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How to Master Your Financial Priorities

Published on September 4, 2023

John Hagensen

Not all financial priorities are created equal. Find out the hierarchy you should follow and how correctly prioritizing your goals will play a crucial role in your future financial success. (1:36) Plus, Creative Planning Chief Market Strategist Charlie Bilello discusses winners and losers in the rising interest rate landscape, shedding light on the surprising resilience of the housing market and dispelling misconceptions about the impact of Fed policies on stocks. (10:48)

Episode Description

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, the two essential tasks for money success, my conversation with chief market strategist Charlie Bilello, as well as an examination of financial products with some of the worst reputations. Is the negative sentiment justified or not. We’ll unpack that together as I help you rethink your money.

Not everything in your life is a high priority. If you go to Paris for the first time, you’re going to see the Eiffel Tower, the Notre Dame Cathedral, the Louvre. Those are must dos. Now, probably get to the Catacombs. That’s a site you should see. And maybe you make your way to the Louis Vuitton Foundation or a PSG soccer game. Those are things you could do. But if you don’t get to them, they won’t ruin your trip.

You see, there is a hierarchy. And some of the most successful people are those who prioritize effectively. Whether it be with how they allocate their time or their resources, maybe most importantly, their attention, their efforts. Because we’re very distracted. We’ve got all sorts of information hitting us from every direction. And when it comes to you managing your finances, it’s vital that you recognize not every financial strategy carries the same weight. Not everything in your financial plan is a priority. But just like in everyday life, there are things you must do from a financial perspective.  There are things you should do, and there are things you could do. And your ability to parse those out plays a crucial role in you achieving maximum success with your finances.

And so as I break these down, it’s important to note that, as your financial situation improves, you can gradually shift your focus away from the must dos, because you’ll say, I’ve already done those, over to the should dos. And then once those boxes are checked, you can focus on strategies that sit on the peripheral as could dos. I only have two essential financial tasks that are must dos at the very top of your list.

The first is create a financial plan that aligns your investments with your goals. Like a legit, written, documented, detailed, dynamic financial plan. I say it often on the show, but if you don’t have this, nothing else that I mention is all that important. This is like bringing your passport on your trip over to France. You’ve got to have it. And a key piece to that plan, are you on track for retirement? Have you saved enough for retirement, or do you need to adjust that? Is the date you plan to retire going to work? If you’re at retirement or well into retirement, is the income you need sustainable to get you all the way through retirement, and maybe have something left over if that’s a priority for you?

And that doesn’t need to be a guess. It should not be something you’re wondering. Because there are fantastic certified financial planners all across the country who aren’t looking to sell you something. They’re not shoving products down your throat. But can break down specific to you, not on some online calculator that gives you a rough generalization. I mean those are fine, but those are not a replacement for seeing a credentialed fiduciary who can personalize and tailor the entire plan and projections to your specific situation.

And if you’re curious how you stack up, let me share with you, the average Americans within certain age brackets have saved. 35 and under, $30,000. 35 to 44, $132,000. Ages 45 to 54, the average American has saved $254,000. From 55 to 64, a little over $400,000. From 65 to 74, about $430,000. And over 75 years old, $360,000. Are you confident that the financial plan that you have in place is complete? Because if there’s any hesitation, and you’re not sure where to turn, why not give your wealth a second look. Reach out to us here at Creative Planning to speak with a local advisor. There’s no obligation to become a client. It costs you nothing. We’ve been helping families since 1983 in all 50 states in over 75 countries around the world. Visit creativeplanning.com/radio now to speak with a wealth manager just like myself.

So I told you there are two. First is have a financial plan. Second must do financial task, create an estate plan. Even if this is a basic estate plan. I met with someone earlier this month, $7 million investible. I mean just done a fantastic job at repeating the habits that create wealth. A net worth of nearly $9 million. In his ’70s, no children, and absolutely zero estate planning documents of any kind. And this is a smart person. Highly educated. I mean, he asked me a lot of questions in our meeting that were what I would consider next level. But no estate plan?

As of 2023, only 34% of US adults have a will. I’m not talking about even a revocable trust or other documents like powers of attorney. Just a will. Two thirds of all Americans do not have one. Are you one of those people? If you are, it’s time to get this done. So I’m keeping it simple. The must dos, create a financial plan and have a basic estate plan. Once you’ve knocked those out, number one is create a tax strategy. I’m talking about forward thinking tax planning. When’s the last time your financial advisor reviewed your tax return? When’s the last time your financial advisor, assuming that they are not a CPA, sat down with your CPA and you, not regarding filing your taxes, but to strategize the next year, or the next five or 10 years, or your lifetime tax bill.

If you don’t like the answer to that, you should be, again, because these aren’t must dos, these are should dos, you should be wondering what you might be missing. I’ll post an article to the radio page of our website written by Creative Planning’s John Wheeler. He is a certified financial planner and a CPA, and he wrote about the four important reasons to proactively manage your taxes. And I’ll summarize the article at a high level. It saves you money. If you’re in a high bracket, and you use a municipal bond rather than a taxable bond, it may provide tax exempt income to help you diversify the portfolio. Maybe you’re using a backdoor Roth strategy, or you’re executing Roth conversions, or you’re staying on top of your tax withholdings, so that you can efficiently manage your end tax bill.

Good tax planning can enhance your investment returns. Returns asset location is a huge one. Do you have the right investments owned in the right types of accounts? Maybe you should be tax loss harvesting. Did you do that in 2022, or in 2020 or 2009? If you’re in retirement, are your withdrawal strategies tax efficient? Are you pulling the income you need from the correct accounts? How are your RMDs, those required minimum distributions, fitting into that strategy? HSAs, contributions to 529 college savings plans for kids or grandkids. If you’ve got your estate plan knocked out, you feel good about your financial plan, this is the next thing you should be asking yourself. Do I have a great tax strategy?

And my other should do for you is that you should have a thorough investment analysis. How frequently are you evaluating the expense ratios, the asset allocation, and where that fits into your risk tolerance, your safety needs, and your retirement goals? And when you review this regularly within the context of your broader financial plan, it creates more clarity, which leads to less stress and anxiety, even when the markets are choppy or down in value, because you feel comfortable that your investments are efficient and aligned with your bigger picture goals.

And lastly, I have three could do financial strategies. They’re beneficial, might not be immediately necessary for you, or maybe ever necessary based upon your situation and your retirement goals. But if you’ve got a great financial plan and your estate planning’s dialed in and your tax planning’s dialed in and you’re on top of your investments, you could then look outside of traditional investment strategies, such as alternatives with a piece of the portfolio. You could look into more complex estate planning. Do you need a charitable remainder trust or irrevocable trusts? And that may also incorporate your philanthropic goals within that financial plan.

But don’t get bogged down by those types of complex strategies that you hear about if your financial plan isn’t in place. Because relative to that, they’re not that important. So if you have any questions about your financial plan or your estate plan, those are the must dos. Do not procrastinate. Find an independent advisor. And again, if you’re not sure where to turn, we’re happy to help at creativeplanning.com/radio, you can schedule your visit.

You may have noticed that the market’s down a bit here in August. Now it’s been coming back, looked worse a couple of weeks ago. It’s not a huge deal. But there were certain asset classes that dropped about 10%, which is called a correction. And of course, whenever they happen, even though they happen quite often, the media blows them out of proportion and makes you think the sky’s falling, you probably need to adjust your entire investment strategy, and most notably that this is probably the beginning of something much worse to come. No, it’s not.

Let me share with you some encouragement. The market’s dropped 10% or more intra year in 10 of the last 20 years. So every other year, this has happened over the last two decades. Only three of those 10 years finished negative. So historically, corrections have been great buying opportunities. If you look at the Fama French Total US Market Research Index returns going back to 1926 through the end of last year, so not even counting the great returns we’ve seen here in 2023, the one year average returns after the market has had a 10% decline, you’re up 12.5%. What are the three year average returns? You’re up 34.5%. And the five-year average cumulative returns are up just under 70% following a 10% market decline. The takeaway isn’t that it’s promissory that you’ll see phenomenal returns every time coming out of a 10% drop, but it’s absolutely not a time to feel pessimistic about your prospects moving forward. So my advice is stay the course, rebalance, and ignore the noise.

My special guest today is Creative Planning chief market strategist Charlie Bilello. Charlie’s been named by Business Insider and MarketWatch as one of the top people to follow on Twitter, or X, or whatever it’s called now. His market insights are often featured in Barron’s, Bloomberg, and the Wall Street Journal. Charlie has his JD and MBA in finance and accounting from Fordham University, after earning his BA in economics from Binghamton University, he holds the chartered market technician designation and the certified public accountant certificate. Charlie, thank you for joining me here again on Rethink Your Money.

Charlie Bilello:  Thank you, John. Great to be with you.

John:  The prevailing story of the past couple of years was heavy fiscal stimulus coming out of the pandemic, record levels of inflation, subsequent rapid rate increases in response, and that’s produced certain winners and losers, as there tend to be in every economic cycle. So I want to start with a couple of questions. Charlie, who do you see as the beneficiaries and those who have suffered most due to this environment? And then more broadly speaking, why haven’t there been the seismic negative impact forecasted, whether it be the housing market that hasn’t broken, or the stock market that’s continued to push higher? What’s your explanation for that?

Charlie:   A lot of resiliencies. It’s really unexpected going in. So if we told you in March 2022, the Fed is going to hike rates over 500 basis points going from zero to five and a quarter percent to five and a half percent, you would say this is going to have big ramification, and almost none of it’s going to be good. That type of broad saying in markets simply doesn’t work. In a dynamic economy, it doesn’t work. Because there’s always winners and losers. I think it comes down to the assets that you have, the liabilities that you have.

So let’s start with the liabilities. If you have floating rate debt, if you have credit card debt, very few assets, not very good at all, rising rates. So let’s not dismiss that enormous factor. We just learned last week that credit card debt outstanding, the total in the US, surpassed $1 trillion for the first time, and the increase over the last year, 16%. So it’s rising far exceeding the rate of inflation that you would normally see. So people are taking on more debt. The interest rate on that debt is now over 20%. It’s at a record high. So if you don’t have assets to counteract that, and you just have that credit card debt, that’s the people that are in the worst situation.

John:  By contrast, someone in a fixed rate mortgage is able to shrug it off because their biggest debt’s interest rate hasn’t moved.

Charlie:  And that’s the huge factor, and that’s the vast majority of mortgage holders in the US. Other countries are different, but in the US have that fixed rate mortgage. And so if they have that fixed rate debt, they either refinanced or bought a home when rates were at 3%. And they don’t have credit card debt and let’s say even more than that, they have cash on their balance sheet that’s now earning over 5%. Well, they’re feeling pretty good. So it’s really been a tale of two cities. It’s the best of time for people that have a lot of assets. As you mentioned, the stock market’s been very resilient. The S&P 500’s actually higher than where it was when the Fed started hiking rates in March 2022. That’s something very few people predicted. But if you go back and look at the history of rate hike cycles, that’s not uncommon or unique. The three rate hike cycles before this last one, the stock market was up each and every time. So this notion that stocks or the economy can’t continue to grow in the face of higher rates, simply not true.

But this bifurcation, John, between the people who have assets, people who have liabilities, I think this is only going to continue to be exacerbated in the next few months here because, credit and debits, it builds over the time. You’re going to have a higher debt burden if you can’t make that monthly payment. Now we have student loans, so talking about other debt. People are going to have to start paying that back. That’s been a few years since they’ve had to do that. And now if you look at the car market, this is a huge factor, and I think it’s an important one to talk about. Anyone who’s in the market for new assets and big asset purchases, well this is a difficult time for them as well.

So the existing homeowner who’s locked into that low rate, very good, but if you’re looking for a new home, you haven’t bought a new home, you need a new car, well now the financing rates on that, you’re looking at mortgage rates over 7%, you’re looking at car financing rates over 7%, and even higher if you have low credit scores. It’s definitely having an impact. It’s just not as big of an impact as people thought. And that’s because only 11% of household debt is floating rate. But if you’re in that 11%, that’s a very difficult time. But for now, people in that other category are making up for it and then some.

John:  These sorts of environments really widen the gap between the haves and the have nots. Because if you’re able to lend out money because you have assets, you’re getting phenomenal interest rates. But if you’re the one needing to borrow, it’s crippling. And all of that’s compounding either to the positive or negative faster than really we’ve seen in a couple of decades.

Charlie:  There was that saying for years, cash is trash. And you don’t want to be holding anything in cash because it’s paying you nothing. That made a lot of sense. You might as well take risk in something like the stock market because at least you have a perspective return. But if you’re a retiree now, you don’t want to take as much risk. Let’s say you have a shortened time horizon. And for any number of reasons, you want to hold a higher level in fixed income, well, you’re probably feeling pretty good because rates haven’t been this high in terms of cash since 2001.

John:  Charlie, let’s move over to a few famous adages. Don’t fight the Fed, sell in May and go away. Are these relevant for investors? How should they think about these?

Charlie: There’s a tendency in markets to want to think that things could be as simple as these sayings. And we hear them all the time. And so let’s break them down. So something like sell in May and go away, every single year you see these headlines. If people don’t know what that means, people are saying to sell your stocks at the end of April because there tends to be weakness from the period of May through October. Now that sounds great on paper. Let’s say that happened each and every year, very simply, you just sell your stocks, buy them back right before November, and you avoid all the downside. Problem is the devil’s in the details. And when you dig into the data, and I tested it going back to 1928, looking at each and every period from May through October, what you find is something pretty interesting. Yes, stocks do go up less from May through October, but they’re still up.

John:  They’re still positive, right?

Charlie: And positive over 70% of the time. So by you trying to time that, and they’re certainly periods from May through October that are bad for the stock market. We saw that in 2008. But there’s many periods like 2009, like 2020, like this year so far, where stocks go up and they go up a lot in that period of time. And the problem for investors that are getting in and out, or trying to get in and out based on this, what do you do when the stock market runs up 10, 15% during that period? If you sold out, are you going to buy back in then at a higher price? Probably not.

John:  Well, and this is going to sound harsh, but I truly think it’s one of the great examples of arrogance or hubris, whatever you want to say. When someone believes that they are going to be able to time the market and figure out when to get in and when to get out. Just go to COVID. That had to break the brain of every attempted market timer in the world because who would’ve thought what transpired would happen? The risk of being out of the market, as the saying goes, is greater than the risk of being in. It goes up and to the right over long periods of time. There’s no pattern to this, like selling in May and going away. I’ve got oceanfront property in Arizona for the person who really thinks that’s doable. How about not fighting the Fed? Because that one has been widely accepted and everyone’s scratching their heads now here in 2023 going, does that one still work?

Charlie:  It’s a mantra, and I don’t think people will ever stop saying it. But they’ll very rarely dig into the data and look at what has actually transpired. So on paper, if you explain the rationale, it makes some sense, and that’s why this is a difficult one, more so I’d say than sell in May.

John:  Because they are manipulating the money supply, and it should in turn have an effect on what’s happening, right?

Charlie: They’re trying to slow down the economy, they’re trying to curb demand. That’s having some success. People are buying less consumer goods because interest rates are higher. Eventually, maybe that’ll lead to an economic slowdown. We can’t predict when. And then people tie that into the stock market, and say, well, if interest rates at 0% are great for the stock market, shouldn’t interest rates at 5% plus be bad? Now you have a competing investment, people can just invest in cash. Any number of reasons people will tell you that rising interest rates have to be bad for the stock market.

Problem is, again, it’s a complex dynamic system. So rising interest rates, all else equal, is that a worse situation for stocks? Probably. But all else is never equal in markets. You have a number of other factors going on. And when you actually look at the historical data saying what has happened to the stock market going forward, because that’s what we care about, not what has happened in the past, but after the Fed has hiked rates, what you find is on average in all of those situations, the stock market is higher a year later, two years later on average.

Once again, the probabilities are against you if you’re using something like the Federal Reserve policy as a buy and sell decision. So the greatest example of that, as we talked about, is simply the fact that the stock market is higher today than when the Fed started hiking rates in March 2022. And the fact that that’s not unusual. And here’s the real crazy thing, John, that nobody thinks about. In recent decades, the opposite, the Fed aggressively cutting rates, has actually been a sign that’s worse for the stock market. So if we look at the period from 2000 to 2002, that was one of the worst bear markets we’ve seen after the dot com bubble, S&P 500 down over 50%. The Fed starts cutting rates in early 2001. They continue to cut rates down to 1% by 2003. Market’s going down that entire time.

So it didn’t stop the market from going down. So this idea that simply easier money’s going to save the market isn’t true. We saw the same exact thing from 2007 to 2009. The Fed actually started cutting rates in September 2007. So a month before the stock market peaked in October, they cut rates all the way down to zero by December 2008. Did not stop that bear market, which was the worst we’ve seen since the Great Depression.

John:  There’s a relationship between cutting rates, which is that things are not great. Where when rates are being, in this case, where they rose as quickly as they did, it was because the economy was too good. And so there is a relationship there. I wonder if the new saying should be focused more on the fiscal policy side saying it’s not about don’t fight the Fed, it’s don’t fight fiscal policy. Because what we saw in COVID was that had a much larger impact on pulling us out than the Fed cutting. Because as the Fed was cutting rates in early 2020, we were still seeing the market down 5% in a day, 4% in a day, 8% in a day. It was really the fiscal stimulus that seemed to pull us out economically much more than easing interest rates. Would you agree with that?

Charlie: Absolutely. The easing interest rates, definitely helpful, but borrowing and spending $4 trillion, much more significant.

John:  Putting it right in business’ pockets with the PPP or with stimulus.

Charlie: In people’s pockets. You just look at consumer spending and retail sales in 2021 after that third round of stimulus, it was the highest we’ve ever seen. It was just an enormous spike higher. Now people did save some of that and invest some of that. Some of it was traded in meme stocks and crypto coins. But a good portion of that went back into the economy and stimulated demand.

John: Why you hating on GameStop? Come on.

Charlie: The notion that the Fed controls everything, I think we want to believe that there’s this omniscient body out there, and they’re looking out for us and they know everything. But simply not the case if you look at their track record in terms of interest rate policy or their forecast, they don’t know any better than you and I. So yeah, hopefully they’re setting the right policy, monetary policy, fingers crossed.

But this obsession, and this is really on Wall Street everyone’s obsessed with the Fed’s every word, and the dirty little secret is it doesn’t really matter as much as people think it does. Why do we even have this body today, a small group of people deciding where the interest rates should be? Why in 2023 is this not dictated either by some formula or just letting the free markets determine interest rates, rather than a small group of people saying, we know better? We know when the rate should be zero or 5%, when all evidence has been to the contrary.

John:  But it’s way more fun to get angry with 400 PhD economists than somebody’s algorithm, right? I mean, we got to have some scapegoat when things are going wrong. We have to have somebody that’s the villain.

Charlie: We want someone to blame.

John:  Yeah, exactly. We’ve talked about government actions, Fed actions. Charlie, are these good examples? I’m a parent, I have seven children. Should I be going to my kids saying, “Well, here’s your example of what to look up to when it comes to your personal finances. United States government. If you do things just like them, you’re going to be in a great spot when you’re an adult.” Of course I’m joking. That’s tongue in cheek because that would mean they would essentially spend significantly more than they make every single year and just shrug it off. We’ll inflate our way out of this debt. And a lot of investors are concerned, we’ve borrowed trillions more, and at some point, what effect will that have on the solvency and the long-term stability of social programs that we rely on, and just the broad economy as a whole. What are your thoughts, Charlie, on that?

Charlie: It’s an example for your kids, but it’s an example of what not to do. So the government’s in their own unique world where they can continually spend more than they take in. Over the last year, this might surprise some people, but the federal government and tax receipts have taken in 7% less than they did a year ago. And a big part of that is simply less capital gains, stocks went down, and so people paid less in taxes. But the government didn’t adjust their spending. Not only did they not adjust it, they increased their spending 16% over the last year. So the combination of those two things is what’s called the deficit. And deficit simply means they’re spending more than they’re taking in. And the amount by which they’re spending more than they’re taking in is $2.2 trillion. Now that’s hard to put-

John:  Just a rounding error, no big deal.

Charlie: It’s a big number, but it’s hard to put it in context other than 2020, 2021, during the huge COVID stimulus, nothing comes close to that. So what we’re seeing here is really unprecedented for an economy that’s still in an expansion. We have an unemployment rate in the US 3.5%, almost the lowest we’ve seen in 54 years. We saw that low in April. You have to ask the question, why do we need to be spending this much more in an economy that’s doing pretty well? GDP is growing. We have very low unemployment. We’re saying we’re trying to get inflation back in check.

John:  And in many respects we have.

Charlie: It’s come down certainly over the last year. We’re down to 3%. But what is all of this additional stimulus going to do to prices with the lag? We can’t answer that question, but structurally, if you want to bring prices back down to 2%, you don’t run these types of deficits. Now here’s the bigger problem, John. It’s not just that the national debt is rising, that’s a problem, but we can always borrow more money. And the saying for a number of years is don’t worry about that because interest rates are so low. So it’s all about servicing that debt. So everyone who would say back in 2020, 2021, look at the 10 year yield. It’s so low. We don’t have to worry about paying this money back because the interest payment is so low on this debt.

John:  People argued it almost made sense to borrow more because who cares. We’re just inflating our way out of it faster than the interest is, right?

Charlie: They did make that argument. And people like me were saying, of course don’t do this. We’re borrowing from the future to spend money today, so this is going to be a problem for our kids and our grandchildren. But neverminded that, these low interest rates aren’t going to last forever because there’s going to be a time when people aren’t worried about deflation, but they’re worried about inflation.

So here we are. We have this situation where 75% of the government’s debt is rolling off within the next five years, and over 40% of that is within the next year alone. So when those treasury bills are coming due or treasury notes or treasury bonds are coming due, what do you think that interest rate on that new debt that has to be issued is going to be? It’s going to be much higher. And so what we’re seeing is the interest expense that the government’s paying on that debt is now fast approaching $1 trillion.

So that alone in terms of the federal budget becomes a bigger and bigger factor. And the problem is when you get to the point where it starts to be so burdensome that it starts crowding out other essential spending, right? We can’t cut Social Security, we’re not going to cut Medicare. We have a certain amount of defense spending that doesn’t seem to be changed. So you have a certain amount of discretionary spending, but it’s not big enough, and there doesn’t seem to be any willingness to cut there. So what the end result is is this just becomes more and more of an issue and you have two ways of dealing with it. One, you just keep borrowing more to pay that interest expense, or two, you have to make some hard decisions today that no one seems to want to make.

John:  And those are hard because you end up with the lobbyists for the underwater basket weaving, synchronized swimming government subsidy, whatever it is, saying, “Well, you can’t cut this. This is basically essential.” And all of a sudden you end up with the amount of spending that we have going on.

Charlie: What’s the number one priority of a politician to get reelected? You promise more stuff than the other person.

John: You give people money. People like getting money. I like getting money, Charlie. Do you like getting money?

Charlie: Certainly. And the stimulus programs are very, very popular. And if there was a fourth one proposed, it probably would be very popular again. But I thought that, and this is where maybe I’m wrong, I thought that after what we saw last year in terms of the highest inflation rates that we saw in 40 years, there would be some more concern about moderating this attitude where it doesn’t matter, we can just borrow and spend and we will worry about it later.

John:  I’m speaking with Charlie Bilello, chief market strategist at Creative Planning. I think the takeaway for investors in the midst of everything we’ve spoken about, and the thousands of other things we haven’t ,is that while it’s interesting, interest rates, government spending, housing market, and yes, it will have an impact short term on your accounts, and it’s worth understanding, it’s worth paying attention to, that while all those things are true, it still likely should not necessitate major changes to an investor’s portfolio or their broad strategies. Because those should be informed by your documented written financial plan that’s aligned with your goals and your time horizons and your overall risk tolerance, not based upon the next three months of Fed policy. Charlie, if someone wants peace of mind, I think that’s where they’re going to find it in that thoughtful disciplined plan because there’s far too much uncertainty, and that uncertainty is never going away.

Charlie: That’s a great point, John. Yeah, so we scared a lot of people with the national debt talk, but just looking at the data, if you chart the S&P 500 over time, and national debt as a percentage of GDP over time, they’re both up and to the right. So the stock market is not the economy is not the government, and thankfully corporations and corporate earnings, they don’t run their balance sheets the same way that the government does. So as long as earnings, not to say it’s not going to impact you, all of this might impact you and the economy, and impact your job and other things, but as far as investing, particularly in the stock market, you kind of have to ignore this. Under the assumption that corporations will engage in fiduciary behavior and try to maximize shareholder value, the opposite of what currently the government is doing. So they have a different agenda.

John:  Absolutely certain economic environments inform what the duration’s going to be on your bonds, or whether you go 70-30 instead of 60-40 because you’re not earning any yield on your bonds, things like that. But these should not be reasons to make wild swings within how you’re invested if you are a long-term disciplined investor looking to invest your money to achieve certain goals that you have out in the future, and hopefully doing so in a diversified manner, minimizing taxes, having a great estate plan, doing it strategically in the midst of basically the entire rest of your life, knowing that there are going to be a confluence of events happening around you that make you feel like things are uncertain or that they’re not predictable.

Charlie: And that’s the job of the advisor, just to help coach that investor through those difficult times and present the data unemotionally, and look at one’s portfolio and present different options based on your unique goals.

John:  Well, Charlie, this has been a great conversation. I appreciate you joining me here again on Rethink Your Money. Look forward to having you back on. Take care.

Charlie: Awesome, John. Always a pleasure. Thanks.

John:  Have you ever run into someone in your life whose reputation wasn’t sterling? You’d heard some bad things about them. But after getting to know them and spending more time together and having more context, you realized that that bad reputation wasn’t justified. They’re a great friend, good parents, ethical business people, whatever it might be. When it comes to investment products, the same is true. Not necessarily that they should be let off the hook and vindicated, but that there are vehicles with very negative reputations, and I want to evaluate together for a moment whether in fact they should be viewed in that negative light, or whether they’ve unjustifiably received this bad reputation.

Let’s start with reverse mortgages. A reverse mortgage is where you as the property owner, assuming that you’re at least 62 years old, can’t do it if you’re younger than that, can borrow against the equity in your home to get cash or a line of credit from a lender. However, unlike a regular mortgage, you aren’t required to make monthly loan payments. You’ll repay the loan when you or your heirs sell the house.

So, let’s unpack the pros. Helps you secure your retirement because now you’ve extracted the money out of the sheetrock of your home, and can use it to buy groceries and take vacations and pay medical bills. It allows you to stay in your home that you love. This entire assumption is that you do not want to move from your home. It allows you to pay off any existing home loan that you might have mortgage payments on that are bleeding your cashflow or requiring you to take higher withdrawals from your portfolio. You won’t have a tax liability. You also are protected if the balance exceeds your home’s value. So there are some safeguards in place in the event that the real estate market drops, and you can frankly just better manage your expenses in retirement. That sounds great.

What are the cons? First off, it’s not free. Reverse mortgages have costs that include lender fees. By the way, origination fees are capped at $6,000, and depend on the amount of your loan. You also have FHA insurance charges and closing costs. And these can be added to the loan balance so you don’t have to pay them upfront if you’re tight on cash. However, that means as the borrower, you’re going to have more debt and less equity. Your heirs will inherit less. You’re giving up upside on the backend, and I’m not going to walk through the entire calculation, for the benefits you’re receiving in the moment. You also can’t deduct any of the interest from your taxes until you pay off the loan. So you might be used to enjoying that mortgage interest deduction. You will not be able to deduct the interest on a reverse mortgage each year. You’ll only enjoy that perk when you actually pay off the loan.

Reverse mortgages can be complicated. They’re a big contract. For most people, it’s the first and only time they’ll go through it. The person selling you the reverse mortgage on the other end of the deal has usually done hundreds or thousands of them. So there is a knowledge deficit and a lot of moving parts. You want to be careful when you’re entering into these contracts. And lastly, you can still be foreclosed on. Since reverse mortgages don’t have required monthly payments for the principal and interest, it might seem as though a foreclosure would be impossible. How can they foreclose on me if I’m not missing payments because I don’t have payments? Well, you still have to keep up on property taxes, homeowner’s insurance, and any potential required HOA fees.

So to summarize, back in the day, these reverse mortgages were horribly inflexible. They passed almost nothing onto your heirs. Even if you did the reverse mortgage and you passed away, let’s say, two years later, the amount heirs would receive in some cases was nothing. In other cases, it was so massively discounted relative to the value after just a couple of years that beneficiaries said, I mean this reverse mortgage was a terrible thing that my parents were sold, and it created a really negative bias towards these. The upfront costs were insanely high, which brought in a ton of bad actors aggressively looking to sell these to anybody who could fog a mirror. Hey, do you like having a mortgage payment? What if I could help you eliminate that? Oh, Mr. and Mrs. Retiree says, that sounds great. I don’t want a mortgage payment. And they didn’t really understand what they were entering into.

But the verdict for today is that reverse mortgages for the right person who understands the pros and cons, who analyzes and assesses that with their fiduciary advisor, they have a financial plan, they’re talking with their certified financial planner, they’re looking at how a reverse mortgage might fit into their broad plan, these can be fantastic for the right person. But do not do these within a vacuum, and understand what you’re getting yourself into. Ultimately though, they shouldn’t have a bad reputation because when used appropriately, they’re potentially a very useful tool in retirement.

Next, let’s look at permanent life insurance. It has a pretty bad reputation, should it? Let me give you one stat that most accurately answers that question. Over 80% of those who buy whole life insurance get rid of it before death. So think about that. Four out of five people have buyer’s remorse at some point and relinquish a policy that by definition is meant to be there forever.

The White Coat Investor had an article where he analyzed a policy for a healthy 30 year old male with a 53 year life expectancy. So they’re banking on this guy living to 83 years old. The guaranteed return on the cash value after five decades was less than 2% per year. So even if you’re an optimist, and you look at the insurance company in those illustrations, they’re projected values rather than the guaranteed values, which is all that you can count on. But let’s look at the projected values. You’re still looking at a return of less than 5%. In reality, you’ll probably end up with a return of 3 to 4%. Considering that you would’ve to hold this investment, and I’m using that term loosely with whole life insurance, for five decades, it’s terrible compensation.

Why wouldn’t you take on a little bit more risk in real estate or stocks if you’ve got a 50 year time horizon to achieve what you expect to be a much higher return, at least from a historical perspective. To put numbers around this, $100,000 invested for 50 years at 3% would grow to $438,000. If instead you made 9%, none of these numbers are promissory, but let’s just say you made nine, in a globally diversified portfolio of stocks, you’d end up with $7.4 million, 17 times as much money. The rate at which you compound your long-term investments matters, especially over long periods of time.

If you need permanent life insurance for complex estate planning, maybe you have a net worth of 20 or 30 or $100 million. There can be some reasons, especially if a lot of that net worth is illiquid, to use permanent life insurance. If you have some sort of split funded defined benefit plan, you have higher contribution opportunities because life insurance is expected to earn low rates of return, which allows you to defer more money. These scenarios apply to less than 1% of the population.

So the verdict on permanent life insurance having a bad reputation, it deserves it. If you have permanent life insurance, you’re not sure how it fits into your plan, you got a phone call from a friend 18 years ago and were sold it, have a credentialed fiduciary evaluate that policy to see what your options are moving forward. And if you’re not sure where to turn and you’d like our help, visit us at creativeplanning.com/radio now to speak with a local wealth manager just like myself. Let’s go over to listener questions. One of my producers, Lauren is here as always to read those. Hey Lauren, who do we have first?

Lauren Newman: The first question I’ve got today is going to come from Joshua in Phoenix, Arizona. He says, “I have two kids, ages nine and 12. And when they were born, my mother-in-law opened 529 plans for them. Unfortunately, it looks like her marriage is headed towards a divorce. What happens with the 529 accounts?”

John: Great question, Joshua. Your children are the beneficiaries of the account. And the owner, presumably your mother-in-law in this case, controls the amount being contributed to that 529 account. She also has control over the investment allocation, how and when they’ll be distributed, and she can, as the owner of the account, also change the beneficiary if she wishes. I mean, there’s no reason, as a result of her divorce, I would think that that would be the case.

But with all that said, while a 529 may legally be in your mother-in-law’s name, most courts consider those funds as the children’s property. They don’t force the parents to divide out the accounts, and all of a sudden in this case, grandkids are losing portions of what they have saved for college. Because in that case, they’d have to withdraw the funds, pay a penalty, potentially pay unnecessary taxes, like during the divorce. That doesn’t often make sense. So hopefully that’ll alleviate some of your concerns. But I think the ultimate understanding here is that your mother-in-law has full control over those accounts. But she always has, and the divorce isn’t necessarily changing that. All right, Lauren, who’s next?

Lauren: Our next question is from Noah in Queen Creek, Arizona. “My wife and I are months away from turning 55, and have roughly 1.2 million combined in our 401(k)s and IRAs saved for retirement. We plan to retire in the next five years. We’ve always planned on having a second vacation home in the mountains. Should we withdraw $100,000 to use as a down payment?”

John: Well, I appreciate this question, but unfortunately, it’s impossible for me to answer. So I’ll instead give you general considerations. First off, I don’t know your expenses, which is the most impactful calculation in this plan. And along with those expenses, I don’t know if you have a pension, how much your Social Security benefits are going to be. Are you going to need to care for an aging parent? Are you still helping kids with college? Are you expecting an inheritance, the other direction, which would change the plan for the positive? How is your health? Do you have any other debt? What are the tax implications of that $100,000 withdrawal? If it would have to come from a 401(k), it’d be fully taxable. How much do you have in non-qualified after tax dollars that could be used for that? With interest rates where they’re at, would you be able to afford the payment, along with yours, and still be able to retire with the lifestyle you want five years from now? Would that impact how much you can save in these final five years?

I’m just scratching the surface on things that are popping into my head. There’s 1,000 other considerations as well. But by the way, it sounds fantastic. Second house in the mountains, getting out of the 110 degree summer heat in Arizona. But this is almost like you going to a doctor and saying, “Hey, my knee hurts. Do I need surgery?” Well, the doctor of course is going to say, “We need to do an evaluation. Let’s get an MRI. Also, what’s your activity level? How long has it been hurting?” And really even after all of that, in many cases the doctor’s going to say, “Option A is surgery. Here are the pros and cons. I probably recommend that.” But they may also say, “An alternative would be physical therapy. It may bother you a little bit, but it’s so much less invasive, and you’d be able to keep golfing,” or whatever it is.

The same is true when it comes to your financial plan. Most financial questions, even that are exactly the same, cannot be answered in a vacuum because every person asking it and their objectives and lifestyle and concerns are unique to them. So I’m not trying to be evasive Noah, but I just don’t have enough information to answer the question. But you’re right here in my backyard in the East Valley of Phoenix. If you’d like to meet with me specifically, we can look through your plan in detail, and I can answer that question. And if you have questions like Joshua or Noah, submit those to radio@creativeplanning.com.

There’s a famous saying that says he who dies with the most toys wins. There was an intriguing and provocative book titled Die With Zero. It was written by an extremely successful businessman named Bill Perkins. He would absolutely say he who dies with the most toys loses. In his book, he argues that the purpose of life is to accumulate as many fulfilling experiences as possible. And in doing so, as the book’s title says, you should aim to die with $0. And while it sounds counterintuitive, when you dig in a bit deeper, it makes a lot of sense. And I think it’s applicable for you and I as we navigate spending and saving and having a healthy relationship with our money.

See, most people look at their portfolio before making decisions. Don’t end up taking that experience or spending that money because of lost compound interest. Or they run the financial plan, if I don’t withdraw the money from my portfolio, and instead it compounds for the next two or three decades, look at how much more money I have. In many cases, we fail to look at the next layer, which is who cares? So you have more money when you die without that experience? Is that a win? Perkins says in the book, your life is the sum of your experiences. Contrary to belief, this can be quantified and optimized.

And he presents his key concepts as a series of nine rules. Number one, maximize your positive life experiences. Start actively thinking about the life experiences you’d like to have and the number of times you’d like to have them. These experiences, they can be large, they can be small, they can be free, or they can cost a lot of money. They can be charitable, they can be selfish. But think about what you really want out of this life in terms of meaningful and memorable experiences.

Number two, start investing in experiences early. And remember, early is right now. Rule number three, aim to die with zero. Now, I know this is weird coming from a certified financial planner. But if you spend hours and hours of your life acquiring money, you’re saving diligently, watching your net worth grow, and then you die without spending all of that money, then you’ve needlessly wasted too many precious hours of your life, and there’s just no way to get those hours back.

Rule number four, use all available tools to help you die with zero. Dying with zero isn’t just about money, it’s also about time. Of course, you don’t want to run out of money before you die, so getting to exactly zero may be impossible. But having a detailed documented financial plan will help you get as close to zero as possible. It’s very difficult to spend a lot of money if you’re not sure if you’re going to end up living in your kid’s basement as a result of it.

Number five, give money to your children or to your charity when it has the most impact. It’s far better to give with a warm hand than a cold one. Rule number six, don’t live your life on autopilot. Think about your current physical health. Think about your spiritual health. Think about your financial health. If your ability to enjoy experiences is more constrained by time, let’s say, than by money or by health, think about one or two ways you can spend some money now to free up more of your time. Can you buy yourself, literally buy yourself, more time?

Rule number seven, think of your life as distinct seasons. Sometimes time bucketing your entire life feels a bit overwhelming, so maybe just do an exercise with three time buckets covering the next 30 years. And know that you can always add more to your list, but do it long before your age and your health become a real factor. If you have young children like I still do, what one experience do you want to have with them in the next year or two, maybe before they head off for college?

Rule number eight. Know when to stop growing your wealth. This is a huge one. Why are you saving? Why are you continuing to work if you don’t want to continue to work? So that you can amass more wealth and save more money that you’re not going to spend in the end? What’s the point? And rule number nine, take your biggest risks when you have little to lose. Identify opportunities that you are not taking that pose little risks to you. And always remember that you’re better off taking more chances when you’re younger than when you’re older. And again, the book title is Die With Zero: Getting All You Can From Your Money and Your Life by Bill Perkins. You can purchase that anywhere books are sold. Because in the end, he who dies with the most toys still dies. And remember, we’re 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 proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31, 2022. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own, and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. Should not be construed as investment, tax, or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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