On our final episode, we’re using the NFL Conference Championship games to draw the parallels between winning on the field and achieving financial victory. Inspired by the wisdom of legendary football coach Jimmy Johnson and the insights of our President and CEO Peter Mallouk, this episode shares strategies for avoiding costly mistakes when it comes to your finances. We also welcome back Chief Market Strategist Charlie Bilello to share his perspective on the 2024 markets and his predictions for 2025.
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
Episode Notes
John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. Today’s episode is a bittersweet one as it marks the final Rethink Your Money Podcast. For nearly 10 years, I’ve had the privilege of sharing this journey with you, breaking down financial myths, exposing outdated financial advice, answering your questions, and helping you make more informed decisions about your money, at least that has always been my goal. It’s been an honor, and I’ve truly enjoyed every moment of it. But while this chapter is closing, an exciting new one begins next week. I’m thrilled to announce the launch of my new podcast, titled, Your Faith, Your Money. If you’re interested in aligning your values with your finances, integrating stewardship into your financial plan, and exploring how your faith can shape the way you give, the way you save the way you spend your money, this new show is for you.
I’ll look at how a comprehensive faith-oriented financial plan can provide both clarity for you as well as fulfillment when it comes to the resources that you’ve been blessed with. So, if this sounds like something that resonates with you, search Your Faith, Your Money on Apple Podcasts, Spotify, or wherever you listen to podcasts. You can also find more information about the show at CreativePlanning.com/Faith. New episodes start next week, and I can’t wait to continue this journey with you. Well, as I reflect on nearly a decade of Rethink Your Money, it is humbling to think about how far we’ve come. The show started on just one station at 4:00 in the morning. There was probably three people listening, like my wife, my mom, and my dad… Actually, my wife didn’t even listen, so maybe somebody that stumbled across it, my mom and my dad.
But the genesis was that so many of the prospective clients that I was meeting in my practice would come in having been sold products rather than receiving objective advice. They’d tell me stories of being pitched high commission annuities, or proprietary funds, or can’t lose strategies that promised protection on the downside and all the upside of the market. Spoiler alert, those don’t exist. And it wasn’t their fault, they were genuinely looking for guidance and they didn’t know where to turn. And I thought, if I can help even one person avoid a major financial mistake, the show will be worth it. And over the years we’ve talked about everything from market trends, to tax strategies, to behavioral finance, to legacy planning, and as we sit here with the NFL Conference Championship games this weekend, I can’t help but see a parallel between managing your finances and winning playoff games.
The legendary Jimmy Johnson once said, “You lose way more playoff games than you win.” And what he was referencing were mistakes, specifically turnovers, they’re the ultimate game changer. A pick six costly fumble, a boneheaded penalty, that can derail even the best team season, and now they’re sitting at home watching another team hoist the Lombardi. Creative Planning president Peter Mallouk wrote an excellent book along these lines, titled The Five Mistakes Every Investor Makes and How to Avoid Them. It’s no different with your money than in football, where avoiding costly blunders over a lifetime of investing, 30, 40, 50, 60 years, is far more impactful than optimizing every small detail, or trying to throw the Hail Mary and hope you complete it. Let me quickly highlight those five mistakes because if you can avoid these, you will win a lot of games.
The first is market timing, trying to consistently predict market highs and lows, it’s impossible. The data shows that missing just the 10 best days in the market can drastically reduce your returns. It’s much better to stay invested and let compounding do its work. Mistake number two is active trading. The more you trade, the more likely you are to underperform. Studies consistently show that frequent trading not only increases costs, but also tends to result in lower returns due to poor timing decisions and emotional investing. Third mistake is misunderstanding performance and financial information. This mistake covers everything from believing the financial news is actionable, to mixing politics with your portfolio. For example, judging performance in a vacuum, like focusing only on one fund’s return without considering your overall plan, it can lead to bad decisions. Mistake number four, letting yourself get in the way. Oh, wouldn’t money decisions be so much easier if we were walking algorithms? If we were just an AI bot that had no emotions?
Yeah, well, we’re not, and human behavior like fear and greed, overconfidence bias, loss aversion, recency bias, anchoring, and a million others cloud your judgment. And that’s why we know invest store returns are not the same as invest meant returns. We underperform the market because of emotional decisions. So, in addition to market timing, and active trading, and misunderstanding performance, and financial information, and letting yourself get in the way, the final mistake is working with the wrong advisor. Hiring the wrong advisor, someone who’s not a fiduciary, or who doesn’t take the time to understand your unique situation can lead to bad advice and costly mistakes. Go find an independent certified financial planner, and while that doesn’t guarantee you’ll get great advice or have a wonderful outcome, it’s a pretty good starting place, when trying to select between the over 300,000 financial professionals in America. These five mistakes are like turnovers in football, and avoiding them can have a huge impact on your financial outcome.
Today, I’m joined by Charlie Bilello, chief market strategist here at Creative Planning. Charlie’s one of the sharpest minds in business and finance, known for his ability to break down complex market trends into actionable insights. With decades of experience and a knack for spotting the big picture, Charlie’s going to help us as investors navigate uncertain times with clarity and confidence. Charlie, welcome back to the show.
Charlie Bilello: Thank you, John. Great to be with you, as always.
John: I want to start with a reflection back on ’24. What surprised you most about the markets as you think back on this previous year?
Charlie: I’d say just the resiliency of the market throughout the year. So, we hit 57 all time highs for the S&P 500-
John: Wow.
Charlie:… in 2024, that was good for fifth most in history. So, going back 100 years, not many years had such a smooth ride higher. So, that’s always a surprise when that happens because as we know, equity markets can be volatile, are often volatile, are often the reason why you have a big return in the long run is because you have a lot of risk along the way, but we just didn’t see very much of it at all in 2024.
John: One, are you saying that also on the heels of a really good 2023 made it even more of a surprise?
Charlie: Back to back years, John, of pretty smooth returns, 25% for the S&P 500 in 2024, following 26% in 2023. We haven’t seen back to back years that good since 1997, 1998. So, very rare in history to have combined years that strong for the markets. But of course, that was following 2022, which was the worst year since 2008 when the S&P 500 declined 18%. So, as we saw, once again, the markets don’t tend to snap back in an orderly fashion, they tend to rip violently higher once the bad news clears, and that’s what happened again in 2023 and 2024.
John: It’s also another reminder that if you want to make sense of the data, sometimes it’s just sliding the starting or the endpoints a little bit, and they make a little bit more sense depending on what you’re trying to look at. So, let me flip that, Charlie, what didn’t surprise you in ’24?
Charlie: Two things, number one, the housing market, and in terms of it continued to be frozen, it continued to be unaffordable.
John: Sure.
Charlie: And that wasn’t surprising because supply entering the year was just so low, and affordability was so low, and we didn’t see much relief at all in either of those places. So, you had home prices, once again, in 2024 outpacing incomes, you actually had the 30-year mortgage rate rise once again, the fourth year in a row, that hasn’t happened since the late 1970s, early 1980s.
John: Wow, I didn’t realize that.
Charlie: Ended the year at 6.9%, and if you remember just a few years ago, it was below 3%, at an all time low. So, that part, not surprising, transactions very low because of that low supply, demand, dynamic affordability hitting another record low. And then, the second thing I would say that probably wasn’t that surprising to me was that inflation continues to be an issue for consumers, for the economy, and for the Federal Reserve, as I think we’ll probably talk about for 2025, it never hit their 2% target, but despite that, and I guess this would be kind of a surprising, despite that they still cut interest rates by 1% during the year.
John: You’re kind of raising your hand on some of the times we’re talking and saying, why am I the only one saying this? The Fed’s certainly not listening to me on this.
Charlie: Yeah, the Fed has an easing bias, they want to ease. Just like the federal government has a spending bias, they want to borrow money, they want to spend, because they’re rewarded for that, the Fed has an easing bias. And so, all else equal, they’re going to try to bring rates down, they’re probably trying to ease monetary policy whenever they can, because they get all of the credit for it when it goes well, and when it doesn’t go well, well, they simply say, who could have foreseen that? Like what happened in 2022, with inflation spiking to 9%. So, very surprising to me, but it probably shouldn’t have been, that the Fed overlooked the fact that inflation remains high, cumulative inflation is a real problem, and the US economy is still on pretty good footing, and that’s what was so surprising in saying why are they cutting interest rates aggressively here, with inflation still a problem, and unemployment still pretty low at around 4.1%.
John: I recognize that the Fed has a very difficult job, but they seem to be notorious for taking credit for cleaning up messes that they created. I think I’m going to take this approach, Charlie, by the way, with my wife. You accidentally crashed the car and then you go outside and you go, I cleaned up all the glass, aren’t I amazing? I’m guessing my wife’s going to go, but you crashed the car, which is why there was glass in the driveway to begin with. But maybe that’s a broader conversation for another time. I want to talk MAG 7, the tech giants that just dominated again in 2024. Do you think that will continue and they will carry the market in ’25 or does the pendulum swing somewhere else?
Charlie: Let’s look at it two different ways. So, the domination in terms of our everyday lives, John, and you and I have talked about this, that’s going to continue, it’s hard to see that changing, right? Especially Amazon, Microsoft, Apple-
John: Big moats.
Charlie:… Google, all of these things, we’re using these products every single day. I know you’ve talked about, you probably couldn’t live without Amazon more than anything else.
John: Couldn’t do it.
Charlie: If we look at the performance, the big question heading into 2025 is, how much of this has been pulled forward? How much of these high expectations we have for these companies is simply unsustainable at this point? If we look at their weight in the S&P 500, these seven companies, Tesla, Meta, Google, Amazon, Microsoft, Nvidia, Apple… You put them together, two years ago, they were 20% of the S&P 500, which is pretty high. Today, they’re at over a third of the S&P 500, which is a record high for any seven companies in the S&P 500. And that’s a result of just the extreme performance we’ve seen over the past two years. You’ve got Nvidia up over 800%, Meta up over 300%, Tesla up over 200%, just enormous gains outpacing the S&P 500, which as we just talked about, had a great two years, but nothing compared to these seven stocks.
So, if you look at the valuations, John, across these seven stocks, they’re on the higher end of things, we have Apple trading at over 40 times earnings, 10 times sales, a record high for Apple. We know investors like Warren Buffett, Berkshire Hathaway, have been selling these types of stocks. So, the big question for 2025 is, are these high expectations for these companies, given these high valuations, are they too high, and are they going to mean revert at some point this year? It’s been a bad bet the last two years, but let’s say the next 10 years, I think it’s going to be helpful to have something else in your portfolio, just in case expectations are too high. Nobody knows that, maybe AI will prove to be the game changer that everyone thinks it will be, and earnings will explode higher, but if they don’t, you’re going to want to have things outside of those seven stocks in your portfolio.
John: Do you think valuations will expand or contract over the course of 2025? And obviously, you just mentioned the MAG 7, but valuations seem a little more reasonable in other asset categories, so maybe this is a multi-part question, but what do you see happening with valuations across the board?
Charlie: That’s the hardest thing to predict, and that’s why predicting where the S&P 500 is going to end in a given year is impossible. Even if I told you what earnings would do, you still have to tell me, well, what is an investor going to pay for that given level of earnings? And during 2024, what most strategists got so wrong, John, is that we would see multiple expansion, they did not think that earnings, first of all, would do as well as they did, they were up about 10% in 2024, but they definitely didn’t predict that we’d see a multiple expansion of around 15%, and that’s how you get to that 25% return. So, where are S&P 500 valuations compared to history? They’re above average. S&P is trading around 25 times, trailing operating earnings, the historical average over the last 30 years or so is about 18 times. So, we’re over 30% above that average.
Do we have to get to that level by the end of 2025? Of course not, but what should you be thinking about for the next, let’s say, seven to 10 years? You should be thinking about, well, how difficult is it going to be to grow that valuation? In any given year it could go up, so that 25 could go to 30 next year, no one should be surprised. But over a long period of time, what we tend to see when we have above average valuations is lower average returns. But if we look outside, to your question, outside of large cap US stocks, valuations compared to history are not stretched at all. If we look at international stocks, we look at value stocks, we look at small cap stocks, it’s a very different story, they’re much closer to their historical average, and in some cases below it, if we look at things like emerging markets. And so, the big debate, John is, well, is it there for a reason?
Are US stocks getting this valuation premium because they’re better, because they have higher margins, because they’re going to grow faster? And are these other areas trading at these low valuations for a reason as well, because the low earnings that they’ve had in recent years are going to continue?
John: Charlie, national debt, how much higher does it go this year?
Charlie: I was hoping you would ask about that. So, let’s talk about first where we’ve come from. 10 years ago, national debt was 18 trillion, and seemed pretty high. If you go back then you’ll read a number of articles, and people saying, this is crazy, can’t go any higher. Well, boy did it go higher, doubled in the last 10 years, we’re now at 36 trillion. In 2024, we added 2 trillion in debt, we have a deficit still running here of around 2 trillion. And the big reason for this, John, is not that we don’t have enough tax revenue coming in, we have plenty of tax revenue, tax season’s going to come up before we know it here, many of the people listening are going to write these big tax checks. So, the tax situation has been very good, we’re up around 60% in terms of tax revenue coming in over the last 10 years.
So, much more money coming in, the problem is we’ve taken that money and we’ve not just spent it, but we’ve now borrowed money to spend even more. So, we’ve increased government spending by about 2X, so doubling in the last 10 years. So, for 2025, the big question, John, is going to be how much will it increase? I don’t think there’s any situation where it’s going to go down, that 36 trillion number is going to be higher, the question is can we cut that deficit, pull back on the spending side? And there’s been a debate, can Elon Musk cut the 2 trillion that they’re talking about? I think that’s going to be difficult. But can they do a 1 trillion? Can they do 500 billion? They should be able to. They’re definitely going to find areas that are ripe for cutting, fraud, waste and abuse. The question is, with the thin margin in Congress, are they going to have enough to support to get this bill passed, because they can’t wave a magic wand and cut that spending, they have to get Congress to approve it in a bill.
So, I think the deficit, assuming there’s no recession, right? That would be the outlier. Assuming there’s no recession, I think the deficit at the end of 2025 will likely be lower than where it stands today, but how much lower is going to be a function of the appetite in Congress to cut all of these pet projects that they have, and then they have to go home to their constituents and say, we’re not going to spend money here anymore, and of course, that’s at odds with them getting reelected in many cases. So, that’s in the weeds stuff. At the high level, it seems easy, we’re spending so much money in so many places, we could cut probably from every area of the government and there wouldn’t be a noticeable impact, but when you get in the weeds, everybody’s been promised something, and all of these politicians want to get reelected on both sides.
John: What does that national debt approaching 40 trillion mean for everyday investors? Someone listening, saying, all right, this is crazy, Charlie, what does it mean for my money? What does it mean for my 401k, what I’m doing for my retirement? Should it recalibrate potentially how they think about investing?
Charlie: At this point, I don’t think so. And the reason for that, John, is because the way the businesses you’re investing in, as an equity investor, the way they run their businesses is different than the way the government runs its business. The government runs its business with no concern whatsoever for producing a balanced budget or a profit, there’s no such thing as profit, right? It’s deficit, deficit, it’s how much more are we going to borrow? US corporations have never been more profitable, profit margins are near record highs, the earnings hit record highs in 2024, when we had that period of high inflation in 2022, they adapted, they adjusted, they cut costs, they became more efficient. So, they run their businesses at a surplus, and as long as they’re doing that to maximize shareholder value, it’s a totally different animal than something like the US government. And thank goodness that’s the case, and that’s why as an equity investor, you’ve been rewarded.
Now, the doomsday scenario that people will talk about is, well, what if we get to the point where this debt becomes unsustainable, where the US government simply… There’s a collapse, in terms of they can’t sell new securities? We’re not close to that point, I don’t believe, and hopefully we won’t get there. But if that were to happen, and that were to cause consumers to pull back and stop spending, if it were to cause things like the US dollar to lose its dominance around the world, yes, all of those things perhaps could impair earnings of these companies, and perhaps bring the market down, but we’re not at that situation today, thankfully. And I think if we can at least make some steps towards reducing that deficit, and let the economy grow into the debt that we have, we’re not going to raise that 36 trillion, it’s unlikely to ever go down, but if we can keep growing the economy a few percent a year, and we cut spending significantly, well, we could eliminate that problem.
John: From fiscal policy to monetary policy, what do you expect the Fed to do in ’25?
Charlie: Let’s talk first what they’re saying. So, in December they updated their own projections, and every quarter they have their projections of what they’re going to do, you and I know that these projections are almost always wrong, but they still do them, and I’m not sure why they do them. Because as you said, maybe that’s part of the reason why they cut interest rates in 2024, because they did these projections and they didn’t want to lose credibility and all the rest of it. So, I’m not sure really that it serves a great purpose, but nonetheless, they do these projections, and they’re forecasting a half a percent cut in 2025. So, two 25 basis point rate cuts, which is not that much. A few months ago they were predicting about a 1% cut in interest rates, and that would still leave interest rates, let’s say they do that 50 basis point cut, that would still leave it at 3.75 to 4% at year-end, which is much higher than the 0% days that we had for a long time.
John: Sure.
Charlie: So, it doesn’t seem likely we’re going back to that 0% environment, what is the market saying, John? This is interesting. The market’s saying the exact same thing. So, they’re on board with the Fed. And the reason why the Fed is slowing down here is we just got an inflation print in the US, 2.9% for the month of December, well, now that’s rising, that’s moving in the opposite direction of their 2% target, which they never hit. So, it bottomed at around 2.4% in 2024, the Fed cuts interest rates, and then it starts moving towards 3%, and now the expectation’s going to come down. Now, where would it actually end the year, John? No one has any idea because it’s dependent, more than anything else, on the US economy. And if there was a recession in the US, or signs of a recession, I think the year will end with much lower interest rates, if there’s no recession and inflation starts picking up and it goes above 3%, maybe we don’t get any cuts in 2025.
John: Sure. I’m going to ask you to answer my final question, which you’ve led me to here, which may be impossible to answer, based on what you just said, what do you think happens economically in 2025, slowdown or the economy picks up?
Charlie: So, the base case scenario always should be the status quo, the economic engine in the US, it’s such a diversified economy, it’s hard to break it. As long as the US consumer has their job, and they’re making more money at their job, and that wage growth is outpacing inflation, it’s very hard to take the US economy down. So, for the foreseeable future, you can’t predict these things more than a quarter or two out, generally. The first quarter we should still continue to see growth, and then all of those economic policy changes that might be coming in with a new administration, well, they’re going to have an impact. We don’t know yet how big they’re going to be, and how much of an impact they’re going to have, and whether that’s priced into the markets or not, but there’s going to be some changes, and we’ll see.
And people are predicting the end of the road for the US economy for the last two years, they’ve been wrong about it, it’s very hard to break a train in motion. If I look at the travel numbers from 2024, people are still spending money on experiences, on travel, on concerts… All of that stuff, to me, means that people still have money, whether they’re going to continue to have it, depends on are they going to continue to keep their jobs.
John: Yeah, absolutely. Well, Charlie, this has been fantastic, thank you for sharing your insights with us here on Rethink Your Money.
Charlie: Awesome, John, always great to be with you. Happy New Year everyone.
John: Now, let’s do what we’ve been doing for nearly a decade together and that is debunking some of the worst financial advice that I’ve encountered over the years, so that you can avoid making these mistakes for yourself. The first is that insurance is an investment vehicle. You’ll hear life insurance referred to as the Swiss Army knife, not really referred to, I should say marketed as by a salesperson, hoping to make a big old commission. You get protection, you get savings, but you get the investment returns, and it’s all rolled into one. Doesn’t that sound great? All the safety, and protection, and the returns? Oh my, amazing. That whole idea, if it sounds too good to be true, it probably is. What’s the catch here? It’s not a good investment vehicle for most people. I’ll give you a few of the reasons why. Generally, high cost. Permanent life insurance, we’re talking whole life, universal life, often come with premiums that are significantly higher than term insurance.
The reason for that is your paying for a permanent death benefit, and we’re all pretty certain at some point you’ll die. How about low returns? The cash value grows at a rate that is typically far below what you’d earn in a diversified investment portfolio. You’re talking about returns that might barely outpace inflation, if at all. You’ve got a lack of liquidity, you need access to the cash value in year four, you’re way underwater. The insurance company paid that commission, and has all sorts of front-loaded costs, where they’ll have to pay a death benefit out to you if you die early in the policy terms, you haven’t made a lot of premiums, that’s where the risk is highest for the insurance company. And then, they’re just massive conflicts of interest. The agents selling these policies often earn hefty commissions, sometimes as much as 100% of your first year’s premium.
So, let’s say you’re doing a 10 pay, just as an example. 100K a year, you’re going to put a million dollars in… I know this is a big policy, but I see these all the time. There’s a few different reasons why, but generally it’s, hey, this is a safe vehicle, it maybe has some tax advantages, it has a death benefit… that insurance agent is likely getting a check for 90 to $100,000 when you send in your first premium. Now, I’m all for people making a good living and making a bunch of money, but that’s a huge conflict of interest because if you just put that $100,000 into an investment account, and they charge you 1%, over the next 12 months, they’ll make $1,000 instead of 90 to $100,000. Yeah, you think that might taint their view a little bit on what they tell you to do with what you’ve worked a lifetime to save?
The bottom line is that life insurance is almost always sold, it’s very rarely bought. So, the next time that you hear insurance positioned as an investment vehicle, don’t walk out of that office, run. Another piece of bad advice, Dave Ramsey’s 8% withdrawal rule. Now, let me start by saying I respect a ton of what Dave Ramsey has accomplished, I am not bitter or are trying to throw the baby out with the bathwater. When it comes to budgeting, helping people have peace of mind around their money, living within their means, having financial freedom… I don’t know if anyone has done more than Dave Ramsey. Plus, he’s just a very entertaining radio host, whether you agree or disagree with his takes or with his beliefs, he’s certainly fun to listen to. But his 8% withdrawal rule is just awful, it’s just not correct, because it’s risky. And it’s risky for several reasons, starting with sequence of return risk.
Even if the market averaged 10% per year, as it has historically, those returns are not guaranteed to occur in a straight line. The stock market’s not a 10% CD, where you say, perfect, it’s going to make me 10 and I’m going to take out eight, so how will I ever run out of money? Well, no, the sequence that you can’t control dictates significantly, whether you have a lot of money at the end or whether you’re broke and living in your kid’s basement, even with the same exact investment strategy. Because if you retire during a down market, let’s say you retire at the end of 2007, and then your first year of retirement, ’08 happens, the great financial crisis, and you’re pulling out 8% a year, you’re cannibalizing your portfolio. You’re selling more shares at lower prices early in retirement, and it means that even once the market recovers, your portfolio might not.
By contrast, you do the exact same strategy, and you retire in 2010 or ’11, and you watch for the next 14 years a phenomenal run in the broad markets, you weren’t smarter, you didn’t do something that would’ve worked in any scenario, you just happened to be a little younger and retire a little bit later, it’s the only difference. A much more realistic and widely accepted approach is the 4% rule. And even that, you should adjust based on your specific situations, like your spending needs, and your life expectancy, and what market conditions are. But this idea that you can take an 8% withdrawal from your accounts, and if you’re invested properly, you should be just fine, and anyone that says otherwise is a, “Dag gum idiot,” or whatever he says, there’s just multiple periods where you can back test that rule and show someone running out of money, if they adhere to what he is suggesting. Bad advice.
So, stick to Dave’s budgeting and getting out of debt strategies, those are good. And my final piece of bad advice that stands out to me over the years of hosting Rethink Your Money is believing in gurus or market beaters. The idea that there’s someone out there, whether it’s a fund manager, a genius stock picking whiz, who can consistently beat the market, who can get you better returns, is one of the most persistent myths in all of finance. Subscribe to my newsletter and you’ll get great returns, or check out these amazing dividend companies that I know of that can get you 12% income. It sounds amazing. Yeah, if that person knew something, they wouldn’t be selling you a $9.99 monthly newsletter, they would just invest for themselves and have 12 houses around the world and be a billionaire. They wouldn’t be hustling you a newsletter.
And the reason it doesn’t work is because of market efficiency and the randomness of success. So, when you look at market efficiency, the stock market is a reflection of millions of participants, two smart people on the opposite ends of a transaction, then prices adjust almost instantly to any new information, making it incredibly hard for any one person or firm to consistently outsmart the market. Think about selling your home, there’s an efficiency level of residential real estate, right? You kind of know about what your house is worth, and if you price it way above that, no one’s going to buy it, and if you price it way below it, you’ll sell it within an hour, and you’ll have multiple offers. And you’d be crazy, because why would you sell your house for way less than it’s worth? You kind of know that range and that window, based upon comps, what your house is worth.
Now, take that level of efficiency and increase it exponentially. That’s how efficient the stock market is, so exploiting an undervalued stock, who’s saying it’s undervalued? I would argue that the intrinsic value of a company is most accurately depicted in its current price because it’s what millions of market participants in a free market environment are willing to buy and sell it for. And then, you have this randomness of success. If I had all of Arrowhead Stadium stand up, and instead of doing the tomahawk chop, or throwing snowballs, or yelling at the refs to give Patrick Mahomes another roughing the passer penalty when he is touched by somebody’s pinky, what if all the fans took a penny, stood up, and every time I told them to flip their penny, those that flipped heads, stayed standing, and everyone that flipped tails, sat down? We could do the exercise 10 times, and you’d have multiple people who had flipped heads in a stadium of 60,000, who never flipped tails. It’s the law of large numbers.
It doesn’t mean they’re amazing flippers, it doesn’t mean they’re really likely to flip heads 10 straight times again, if we had everyone stand up and do the exercise all over again, it’s just that they got lucky. That’s how it works when you have thousands and thousands of money managers. In fact, the data shows that about 10 to 15% over an extended period of time will outperform the market. Unfortunately, there’s no mathematical correlation between past performance of those managers and their future. So, we then rush in and buy into those investments because, man, look at the track record, right? And this is a classic thing for brokers and salespeople to show you. Look at the five star fund. Look at its three year and five year and seven year performance. And then you wonder why you’re disappointed so often over the next three, five, or seven years.
Yep, I know it’s shocking, the same coin flippers weren’t standing again when the fourth quarter ended at the AFC Championship game. Shocking, right? This myth persists though because it feels intuitive. In most areas of life, harder work leads to better outcomes, right? If you study more, you’ll ace your test. If you shoot 100 free throws every day, you’ll become a better shooter. No, you’re not going to become Steph Curry, shooting 30-foot threes and turning around before it even goes through the net because you know it’s in. No, you’re not going to be Steph. But you’ll likely be a lot better shooter than you are right now, because you put in the work. The stock market is different, no amount of effort or intelligence can consistently predict the unpredictable.
And I do want to highlight three other common financial wisdoms that are worth giving a second look to. The first is that you should strive toward a 0% tax rate in retirement. It’s a common goal to pay as little in taxes as possible during retirement, and this has become increasingly popular because the vast majority of Americans saved almost everything for retirement in deferred retirement accounts, like your 401k, or if you’re a federal employee, the TSP, or a 403B, or a 457, or a traditional IRA. Maybe had been rolled from a previous employer 401k. And so, you minimize taxes by deferring income while you were saving, the whole time you were working. And then that person got into retirement and all of a sudden realized every distribution for the rest of their lives was taxed at ordinary income, and stacking on top of all the rest of their income, and anything that they passed away with would also be taxed to their beneficiaries at ordinary income.
And because we’re in the Trump tax reform, at historically low tax rates, and we are approaching $40 trillion of national debt, people have started to rethink that. Which, by the way is a good thing. But it’s brought about this idea that just pay all your tax up front and then get into a 0% bracket in retirement so you don’t have to worry about that. Well, yes and no. Because striving for a 0% tax rate in retirement is not always the best strategy. Instead, here’s what I want you to do, aim to minimize your lifetime tax bill. The Roth option in a 401k or an IRA can be a great tool if you are in a lower tax bracket now than you expect to be in the future, right? But if you push everything into the Roth, and maybe right now you’re in a high bracket, much higher than you’ll be in retirement, because you’re a high income earner right now, that might not make the most sense.
Yes, it will minimize your tax bill in retirement, but if overall you pay more, that wasn’t a win. If you’re very charitably inclined, you’ll pay $0 of those $10 if you pass it to a charity, to your church, any 501C3. Well, then why would you ever be doing a Roth and paying tax to the IRS when you could completely disinherit them? But on the counter, why do you want to defer if almost everything’s going to go to your kids, who are super high income earners in a state like California? Going to pay the IRS more, you should be taking your medicine today at your rates, and getting the IRS out of your kids’ pockets down the road. This is where an individualized customized plan is so important. To work with your CPA and your CFP and have them discussing your situation, not just reporting accurately, being a good accountant historian, of what you already did, putting the right numbers in the right boxes, but actually looking into the future.
Another piece of common wisdom to rethink is that Medicare covers costs abroad. This is one of the most misunderstood aspects of health insurance once you’re in retirement. Generally, Medicare does not cover medical expenses incurred outside the US, and if you plan to travel internationally during retirement, plan ahead. We have an entire international team here at Creative Planning, works with our clients, in over 75 countries, because there are a lot of nuances and things are not the same. You might need supplemental insurance. What are you going to do for emergency evaluations? How about prescription medications? The key takeaway, don’t assume Medicare has you covered overseas, planning ahead can save you significant stress.
One of my favorite books in recent years is James Clear’s Atomic Habits. And I believe the lessons from that book apply directly to personal finance. Clear emphasizes in a specific section around money that success is about small incremental improvements, it’s what he calls the 1% rule. He explains that getting just 1% better each day leads to exponential improvement over time. In fact, if you improve by 1% each day for an entire year, you’ll be 37 times better by the end of the year, and that principle applies perfectly to your financial life. You don’t need to become a financial wizard overnight, but focus on small wins, on automating your savings, on increasing your 401k contributions, even just by 1% every year. Think about where you’ll be 10 years from now, 15 years from now. Maybe it’s just reducing unnecessary expenses by 1%. These small steps compounded over time create massive progress.
Clear has a few other principles that he also lays out that are fantastic, like focusing on systems rather than goals. Goals are fine, they’re often just wishes, certainly without a clear plan. But if you want to improve your finances, you need a system. Have a written documented detailed financial plan that outlines exactly where you are, your cash flow, your balance sheet, your investment strategies, your estate planning, your tax planning… If that sounds like too much, then hire a great financial advisor to help you with that. But that’s the beginning, have a system. And finally, Clear talks about the importance of tracking progress. What gets measured gets improved. And that’s why I encourage you, you don’t need to look at the stock market every single morning, but should you stay broadly on top of monitoring what’s going on with your financial life? Yes, you should.
And when you do, it should be really boring. It’s like going to the doctor. You don’t want the doctor to say, well, this is crazy, I’ve got this unbelievable new idea, you want it to be business as usual, with maybe a few tweaks along the way. The best financial plans are predictable and pretty boring, but generally very effective. Now, it’s time for listener questions, one of my producers, Britt, is here to read those. Britt, let’s start with Randy in Delaware.
Britt Von Roden: Sure thing. Randy shared that he is considering Roth conversions as part of his retirement strategy, but he is unsure about the optimal timing. His question for you, John, is when is the best time, or situation, to consider Roth conversions, and how can it benefit his overall plan?
John: Well, great question, Randy. Questions around Roth IRAs, Roth 401ks, whether it be contributions, conversions, backdoor Roths, mega backdoor Roths dominate my inbox. Roth conversions are most useful, just looking at these from a high level, when you’re in a lower tax bracket now than you expect to be in the future. So, for example, let’s just say you retire at 62, but you have some flexibility on when to take social security, or a pension. Maybe you’re going to wait until ’67 or ’70. That gap can create a window of opportunity, and during that time, you might be in a very low tax bracket voluntarily. And meanwhile, you may have a lot of money you’ve previously saved while working in tax deferred accounts, that between now and the day you die will be taxed at ordinary income rates. Assuming you don’t give them away to a charity.
And that’s the period of time where a Roth conversion can be a smart move. Maybe it’s just that you’re in between jobs for a year, you’re used to making 250K a year and all of a sudden you’re going to have one year where you make nothing. But you’ve been saving a bunch of money. You’re not yet retired, but maybe you’re in your 40s or your 50s and you have a temporarily low income year. You maybe look to do a conversion. The mechanics of how it works is you transfer your money from a traditional IRA directly into a Roth IRA, the money in the Roth grows tax-exempt, and when you withdraw the money in retirement, there are no taxes owed, assuming you follow a few rules. You do pay tax on the converted amount at ordinary income rates the year that you do it, but the assumption is that’s a lower rate than you anticipate it would be down the road.
That’s the benefit. And with national debt approaching $40 trillion continuing to run at a deficit, many assume that rates are going to increase from where they are today over the next 10, 20, 30 years. The bottom line though, Roth conversions are about strategic planning, they’re not about guesswork, they are irrevocable once done. So, work with your certified financial planner, make sure your CPA is looped in, as we do here at Creative Planning, so that you can feel confident that you’re minimizing your lifetime tax bill, not just how do I minimize taxes in this calendar year. All right, Britt, let’s go to our next question.
Britt: Our next question is from Patrick in Delaware. And Patrick says that his employer sponsored retirement plan has a vesting schedule, and he wants to know if you can explain what might happen if he quits before he’s completely vested.
John: Well, vesting refers to the percentage of your employer’s contributions that you’re entitled to keep if you leave the company. Your own contributions are always 100% yours, but sometimes employer contributions, like matching, come with a vesting schedule. There are two common types of vesting schedules, one would be cliff vesting, where you get zero of your employer’s contributions until a specific date, say three years, and once you hit that date, you’re 100% vested. The other type is a graded vesting schedule, where your ownership increases incrementally over time. So, for example, you might be 20% vested after one year, and then 40% after two years, and so on. It is important for you to understand, if you leave your job early, before you’re fully vested, you will forfeit that portion of your employer’s contributions that have not yet vested. So, before making any decisions, check your plan’s vesting schedule, and consider whether it’s worth staying maybe for a few more months, or for some other extended period of time until you’re more vested or fully vested. All right, Britt, let’s go to the last question for today.
Britt: Our last question today is from Mackenzie, who just inherited an IRA. She says, this seems like an easy question, but she has no idea what she should do with this, and would like to know if you have any advice for her, John.
John: Well, great question, Mackenzie, it’s probably the first time you’ve ever inherited an IRA, so it’s no surprise that you are unaware of exactly how they work. Let me help you here with some of the basics, if you have additional questions, certainly you can visit CreativePlanning.com/radio, reach out to us and we can help look at this more specific to your situation. Here are some of the things that you need to know. The first is determining the type of IRA. A traditional IRA is treated different than a Roth IRA, from a tax and distribution treatment standpoint. Understand the new rules, under the Secure Act, most non-spouse beneficiaries must withdraw all the funds within 10 years, this can create significant tax implications, under the assumption that it’s a traditional IRA. Now, you don’t have to wait all 10 years, but you may have the ability to wait 10 years.
So, again, it really comes back to tax planning, similar to the Roth conversion question I just answered, where you are trying to figure out how you smooth out your lifetime tax bill and what makes the most sense, along with the logistical headaches and reporting requirements of an inherited IRA, and how large is the balance to begin with. I’d consider a strategy. If this is a large IRA, withdrawing large amounts may push you into a higher tax bracket than you want to be, so talk with your CPA, figure out the right amount relative to the rest of your plan. Maybe you bunch some charitable donations in years where you take larger withdrawals to control the income, just to keep you potentially below the threshold of a certain bracket that you want to avoid. And then lastly, there are investment considerations. The current IRA may be held in an insurance product that isn’t growing much, and so now you’re balancing the tax implications with maybe a strategy, or a lack of options, or higher costs, or whatever it might be that you’re not a big fan of.
So, you do want to weigh the pros and cons of the specific product, and whether there are any additional restrictions. There are some cases where you have 10 years per the IRS to distribute the money, but it’s in an investment vehicle that says, hey, within 12 months of the account owner’s passing, this money has to be out of here. Right? So, that doesn’t necessarily mean the distribution has to be taxable, but you may have to move it from one investment to another. Again, if you have questions, you can reach out to us or a certified financial planner.
Well, as I close, I want to leave you with one of my favorite thoughts. We all want to make progress, but how do we do that? I love the quote, “You’ll never change your financial life until you change the habits you practice daily.” The secret to financial success isn’t found in one big moment, it’s found in small, consistent actions you take every single day. Money is just a tool, it’s how you use it that determines whether it builds the life you want or whether it holds you back. If you want to change your financial outcomes, start by changing your habits. Thank you for joining me over the last decade on Rethink Your Money, if you’d like to join me for my brand new podcast that launches next week, titled, Your Faith, Your Money, you can learn more at CreativePlanning.com/Faith, or subscribe wherever you get your podcasts by searching Your Faith, Your Money. And remember, we are the wealthiest society in the history of planet Earth, let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning, To hear past episodes or learn more about the topics and articles discussed on the show, go to CreativePlanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer:
The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Higginson works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show was designed to be informational in nature and does not constitute investment, tax, or legal advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to CreativePlanning.com, Creative Planning Tax and Legal are separate entities that must be engaged independently.
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