can tell that you’ve done this for over 3000 clients and if people are listening and would like to meet with your team, discuss this in more detail, they can of course go to creativeplanning.com/radio. Thanks again, Jameson Moulder for joining me here on Rethink Your Money.
Jameson: Thanks John.
John: Let’s talk about bonds. Now, I know you’re thinking, “Really, bonds?” I’ve received more questions around bonds the last six to 12 months than I had received in the previous decade, so I know it’s something that you’re thinking about and from a fundamental standpoint, when you’re designing a financial plan, the change within the bond environment does play a major role in how you should be thinking about your asset allocation. Many investors have a bit of fear of bonds and it makes sense after 2022, long-term bonds were down 30%. The aggregate bond index is down 15%. So I get it. That came as a huge surprise to many but also, keep in mind, I think this is important to not lose sight of. Short-term bonds didn’t lose any money. They were basically flat or slightly up.
The reason for that, I’ll hit on here in a moment, but let’s talk a bit more about bonds. They are a fundamental component. They’re one of the building blocks of an asset allocation and while stocks are ownership of a company, where you’re participating in current earnings through dividends and you have a value of your stake based upon future earnings that you see in the current share price, a bond is different. It’s basically a loan, it’s an IOU, where you’re lending money to the federal government, a corporation, a municipality in exchange for regular interest payments, right? Then, eventually you get your return on principle at the maturity date assuming that they don’t go broke and they’re still solvent and they can pay you back.
In bonds they provide a mechanism for these entities to borrow money from investors and on your end of things, they do play a crucial role in diversifying investment portfolios because they tend to move dissimilarly to stocks and in many cases inversely with stocks. Here’s where things got interesting in 2022 is that bond prices and interest rates move opposite of one another. So when interest rates rise, which they did about as fast as they ever have in 2022, bond prices tend to fall and vice versa, and this is logical if you think about it, because when interest rates go up, new bonds are then issued at higher rates, making existing bonds with lower rates a lot less desirable on the secondary market. Consequently, bond prices adjust to attract buyers and align with new market rates.
I think an effective visual for this is a seesaw, like my kids like to plan on the playground, which by the way, there’s only one in our entire town. I’m guessing way too many kids were injured and for insurance purposes, they got rid of these seesaws, but maybe when you were a kid they were more out there and when it was a less litigious world. Well, when you picture the seesaw, obviously when one end goes up, the other side goes down and it’s more dramatic on the ends. If rates go up, which is one side of the seesaw and bond prices are the other side and you are in a long-term bond, your bond price is going to fall all the way to the ground when you’d smash your butt on the ground. Yeah, that’s long-term bonds last year when rates went up on one end they crashed down on the other side.
If you looked at the axis of the seesaw, which would be the comparison to short-term bonds, its elevation isn’t changing much as the seesaw goes up and down. If you look at the historical data on intermediate term bonds, so we’re sort of halfway out toward the end of the seesaw, we can see that the returns have been relatively steady, just looking since 1950. The average annual return for intermediate term bonds has been around 5%. Moreover, despite occasional volatility, they have a very limited number of negative years. About 17% of the time, they’ve experienced negative returns. And you might think, “Well stocks are only down about 25 or 30% of the time and you get a lot higher expected returns.”
Why would anyone want to buy bonds? Well, again, one, they zig often when stocks zag and secondarily, the average negative performance of those 17% of down years is only about three and a half percent. So when they lose money, which is less often than stocks, they’re down a lot less, where stocks on average, when they’ve been down since 1950, the average of those negative years was 13%. So certainly more volatility in stocks. When we zoom out and look at a longer period of history for bonds, there are a lot of twists and turns. If you’ve been investing the last 25 or 30 years, all you’ve known is a period of decreasing interest rates, which while yields were lower, were positive for your bond prices until 2022, we had progressively decreasing interest rates.
This isn’t that environment as we look at the present day. Those near zero yields are gone and rates have skyrocketed, which present new opportunities and we’ve gone through some of the challenges that we’re very acutely aware of and this applies to accumulators and retirees alike. So the question that has to be answered when designing your portfolio is what’s this effect of higher yields on the way that I asset allocate my portfolio? How does this change my mix of assets? It’s really the art of combining stocks and bonds and cash and maybe alternatives in the right proportions to achieve a balanced and resilient portfolio. The reason there isn’t one asset allocation that works for everyone is because it totally depends on what you’re trying to accomplish as to finding the right allocation.
Back to higher interest rates and the impact they have on asset allocation. A key point to note, and maybe the biggest is that short duration bonds when you are loaning money for a short period of time are far more attractive than ever before. At the beginning of this, those were paying far less than 1%, but now, you’re looking at a solid 4%. It really is wise right now to revisit bringing back that crucial balance, looking at how much of the allocation should be sleeved toward bonds because the performance drag and the expected difference between stocks and bonds is compressed certainly by comparison to what it has been for the past decade.
Let’s talk cash for a minute. Really, how much should you be holding? Well, the game there has changed as well. Cash is no longer the cheap option that it used to be. Inflation is higher and holding onto cash right now comes at a cost. Now the good news, floating rate treasury bonds are now yielding around 4%, which provides a very reasonable alternative to cash. I’ve met with multiple people who are concerned about risk over the last month and therefore are carrying seven figures, maybe it’s 40% of the portfolio or 60% of the portfolio or 50% of the portfolio, trying to figure out how do I want to deploy it? When do I want to deploy it? I’m a little goosey about what might happen in the markets, why not be in treasuries?
Why not be earning four or 5% on that money rather than sitting in cash watching the purchasing power be eaten away like little termites. So let me address the overarching question here, which is, do you need to adjust your overall allocation in light of higher rates? And the answer, my friends, is probably, you most likely do. If your portfolio was optimized around the assumptions of the last decade with basically near 0% bond returns, you simply might not need as much stock exposure to meet your return targets and accomplish your goals. It doesn’t mean you have to get more conservative, but if you’re someone who considers yourself more conservative and risk averse, it’s time to reevaluate and ensure that your asset allocation aligns with this new financial landscape.
I recommend if you’re not sure where to turn, seek guidance from a fiduciary, a financial advisor not looking to sell you something like us here at Creative Planning, so that you can ensure your plan is staying up to date. Visit us now to schedule your meeting with a local advisor just like myself by going to creativeplanning.com/radio. If you’re like most people, you’ve probably assumed that social security benefits are exclusively reserved for retirees. That’s common wisdom, but I want to rethink that today with you. Although we’ve come to associate those monthly checks with a well-deserved reward after a lifetime of hard work, in reality, social security benefits extend beyond retirement and can provide crucial financial support in various life situations.
In fact, I had a scenario that this precise situation occurred in. It was probably, I don’t know, maybe seven years ago. A new client came in and we were gathering her information. She was a widow, she had two minor children, and I asked her what she was receiving in social security. She said, “Well, I’m not nearly old enough to receive social security,” and of course I said, “Whoa, we need to check on this.” And she ended up receiving over $35,000 per year and unfortunately, she had been entitled to it for nearly three years, over a hundred grand that she hadn’t received, but she’s not alone. There are many people out there who qualify for social security benefits and simply don’t realize it.
In October of 2022, there were more than 3.8 million children receiving social security benefits. These benefit payments to children total more than 2.6 billion dollars every month. So who might be eligible? Well, family members, widows and minor children. Any child who is your biological child, an adopted child or dependent stepchild is eligible for children’s benefits. If you either become disabled, you retire or you die, and even grandkids can be eligible in certain situations and it’s not an insignificant amount. If you become disabled to retire, your qualified child is eligible for up to 50% of your full retirement age benefit. If you die, your qualified child is eligible for up to 75% of your full retirement age benefit.
Now, there are some family maximums, so if you’re like us and you have seven children and something were to happen to me, my wife wouldn’t receive 75% of my full retirement age benefit for all seven children. It does cap out at a point before that. I won’t get into all of those numbers to today, but the point of this is social security benefits are not only for retirees and we absolutely need to rethink that conventional wisdom. Another statement that I’ve heard more times than I can count as a wealth manager is that the stock market is a casino where the house always wins. “John, why would I want to gamble with my life savings?” That’s why I put my money in cash and CDs. Well, let’s first look at gambling. There is a reason that in a casino there are no windows, there are no clocks.
You have to search hard to find even where you cash out your chips. Normally, it’s located in the very back, so you’ve got to pass all the video poker and slot machines on your way to cash out, just hoping that you’ll impulsively take some of your chips and keep playing and then, usually there’s only one line open and you’ve got to wait forever. By contrast, of course, there are ATMs everywhere with lights and sirens and I can’t forget about the free drinks. I mean, they’re just so nice at casinos to give you free alcohol. I mean, man, they’re the best. See, the longer you stay put in a casino, the more likely you are to lose. Take blackjack for example. If you’re playing a six deck shoot and the house is hitting on a soft 17 and you get paid 150% on a natural blackjack, and I know all of you right now are thinking, is this guy a degenerate gambler?
No, I think I’ve gambled two or three times in the last 10 years with very little money, so don’t judge me, but I do know how the game is played. Your odds of winning a single hand in blackjack are between 45 and 47%, and that’s assuming that you’re playing the game using the highest odds, not being an idiot and hitting on 18s. So if you play blackjack for an hour or two, it’s not inconceivable that you might walk out having won a few hundred dollars. By the way, the casino loves that. They would love nothing more that the first time you go to Vegas and you’re 21 years old and you’re there for a weekend, they want you to win because it’ll keep you coming back.
If you play eight hours every day for a year, the odds that you’re going to beat the house are essentially zero. With investing though, the best comparison I could make to gambling is that you are in fact the house, isn’t that great? You are in the position to have increasing odds of success the longer you stay invested. Let me give you some numbers around this. Since 1970, if we just look at the US stock market, you’ve experienced positive returns, 54% of the time on a daily basis, so over 50, but that’s why day-to-day, I mean you’re down a lot. It’s a little over 50% just like the house, only wins in blackjack between 53 and about 55% of the time.
On a monthly basis, how often do you experience positive returns in the US stock market? 63% of the time. On a yearly basis, 80% of the time. On a five-year basis, 90% of the time. Over a 10-year period, you’re up 95% of the time. And by the way, if you extend this to international stocks, those XUS stocks since 1970 are up 99.6% of the time, since 1970 and over 15 or 20 years since 1970, you are up 100% of the time. The stock market is the opposite of gambling. So the next time you hear someone compare gambling to the stock market, you can set them straight and tell them you are the house. Send over your questions by emailing [email protected]. One of our producers, Lauren is going to read the questions for us here today.
Lauren Newman: Hi John. We’ve got two listener questions today. I’ll start with the first one, Tom from St. Petersburg, Florida writes, “I’ve heard you talk about Roth conversions a lot on the show, but I have to admit, I don’t know if that is a strategy I should be considering. I’m currently in my mid-50s and I’m hoping to retire sometime in the next 10 years. Should I be looking into this strategy?”
John: Well, Tom, this is a great question. It’s one of the biggest hot buttons the last three or four years, and the reason for that is because we’ve entered with the Trump tax reform, the lowest tax environment we’ve seen in decades. The primary question when it comes to a Roth conversion is what tax rate am I paying now and how would that compare to the rate I would pay on these dollars later? Because in a traditional 401K or IRA, you are deferring taxes, you’re not eliminating taxes when you stuff money into your employer plan, you’re just asking to pay them later with the assumption that later you’ll be retired, you won’t have your income and you’ll be able to take those dollars out at a lower tax rate.
Well, that conventional wisdom started being rethought when our tax rates went down significantly and the income amounts you could earn within each bracket expanded dramatically. I mean, you can make over $350,000 a year right now, married finally and jointly, and you are still in a 24% tax bracket. By comparison, the 25% bracket during the Bush tax cut years started a little north of 75 grand. So there’s the backstory on why it’s being so hotly discussed, and Mike Piper was recently on a Morningstar podcast and he’s a CPA and spoke about this and I thought he broke this down beautifully, in providing four primary factors to consider, the first is of course, your marginal tax rate, which is often the most common obvious in your face factor.
It doesn’t just mean tax bracket when you think about marginal tax rate because there’s a million different things in our tax code where some additional income doesn’t only hit your income bracket, it may cause something else to happen as well. For instance, it could cause a particular deduction or a particular credit to start to phase out because now you’ve made too much money. So your actual marginal tax rate through a particular range could be much higher than just your tax bracket itself, and I’ve seen this often with people who do not have any tax integration with their plan, they Roth convert because they’ve heard it’s a good idea or their advisor said it was a good idea without really taking a fine-tooth comb or discussing it with their CPA.
Running amok tax return and actually seeing the impact because it might not just be a slight bump in the marginal bracket. So first factor is marginal tax rate. Second one is future tax rate might not be in fact your future tax rate. It could be the one your children pay. Any money you die with in tax deferred accounts they have to distribute over 10 years, meaning that the distributions themselves might potentially bump your kid into a higher tax zone or maybe your child just is a high income earner and makes a lot more than you currently do, that might be part of the calculus for a Roth conversion as well. By contrast if the money is going to a charity, then the future tax rate of that charity is zero, which would make Roth conversions a lot less appealing if those were moneys that were ultimately going to go to a 501 (c)(3).
A third factor to consider is your marital status. Married couples should remember that it’s very likely there will be a period of several years where only one of you is going to be alive. I mean, it would be great if we all died at the nursing home holding hands on a twin sized bed like they did in The Notebook and that was a great love story, but that’s not often how it plays out. Once the first spouse passes away, the surviving spouse will be filing as a single and yeah, they’ll only have one social security benefit, but they’re going to lose the smaller of the two. The larger will remain. It often doesn’t affect income that dramatically, but your brackets get slashed in half.
So the takeaway there is that for a married couple, it can sometimes make sense to Roth convert while both people are alive because you recognize that there will likely be a period of life down the road where the same amount of income will be taxed at a much higher rate. And my final consideration, and certainly, this is not an exhaustive list of factors, but there are some of the key ones I’d be considering, Tom and that is required minimum distributions. Roth conversions will reduce future RMDs because Roths do not require any distributions. So if you’re in a situation where you will not have to spend it every year, any money you take out that you don’t spend, you’ll likely reinvest.
That’ll go into a taxable account and then, there’s going to be a tax drag moving forward as you’re going to have to pay tax on interest and dividends, capital gains and whatever else. So conversions can help you minimize that future tax drag by instead of essentially taking deferred money and putting it in a non-qualified account, you’re taking deferred money and putting it into a tax-exempt account like a Roth. So lot of factors to consider, must be strategized within the context of not only your current tax situation but also your projected tax situation. Tom, we have an office there in Florida near you. If you’d like us to do a deep dive specific to your situation, we’re happy to do so.
You can request that by going to creativeplanning.com/radio. All right, Lauren, what’s next?
Lauren: Okay, next we have Alice. She didn’t list a place so unknown location, what is your opinion on 401Ks and employer match programs? I know I should contribute up to the match, but is it the right move to invest over the match? I currently have 800,000 in my 401K, 34,000 in savings and 10,000 in a brokerage account. My husband has about 450,000 in his 401K. We are in our 50s. Where is the best place for us to put our money?
John: Well, Alice is on the money there. You absolutely want to take advantage of the 100% return on your money, the moment you put it in when it comes to an employer match, but I would agree a lot of people max out their 401K or go way beyond the match and in some cases it’s suboptimal. The 401K that’s being offered is high in costs, pretty rigid and inflexible in the investment options, and it may just not make sense from a tax standpoint. So you certainly want to pay off high interest debt. I would max out an HSA, a health savings account, and since you’re married, Alice, I’m going to assume you’re filing jointly, it should be probably looking at the Roth side of the 401K or even a backdoor Roth.
In your situation, depending upon liquidity needs, you only have about $44,000 not in retirement accounts. Where you have right now, it looks like 1.25. I would look for more liquidity and flexibility in non-qualified accounts just after tax accounts because you really can’t touch any of that 1.25 in your retirement accounts without incurring a 10% penalty at this time. So I’d like to see that built up a bit more either through non-qualified or Roth options. As I sit here and reflect on all the personal finance topics that we’ve discussed today, I can’t help but feel a profound sense of gratitude for the freedom that money brings. All these strategies are fantastic, but ultimately, money is just a tool that we use to improve our lives and freedom is one of the great blessings that can emerge.
And not just the freedom to indulge in material possessions and vacations, whatever else it might be, but something far more precious, the freedom of true presence. Last week, our kids’ school year came to an end. Summer break is here again, can’t believe it, but I’m reminded of the fleeting nature of time. If you’re a parent, if you’re a grandparent, you know what I’m talking about. You seemingly blink and they’ve grown afoot. Where has time gone? I’ve got 18 summers to create memories and nurture bonds that are ultimately going to shape their lives. These truly are the days and then they’ll be off into the world and they’ll be building their own nests, embarking on their own adventures. That realization is humbling and invigorating and also, a little bit convicting. It’s a call to action. It’s a reminder for me, I got to make each summer count. I want to make each moment count.
Because in the grand tapestry of life, money serves a far greater purpose than simply accumulating wealth. I want you to understand, I have met with miserable people that have more money than they’ll ever know what to do with it, and I have met with people who radiate joy with every fiber of their being who have very little, by American standards. There is no correlation between happiness and wealth once your basic needs are met because wealth accumulation on its own is a number on a page, it’s meaningless, but money does have power and its power is when it grants us freedom to be fully present with those that we love. Now, of course, that’s only if we fully embrace that blessing.
Now, I don’t claim to be some sort of zen master or a perfect embodiment of presence. My wife would attest to that. Life certainly has its demands and distractions and we’re only human after all, but it’s a practice and it’s a conscious choice to cultivate presence in our lives. I want to encourage you to do this, and I think it starts with celebrating the tiny joys that everyday miracles that are surrounding us that so often we just brush off. We don’t even notice them. Maybe it’s truly listening without the intention of responding or embracing the unknown or being okay with not having all the answers. It’s about reducing distractions, whether it’s the constant notification on our phones or the noise that’s permeating in our minds.
It’s about finding balance between go with the flow and intentional planning. You got to allow some room for spontaneity while relishing cherished rituals and those family traditions. So my friend, as you embark on your journey toward financial peace, remember the true meaning of money is that freedom to be present. And hey, while we’re at it, let’s not forget to inject a little humor into our lives as well because after all, laughter is the ultimate expression of being present. As the great comedian George Carlin once quipped, “Don’t sweat the petty things and don’t pet the sweaty things.” In conclusion, let us strive for a life that’s not just measured in dollars and cents, but in moments cherished connections nurtured and love shared.
Until next time, embrace the beautiful freedom of true presence because we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
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Disclaimer The proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined 210 billion in assets as of December 31st, 2022. John Hagensen 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 this station. This commentary is provided for general information purposes only. It 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 for sources deemed reliable but is not guaranteed.
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