This week, John shares five common investor mistakes and how to avoid them as well as the two most important action items to lead you into financial success. He’s also joined by Estate Planning Attorney Jerry Bell, JD, for a discussion on taking care of loved ones with special needs.
Read more about determining who should inherit your wealth: https://creativeplanning.com/insights/determining-who-should-inherit-your-wealth/
Read more on the five considerations for choosing a special needs trustee: https://creativeplanning.com/insights/how-to-choose-a-special-needs-trustee-5-considerations/
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show I’ll share with you the five most common investor mistakes and how to avoid them, the two most important actions that lead you financial success as well how to unlock true peace of mind around you money. Now join me as I help you rehtink your money.
Have you ever noticed that there are these times in life where something so counterintuitive that it actually catches your attention, it jumps out at you? I recall one of those moments as an airline pilot, which was my career prior to becoming a financial planner where I was being type rated in a new aircraft in the simulator, practicing emergency situations, and one of the particular emergency maneuvers we needed to accomplish was losing an engine just after takeoff. Well, conventional wisdom is that you better increase thrust on the one engine that’s still good. You better get max power into that engine. But in this case, the jet that I was training on was so overpowered that you actually maintained and then reduced thrust with only one engine because it was actually easier to maneuver the aircraft. Now, while that’s not only counterintuitive, I hope that if you’re someone who’s terrified of flying, like so many people across the world are, this gives you a little more comfort knowing that you can fly on only one engine, and it doesn’t even need max power.
This weekend here at Creative Planning, we had an amazing conference called Connect ’22. Nearly 1500 of our team members, as well as thousands of Creative Planning clients were in attendance as well. Here at Creative Planning, I mean, we’re committed to doing a whole lot more than just managing investments. We believe that through continued education, we are empowering our clients to make great financial moves, and not just to blindly say, “Well, I guess they say that’s great,” but by also finding unique and interesting ways to deliver valuable information to our clients.
Our keynote speaker that kicked the conference off was the world-renowned great Jeremy Siegel. And if you’re not familiar with Jeremy Siegel, he is an absolute legend when it comes to economics, and in particular, how economic applies to personal finances. He’s the senior investment strategy advisor at WisdomTree. He’s a professor at the Wharton School of the University of Pennsylvania. He’s also taught and done research at the University of Chicago after receiving his bachelor’s degree from Columbia and his PhD from MIT.
I believe that as he was sharing his basic premise of how to handle inflation, there were many people in the room thinking to themselves, “This is really counterintuitive,” because what Dr. Siegel shared was that you need to own stocks in the long run, even if you’re near, or in retirement, and he had one statement that I immediately grabbed my phone, put it in my notes because it was so profound. He said, “Stocks are the most volatile asset class over the short run and the most stable asset class over the long run.” Now, think about that for a moment. We often hear stocks are volatile in the short run, but you make more money long term. No, that’s not what he said, and this was a really important detail. He said, “They’re more stable than bonds in the long run,” not just going to make you more money, they’re in a sense safer than bonds in the long run. I don’t think he’s wrong.
One of the great mistakes of those that near and enter retirement in a world where you may have a 30 or a 40-year retirement is not staying too aggressive, although that certainly can be a problem, too, it’s normally allocating far too conservatively when you still have an incredibly long runway that your money will need to last. If you look at a chart of the broad stock market since 1926, there are very small gyrations on a line that goes up and to the right like a mountainside. The stock market has made approximately 10% per year on average for a hundred years and that’s why Dr. Siegel says that in a high inflationary environment in particular owning bonds that are paid back in dollars and are fixed rather than owning stocks, where you have ownership and companies that are able to increase prices to maintain profit margins, it may have less volatility over a one-year period, or a five-year period, or a three-year period. Sure, bonds will be more predictable, but in the long run, the stock market has historically been an incredibly stable long-term growth driver.
Let me expand briefly with a few other adjustments that you may find to be somewhat counterintuitive. Number one: Along the same vein we were just discussing, reduce cash and bond positions. Number two: Keep low-interest debt such as a mortgage at 3.5 or 3.7%. Don’t rush to pay that off. Number three: Hold real assets like stocks and real estate. Number four: Consider floating rate debt as I discussed last week on this program with our chief investment officer, Jim Williams. Rather than me summarizing, I’ll let you hear a short excerpt from our conversation last week, pertaining to floating rate private debt.
Jim Williams: One of the important things here, though, is the word “floating.” This is key in today’s cycle. Floating means that the income that gets paid to you, the investor, is going to move up and down with short-term rates. Right now, this is tied to LIBOR. LIBOR’s not a hundred percent correlated, but it is highly correlated to what the Fed does with Fed fund rates, so as the Fed is raising rates, this provides a defensive mechanism that you don’t see in traditional bonds. When traditional bonds of interest rates go up, the value that bond goes down. Whereas here, we don’t have what’s referred to as “interest rate sensitivity,” meaning that your bond price might fall. Here, we have a situation where if interest rates go up.
Well, this debt instrument, the income that’s paying you is moving right up alongside interest rates, and it seems fairly obvious that the Fed is likely going to continue to raise rates, and so this could be considered defensive mechanism, not only for a rising rate environment, but also for inflation because if inflation were to remain robust, we would expect the Fed to be more aggressive in their tightening cycle. When we think about this investment, we need to be cognizant of the lack of liquidity, that we’re basically locking the money up for a year’s time, but the driver here is we’re looking for excess income, that 8% to 10% income threshold that you simply can’t achieve within the publicly traded bond market.
John: Again, that was Jim Williams, our chief investment officer here at Creative Planning from last week’s show, and if you’d like to hear that interview in its entirety, we covered all things alternative investments, you can find past shows on Apple Podcasts, Spotify, or at creativeplanning.com/radio.
I want to transition and change gears over to my rule for money today, which is that financial success requires avoiding big mistakes. It’s far less about hitting the home run and far more about not making the Bill Buckner error. Don’t be over at first base and watch a ground ball go through your legs in game six of the World Series. Two-time Barron’s Financial Advisor of the Year, our president Peter Mallouk wrote a book that I’m not promoting just because he’s our president, it is a fantastic book and an easy read entitled The Five Mistakes Every Investor Makes and How to Avoid Them. I’ll briefly run through the five investor mistakes he outlines, and if you’d like to know more, you can certainly find the book anywhere books are sold.
The first is market timing. I don’t think I need to go into a lot of detail around why that’s so hard, but in short, try predicting what seven billion people’s behavior is going to be, even think recently with the pandemic, markets down 35% in a couple months, and then swings back up over 80% before you could blink an eye, and then fell back down more than 20% as we’ve been in this bear market. Good luck trying to figure out the cadence of market swings up and down. Oh, and by the way, just remember the market’s up far more often than down, so as I like to share with my clients, the risk of being out of the market is often greater than the risk of being in.
Second investor mistake: active trading. There have been 25,967 stocks in total from 1926 to 2016, so we’re looking at a 90-year period, and for all intents and purposes, 26,000 total stocks, 48% of those stocks delisted due to a merger, exchange, or liquidations. 35% were delisted by the exchange themselves. Average return on those: -92%. Of all the stocks ever listed between 26 and 2016, only 17% still remain, and to take that a step further, only about 4% of all total stocks have accounted for 100% of the growth of the stock market, so it’s simple math that it’s incredibly difficult for us to find those 4% by jumping around from one to another through active trading.
Number three: Misunderstanding performance and financial information. It’s never been easier than today to find information while it’s never been more difficult to find truth it’s cluttered and it’s hard to know what’s correct and then how to interpret that. I hope that this show aids in your pursuit of clarity around how to do things well with what you’ve worked a lifetime to save.
The fourth mistake: Letting yourself get in the way. On average, the last 30 years, according to Dalbar, we meaning all of us Americans, have made about half of the returns of the S&P 500. Think about that. We lose half of the returns simply because it’s difficult to invest broadly and shred your statement. Remove the emotions. Money’s very emotional. We are human beings.
The fifth mistake is working with the wrong advisor. As a reformed broker myself, I can attest firsthand the quality of the advice you’re given, the competency of the advisor you use, the dynamic of them being a fiduciary 100% of the time is paramount in your success. Selecting your advisor because they’re nice, or you golf with them, or they go to your church, or they live down the street isn’t good enough because the stakes are simply too high with your life savings.
I’ll wrap it up with a bonus number six mistake, which circles right back to my rule for money. Mistake number six is mistaking. I know you’re totally confused right now, “What are you talking about, John?” What I’m talking about is have a clearly defined financial plan that accounts for taxes and your estate plan, a set of rules that’s academically grounded, that’s evidence-based that guides all of your financial planning and investment decisions because the largest determinant in whether you find success will be rooted in your ability to avoid the big miss.
Announcer: At Creative Planning we provide custom tailored solutions for all your money management needs. Why not give your wealth a second look and learn how the team at Creative Planning covers all areas of your financial life. Visit creativeplanning.com
And now, back to Rethink Your Money present by Creatoive Planning with your host, John Hagensen.
John: Well, if you’re like me and you’ve had interactions and been in relationship with families who have special needs children or grandchildren, you know that there can be challenges logistically in terms of the financial implications or the time implications. But you also know that those challenges are accompanied by some of the greatest blessings imaginable.
We are all created unique with strengths and weaknesses, and I believe this is what makes our country, and the world, for that matter, such an incredible tapestry where ideally we are all working together. Where one person is weak, someone else in their life is strong and they can support them. I don’t know if there’s any type of work that we do here at Creative Planning that is more lasting in its impact than when we support a family with special needs. Here to join me today on the program is an extra special guest. Jerry Bell is an estate planning attorney here at Creative Planning who focuses specifically in working with families that have these special needs circumstances, and so with that said, thank you so much for joining us today, Jerry.
Jerry Bell: John, glad to be here. Appreciate it.
John: Well, it’s important for all of us to plan, but why, Jerry, do you think it’s even more critical for families with special needs to have a real solid financial plan?
Jerry: Well, if you think about it, John, they don’t really have a choice because now, special needs can have a wide spectrum of different types of needs, but when that parent is gone, usually the special needs person has depended upon them for a lot of their lifetime, and they have to have something in place to continue their life, and to have a quality of life they’ve had with their parents.
Another key reason is most of the time, they’re on government benefits of some type, for instance, Social Security, a Medicaid, perhaps some other ones, and if they don’t have a plan in place, there’s a high probability, they might lose those government benefits if inheritance or insurance money or things of that nature should end up landing directly with the special needs person and disqualify them, so that’s real important to plan ahead on that. I guess it seems like a no-brainer, but as much as anything else, they have to have a life care plan because whatever is left for that child or that adult has to last their lifetime, and their lifetime might have a very high cost, it might not have any significant cost over than an average person, but that life care plan is important for them to have in place, and so all that is much more complicated than the average person we deal with with estate planning and financial planning.
John: This is a space here at Creative Planning that we’ve invested heavily in with talented attorneys like yourself focusing specifically on guiding special needs families. What, from your perspective, Jerry, do you believe makes this such a worthwhile specialty that we provide here as a company?
Jerry: Well, it’s important to me. I just get a lot of value from the families and from the beneficiaries, but from a Creative Planning perspective, we’re a comprehensive wealth management company, but what we find more and more is families have special needs. I remember, I’m dating myself a little bit here, the word “autism” was not a very common word in the ’60s and ’70s. You start hearing more and more about autism. Well, those children that are now adults, whose parents are now perhaps passing away, that’s a fast-growing segment of the demographics we’re dealing with here, and so we find more and more clients will either have a special needs scenario, they’ll have one that they don’t realize, or they may have a mental health situation that will morph into a special needs scenario when mom or dad pass away, and so all of those get very confusing.
God bless our government sometimes because they made it somewhat complex. Just one letter makes a difference between SSI and SSDI, as an example, or who would know that Medicaid and Medicare can confuse as many people as it does? But when you start combining all the components with the unique special needs that that person has, that planning gets quite complicated for a lot of our parents, and so we have that specialization built within our toolkit to help families more and more. That’s why it’s been so important to me, because it is complex, and man, you really get a lot of value back from the clients when you’re making a difference in their lives.
John: Well, I completely agree, it’s complex, it can be confusing. I’ve worked with families running point as their certified financial planner who are confronted with special needs situations, and what I’ve found is that you don’t get a Mulligan. There isn’t a do-over if the plan fails, a lot of these things are irrevocable choices, so they really do need to get it right the very first time. You mentioned the word “components.” Would you mind sharing with us what are a few key components for a special needs financial plan?
Jerry: Well, just like any family, a big one is guardianship of the individual involved, and for most families without special needs, guardianship is generally over at age 18. Well, in the case of special needs, that guardianship is probably going to go perhaps for the lifetime of the beneficiary, and the list of people that a family can choose from to provide such a guardianship when they’re gone is usually very short. That’s the first one, simple as that sound, but that’s a very important one.
The other one, I spend a lot of time with special needs trust. Sometimes an overused term, but a very important term because a special needs trust is an arrangement from a legal perspective where assets can be protected, the assets that are in those special needs trust can be invested in prudent ways, but more importantly, they can remain as exempt assets, so if someone’s on Medicaid, or they’re on SSI, and their inheritance goes into a special needs trust, they’re going to keep their government benefit, and they’ll be able to have that last for their lifetime. Having a life care plan, I’ve already mentioned that, but that’s important to have as well because that just specs out the cashflow that would be required for their lifetime.
I guess as important as anything else is, like everything, things are involving in that community. We didn’t have something called “ABLE accounts” over five years ago. That is a very valuable tool, but a very limited tool as well. They have debit cards that can be programmed so that they can only be used for certain types of special needs and limited in that way, so all those things are things that we try to keep up with as a wealth provider, as well as a trust company, and obviously as a legal department as well. It’s a challenge, but they’re all components of a overall plan for that special needs family.
John: Just to recap here, you mentioned guardianship, coordinating special needs trusts to work in coordination with government benefit programs, a life care plan, and ABLE accounts. That is just such great information, Jerry. My wife and I have experienced raising a child with special needs and I think what you and the rest of the legal team here at Creative Planning, what you’re doing is making a huge difference in the lives of these families, and so thank you so much for that, and for sharing those things with us. But I’d like to pivot a little bit as we wrap this up and hear from you regarding what you have found to be the most rewarding aspect of helping these families in particular build out a plan.
Jerry: Well, John, that’s an easy one for me. I mean, my background was in sales, and it was pretty good to me, but the legal profession gives you a chance to give back to the community, give back to your profession as well as to a lot of other areas. But in the case of special needs, spend some time with the parents or the family that have special needs embedded within them, how much dedication they have to have and how overloaded they are. For me, it was just invaluable to be able to make a difference in those people’s lives by sharing ways to help their lives better, but if you really want to find out how to feel good about something, go meet some of those beneficiaries of a special needs plan. Hug a child or an adult with Down syndrome and you’ll feel an emotion you haven’t felt.
One of my favorite special needs children, if you will, as a little girl that unfortunately she had a birth defect, we’ve done a lot of work with her, and she just gets the biggest smile on her face sometimes when you’re helping them. But it’s just really good to feel and to see a difference that they’re making or that you’re making in their lives. Yeah, I can sit there and banter with them about their college team, and they banter back with me, and it’s very valuable for me to be able to make a difference in the lives of those individuals.
John: Well, that’s a great story, Jerry. Let’s face it, your Missouri Tigers are leaving a lot of room open for her and everyone else to come after you so far for this season, so I know probably pouring lemon juice right now in the paper cut, but that’s great. I absolutely love it. Thanks so much for your time and for joining us today on Rethink Your Money, Jerry.
Jerry: Thank you. I appreciate the opportunity to be here.
John: I’d like to expand a bit more on Jerry and my discussion by highlighting an article that I will post to the radio page of our website written by the man you just heard, attorney Jerry Bell on how to choose a special needs trustee. He lists out five considerations. Again, this will be visible in its entirety at creativeplanning.com/radio because choosing the right person to serve as trustee in particular of a special needs trust is one of the most important, and by the way, difficult issues in creating the trust itself.
I’ve had folks wait on this and wait on this and procrastinate and put it off, and when I speak with a client about it, “We need to get this done,” they say, “John, we can’t figure out who to select as the trustee,” because as Jerry just mentioned, this trustee may be responsible this for 40 years, 50 years, 60 years. It’s not a short-term responsibility in many cases, and typically special needs trustees are taking care of managing the day-to-day operations of the trust, making distributions to the trust, beneficiary, investing the trust assets, paying the trust bills, and maintaining the beneficiary’s eligibility for those public benefit programs that Jerry spoke of, so it’s this very long-term, very complicated task that has a huge impact on that special needs beneficiary, yet the law is not strict at all on who can do this, so you end up having a lot of folks running around doing this that really shouldn’t be doing it. It’s not in the child’s best interest. Three logical choices are the child’s parent, or another relative, a trusted friend, or a professional, so a lawyer, accountant, trust company, bank, or private professional fiduciary.
In this article, Jerry outlines and goes into detail on five different considerations. I’ll share just the bullet points here today. Number one: Are they familiar with public benefit programs? That trustee needs to know inside and out exactly all the things that beneficiary may or may not be able to qualify for.
Number two, and this is a real simple practical one, does the trustee have time to do the job? Sometimes being the trustee is a major weekly time commitment. Sometimes the trustee you’d like to choose is way too busy.
If they are, it leads into number three, would a professional trust be better in this particular case, doesn’t make sense to hire an attorney accountant trust company, investment firm that does this a lot for many clients?
Number four: How comfortable are you giving trust control to an outsider? If you choose a company, how comfortable are you with that? Does it need to be a family member for you to feel comfortable?
Number five: Is a pooled trust an option? Without going too far into the weeds, a pooled trust is administered by a nonprofit corporation and it can be a good option for some families.
Announcer: Special needs individuals can also have special financial needs. The team at Creative Planning can help deal with the most complex situations regarding these individuals. Go to creativeplamming.com come to learn more. That’s creativeplamming.com.
Now, back to rethink your money presented by Creative Planning with your host John Hagensen.
John: One of the things that I’ve learned as a parent is that each of my children are unique. You might think to yourself, “Well, John, that’s pretty obvious,” but while it is, so often as parents, we try to do things the same way for each of our kids.
Something that might have worked for our oldest child in terms of an approach or a discipline, maybe very ineffective for one of their younger siblings. And my wife, Brittany, and I have a particularly unique perspective on this because of our seven children, we have two that are adopted when they were older in life from Ethiopia.
So they had very different experiences until they were nine, 10 years old. Didn’t even speak a word of English. We have two other children that were adopted domestically, but as babies. And so oftentimes you say, “Well, John, those four children have different genetics.” Of course, they’re all different from one another.
Well, we have three biological children and they’re all completely different. Jude, our six year old’s first day of preschool, few years ago, he was throwing things across the room, like going nuts. Aria, our three year old, who just started preschool this fall, she showed up the first day for Meet the Teacher and she was carrying around a broom twice her size asking the teacher if there was anything she could clean, and that’s a quote.
And of course she had to clean because there were boys in the class that were launching crayons across the room like Jude used to do. And as a pretty type A guy myself, I did used to color coordinate my closet. I know, don’t judge me. Don’t knock it till you tried it.
Of course, I had seven kids in 10 years and then I realized I was going to stroke out if I didn’t chill. So definitely let my hair down a little bit, if you are worried about me. But I would say in my still very limited knowledge of parenting, you’ve got to figure out how to relate and guide and communicate in a way that resonates with each individual kid.
You have to customize your approach, which leads me into what I think you should look for in a financial advisor. And here at Creative Planning, and by the way, not all roads lead to Creative Planning. We may not be the right fit for you, in particular you might not be the right fit for us.
Now I do think that what we offer is incredibly valuable for most people, but while being planning led on top of everything else, we have three pillars. We’re independent, right? So we’re not pushing proprietary products or manufacturing funds. We’re fiduciaries at all times. We customize and we’re comprehensive.
And why Barron’s dubbed us a family office for all, that comprehensive piece, tends to be the pillar that many prospective clients focus on. And it makes sense, we have 85 CPAs. We’d be a large tax practice if it was just a standalone business without the $225 billion under management or advisement on the wealth management side of things.
We have 45 attorneys. We’d be one of the larger estate planning law firms in the country if all we did was estate planning. And of course, in addition to that, we can help with Medicare supplements and your property and casualty insurance needs as well as 401(k)s and institutional planning.
But while I think that’s incredible and a huge differentiator for you to be able to just walk in and have all of those things done, all of it coordinated amongst professionals that are doing it at a very high level every single day, just as you heard from Jerry Bell, an attorney of ours who’s a specialist in just handling special needs situations.
Like that’s pretty cool that we can offer that depth of specialty. But I want to highlight today something that I feel like has been coming up more and more as I personally interact with clients and my colleagues do, and that’s this idea of customizing. Just like our kids need to be parented differently, you are unique. Your situation is unique. Your circumstances are specific to you.
So with that said, let me share with you just a few examples where we’ve been able to customize for clients recently here at Creative Planning and not just because I want you to think, “Oh wow, they’re so great. Look at them customizing,” but I think you’ll be able to learn some things about your situation that may apply to these examples.
Kent Anderson, who’s one of our wealth managers in Bismarck, North Dakota had a client who possessed a sizable position in one single stock. You say, “Well, John, why didn’t client just sell the position and get diversified? It sounds too risky.” Well, there was a tremendous amount of unrealized gains in that position. That stock had been held a long time and grown a lot.
And that’s why it became such a large, concentrated position for this client. Well, we have an options team here at Creative Planning. We implemented a strategy to hedge that single stock risk and then built the entire rest of the investment allocation around that single position, which we were able to reduce risk on.
Another example, Jerrod Pearce, who’s a CPA as well as a CFP, a wealth manager who works with the ultra affluent group, those with 25 million of investible assets or more used a direct indexing strategy for a client to create individual tax positions for harvesting potential.
So to unpack this a little bit more, in many years, even if the S&P 500 as an index is up let’s say, 10% in aggregation, there might be 100 of the 500 individual stocks that are down in value.
Well, if you’re trying to offset the sale of a business or other long-term capital gains that you’d like to trigger, it can be beneficial to sell those 100 positions or some of those to capture some of those losses, allowing you to then harvest gains without paying taxes.
And of course, after 30 days, you can go back into those exact positions if you deem that necessary for the allocation. But that’s just another example of how Jerrod in this case customized for this client. Two examples that I personally had as a wealth manager, I recently had a prospective client who was very focused on investing in a way that aligned with their Catholic faith.
And so they were adamant about avoiding certain types of stocks, which I was able to exclude through ESG screens that we have so that they could get a portfolio that was customized to fit their religious beliefs. I had another client whose net worth and certainly investible assets were mostly held within IRAs.
And per their financial plan, that’s where we need to drive most of the distributions for their income, needs to come out of those retirement accounts. So in their situation, we added a bit more into private debt and that interval fund that Jim Williams, our chief investment officer shared last week during our conversation.
And it made a ton of sense for them floating rate debt paying right now between six and 8% interest with far less day-to-day volatility. It didn’t matter that it was taxed at ordinary income because we were holding it, again, inside of a tax deferred account.
But I have plenty of other clients who have zero alternative investment exposure. They want more liquidity, they want more simplicity and there’s not enough value add for their specific situation. That’s why all this needs to be customized to say anything that I’m sharing with you, resonating.
I mean, are you listening to this saying, “I don’t have these sorts of levels of customization with what I’m doing right now. Either I’m doing it on my own and I don’t really even know where to look for these things, or not well versed in these sorts of strategies, or I’m working with a firm that throws me into one of four models and we talk once a year.”
Back to two more examples. Carlton Weber, a CFP, one of our wealth managers in my office here out of Gilbert, Arizona had a client who was in tech and therefore he was able to exclude all tech from the portfolio to ensure that they weren’t overweighted in one sector.
And lastly, Perry Dufresne who’s a chartered financial consultant, wealth manager in our Phoenix, Arizona office had a client with significant private real estate exposure, a lot of rental properties. So he built the entire investment allocation and then excluded all REITs from the portfolio.
All real estate investment trusts were extracted so that we weren’t compounding an area that they were already concentrated in. And so just like my kids they need me to adapt in my approach, consider their uniqueness and individualism, you need that with your financial plan as well.
And I would encourage you to really consider if you’re not getting that the benefits that you might be missing. Now if you’re just joining me at the top of the show, I talked about our Creative Planning Conference this past weekend that was called Connect 22.
It was an enriching time for me to be around nearly 1500 of my colleagues, thousands of our clients. One of the speakers Eric Potterat, he’s the performance psychologist for the Los Angeles Dodgers. And he’s also a retired Naval officer.
And the premise of his speech just peaked my interest from the very beginning because what he said is, “Let’s examine what 25,000 of the most elite of the elite within their fields, whether it’s the military, professional sports, entertainment, medicine, science, what do they do that the rest of us don’t?”
And since I’m short on time, I want to give you the one thing that I took away more than all else. Elite achievers are doers. They’re not talkers, they’re doers. I mean, we all know people that talk all about what they’re going to do next. And then the next time you see them nothing’s changed and they talk all about what they’re going to do over the next year, two years.
“I’m going to get in better shape.” Well, you don’t have a gym membership and you’re buying the same groceries. “I’m going to drink less.” Maybe get your favorite bottle of bourbon out of the liquor cabinet. Or how about this one, this hits eerily close to home.
“I’m going to drink less caffeine.” And I’m just crushing coffee all day long every day. But we know here in America, we have an incredible health crisis between substance abuse, obesity, and the mental health crisis.
And it’s not because we can’t intellectually figure out what we need to do to be in good shape. The steps that are needed, eat less, move more. It’s that we’re humans and it’s really hard to actually do over long periods of time. The same is true with our money.
A recent study showed that half of all Americans live paycheck to paycheck. And so as promised here are the two things, really the only two things in the midst of how difficult this is for you to overcome your human nature and achieve the results that you desire when it comes to your money.
Number one is delegate. By having enough self-awareness to realize I might not achieve all these things if I have to do them myself. If they’re on me to do, then you delegate, you pay someone else to do it. They need to ensure that it gets done. If they don’t, you fire them, you find somebody else that you can delegate to.
And this means your balance sheet, your retirement projections, your risk management assessment, estate planning, taxes, investments, by making one good hire, you now someone else handling all of that for you. The second thing, automate. That’s right, after you delegate you automate.
I just traveled this last week. I have TSA pre-check. It costs $85 every five years to not have to take off any shoes, to not have to take any liquids or laptops out of your luggage. And to go into a line that saves you, in the case of Sea–Tac International, well over an hour on one leg of my trip.
Why does everyone who isn’t a convicted felon in the TSA pre-check line? Because unless we automate things, even really simple things like filling out a form, spending 20 minutes one day at an office getting fingerprinted is way too much friction for most of us to overcome.
We don’t do even relatively easy things that we know are better for us, unless we automate. Most of the money saved in America for retirement are held within retirement accounts. Why is that? Because it automatically comes out of our paychecks every two weeks. You never see it. You don’t have to proactively go do something with it.
If you think about it, you’re just saving money. You could save it anywhere, but that one little automated step changes the math completely for us. So you delegate and automate. And while we’re just hitting up this alliteration, let me give you one more. It all starts with you needing to initiate.
You initiating means taking the first actionable step toward your goal. “All right. John, I get it. I’m going to delegate and automate. Well, if I’m going to delegate, who am I going to delegate it to?” Well, you better initiate.
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Now back to Rethink Your Money presented by Creative Planning with your host John Hagensen.
John: By now you know Britain’s Queen Elizabeth II passed away at the age of 96 at Balmoral Castle, her home in Scotland. And her majesty leaves behind over $500 million in personal assets from her 70 years on the throne. And who will inherit that, her son Prince Charles, when he is crown king.
And though that might seem straightforward, the Queen’s fortune and what happens to it now is a little bit more complex because much of what is seen to be owned by her actually belongs to the so-called Royal Firm, which is a 28 billion, with a B, empire that members of the British Royal family like King George VI, then Prince Phillip, once referred to as the family business.
And while you likely don’t have $500 million inside of a $28 billion fortune from hundreds of years of past generations, it’s likely you’ve got something. You have some accounts, you have a home, you have vehicles. And so I want to be clear in debunking one of the most common myths I see around estate planning, and that is estate planning is only for rich people.
No, estate planning is for everyone who’s alive and thinks there’s a chance they might die at some point. And so documents like wills, trusts, powers of attorney, proper beneficiary designations. Even if you have a really straightforward situation is incredibly important and they need to be updated as a child goes from being a minor to an adult, as life changes occur, as laws change that impact.
Maybe the taxation of those assets, or a child moves state now they’re in a high state tax environment like California. You may want them to inherit different assets that aren’t taxed as heavy while a child that lives in Florida or Texas and pays no state tax, maybe better off inheriting taxable assets.
And that speaks to the customization that I spoke about earlier on the program. Outside of those documents though, a couple of tips that I’ve seen make a huge impact once my clients are gone and in meeting with their children. And that is don’t forget beyond just passing your valuables, pass your values.
I think that’s one of the reasons along with holding a throne for 70 years, Queen Elizabeth II was admired because of her character and the things that she stood for. And so one of the tips that I have for you is write a letter to each member of your family, at least your immediate family, or you can even record a quick video to them and keep it with your estate planning documents.
And so that when you’re gone, you’ve actually documented, “Hey, this is what I stood for. And this is what I believed in. And don’t forget this.” And it doesn’t need to be you trying to control things from the grave or be in some creepy thing. It’s just reminding them that you love them and you’re proud of them in these ways.
I mean, you won’t see anything be more emotional than a child reading a letter from their parent that’s passed away or from a spouse who’s passed away. In fact, it’s often a whole lot more meaningful than $280,000 in the IRA account because that’s fleeting, that’s temporary.
And this leads me into a question that I receive often from my clients, “Hey John, who should be inheriting my wealth? Who should get this stuff? How do I think about this?” I’m going to post an article on the radio page of our website at creativeplanning.com/radio from one of our estate planning attorneys, Megan Kelly, who wrote specifically regarding the ins and outs of how you can think about who should inherit your estate.
And in that article, I love it because she speaks about reasons to give to your children equally. And if you have multiple children or reasons to give amounts that are different to each child, that can be a hot button. And I know so often you’re saying as a parent, “Well, I love all my kids the same. I want it to be fair.”
Well, I just talked about it. We have seven kids, some that have unique needs, that are different than others. So I want you to remember this concept, love your children equally by treating them uniquely. I love it so much, I’m going to say it again. Love your children equally by treating them each uniquely.
It’s how you show them love, by seeing them individually for who they are. But again, if you want to read the great points Megan has, the details, you can visit creativeplanning.com/radio and I’ll have the article posted there that we provided for our clients.
And while planning things well for once you die can certainly leave a lasting impact, a great legacy, often giving with a warm hand can be far more meaningful for both you the giver and the receiver. And I always encourage our clients, if they’re able to do it and they have a desire to do it and it doesn’t blow up their plan where they’re going to then be dependent upon other family members, try to give while you’re alive.
I want to share with you a conversation that I had with Eric Grauer, who is a wealth manager of our here at Creative Planning out of Chicago. He and I were talking at the Connect 22 Conference about a client planning situation where he rolled everything that I’ve been talking about together.
Customization, next level thinking, giving with a warm hand, these ideas were all combined and coordinated to knock it out of the park, relative to what this client’s objectives were. He had this couple who wanted to start gifting to their children to reduce their estate. They wanted do something more impactful than just handing them cash with no direction.
So their oldest daughter is 22 years old and she just got her first job, done with college. She’s making about 50 grand a year. So what they had her do is max out her Roth 401(k), which is $20,500, contribute to her Roth IRA, which is another $6,000. And like I said, she’s only 22 years old.
And so therefore she’s still on the family’s high deductible health plan. She was also able to max out her own health savings account to the tune of $7,300, because it’s a little known fact, but the daughter’s allowed to do the family max in addition to her parents being able to contribute to the max on their own HSA.
And so with the help of the parents $32,000 gift, the daughter was able to stash away $33,800 into tax free buckets in one year. If she gets historical stock market rates of return and doesn’t touch that 33,800 until 67 years old, it will have grown in tax free accounts to just under $3 million. That’s the power of compounding.
What a great job by Eric Grauer, my colleague, as well as these parents for putting this together to make that sort of impact on the next generation. And that’s where I want to end today’s show. Every week I finish with a line about us being the wealthiest society ever. So let’s do something with it.
Let’s make it matter. But sometimes we think, are we really rich? Do we really have enough? Consider this, the poorest half of the world on average makes just $3,920 per year. Per year, less than four grand. And so by simply being employed and living in America, from a global perspective, we are rich.
And there are so many great mechanisms strategically that you’re able to donate money. Let’s briefly unpack qualified charitable distributions as well as donor advised funds. And I’ll start with QCDs as they’re often referred to, these qualified charitable distributions.
This strategy is applicable if you are over 70 and a half, you desire to give money to a 501(c)(3). So it may be your church, habitat for humanity, charity, water, the humane society, whatever organizations you like to give to. And of course, you also need to have an IRA.
So are you over 70 and a half, you have retirement accounts and you like giving money to charitable organizations? And if that’s the case, QCDs are incredibly efficient. There’s a high likelihood you should be utilizing them. Here is a recent example of a new client that I was working with who was over 70 and a half.
And by the way, required minimum distributions now are at 72 years old, but the QCD age limits 70 and a half, you don’t really need to know that. Just need to be over 70 and a half years old, which this gentleman was, and his required minimum distribution was about $10,000. Well, he was a churchgoer and every Sunday when the offering plate would come around, he’d drop a check-in.
And he gave about $10,000 per year to his church. So it matched up closely with his required minimum distribution. That doesn’t need to be the case, but it makes the math for this example a little bit cleaner.
Instead of him taking a $10,000 distribution from his IRA, paying tax in the 22% tax bracket and then donating either the remaining $7,800 to his church, where his church essentially doesn’t get all 10 grand because 2200 had to go to the IRS, or he chooses to give his church 10,000 and actually has to take out over $12,000 in a distribution to make up the taxes.
He didn’t need to do that if he utilized this qualified charitable distribution strategy, because what’s neat about this is it satisfies that required minimum distribution. Yet because it was directly donated, it does not flow through as ordinary income.
Now you may be thinking a step further and saying, “Well, John, won’t he get the deduction anyhow? Why does it matter? It seems like it’s the same thing.” Well, it’s not for many people like this gentleman in particular due to the Trump tax reform. Because if you recall when that was passed, the standard deduction doubled.
So for many retirees, they’re no longer itemizing their deductions. Meaning many people are not getting any credit for their donations because the total of their deductions still don’t exceed the standard deduction, which is now so much higher.
So again, if you’re over 70 and a half and you are giving money away and you’re taking a standard deduction and you’re not using QCDs, you either love the IRS or are just unaware of this. Don’t make that mistake any longer.
Get more money into the pockets of the organizations that you care about and want to support. And the second giving strategy that I mentioned I would unpack are donor advised funds. Recently these have exploded in popularity and for good reason.
These types of accounts, you can open at most of the major custodians that you’re familiar with, make a one time donation, make flexible donations into that account, invest to that account, have it grow off of your tax return and then select charities at your discretion along the way to distribute that money to.
If you’ve got questions about donor advised funds, qualified charitable distributions or anything else around giving, there aren’t many things our colleagues and I are more passionate about than helping special needs families like you heard earlier on the show and helping you tax efficiently donate money to organizations that are making the world a better place.
My little sister, Elizabeth, works for an incredible organization out of Seattle. In this past week I was talking with her and she pulled out her phone and showed me a video from her trip this last month to Ghana, Africa, where an entire village watched for the first time in their existence a new water well that was being primed up and down, up and down, up and down.
And when it shot out of the ground, like old faithful, like a geyser, that’s what it looked like. Just straight up in the air from all the pressure of the water, the celebration that ensued from those hundreds of people, children dancing, adults hugging one another crying, weeping, because they had clean water.
Because they’re not going to have to have children dying from dehydration, from water born illnesses. And so I don’t share this with you because you should feel guilty about what you have, but rather to encourage both you and me that no matter how small it may seem, any act you can take of generosity may make a lot bigger impact than you would ever imagine when it comes to someone else’s life.
That ripple effect is long and wide and often we never see it. And here’s reality, you want to achieve peace of mind, lower the anxiety and stress around your money. There’s one way to do that. Give some to others. No matter the size, the simple act of giving alerts your subconscious that you’ve got enough, there’s an abundance.
And that abundance mindset, that perspective is far more impactful than your contentment than any account balance will ever bring. And as I say every week, we are the wealthiest society in the history of planet earth. Let’s make our money matter.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on $225 billion in assets. 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.
This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show.
For individual guidance, please speak with an attorney, CPA, or financial planner directly for customized legal, tax, or financial advice that accounts for your personal risk tolerance, objectives, and suitability. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.