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How to Thrive in a Bear Market

Peter Mallouk Portrait

John Hagensen

Managing Director
PUBLISHED
September 06, 2022

Join John this week as he discusses how to thrive during this bear market, avoiding the biggest mistakes around Social Security, and the impact our perspective has when it comes to peace around our financial situation. Plus, John is joined by Creative Planning’s Chief Valuation Officer, Gary Pittsford, who breaks down what to do with the proceeds from a business sale.

Hear more on investment buckets here: https://creativeplanning.com/insights/four-buckets-for-financial-planning/

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!

Important Legal Disclosure: 
creativeplanning.com/important-disclosure-information/

Have questions or topic suggestions? 
Email us @ [email protected]

Transcript:

John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen. On todays show we’ll be discussing how to thrive during the bear market, how to avoid the biggest mistakes around your social security as well as the impact our perspective has when it comes to peace with our financial situation. Now join me as I help you rethink your money.

And we have a lot to cover since last week’s show. A ton has happened. I mean, the Fed’s getting their best Darth Vader costume on early for Halloween, and just scaring the you know what out of the market. We’ll unpack what you can do during these times of volatility and heavy negative sentiment. I’ll also show you how to avoid the biggest mistakes I’ve seen, one of which I just saw this past week around social security planning, as well as one cost that is substantially up.

But I want to start with the conversation that I had with one of my kids the other day. And they asked me how anyone needed to still be poor? If money’s just paper and we can print more and give it to those in need, wouldn’t everyone have money? It’s that childlike innocence where they’re looking at me as their dad saying, “This is so easy. I mean, why haven’t we thought of this yet?” And although that would be amazing, we know that the cost of goods that paper would buy would increase to reflect more currency in circulation. And here’s the best way that I’ve explained it to our children. So feel free to use this with your kids and grandkids as well.

But let’s just say you lived in a rural village, and one day a helicopter comes and hovers over the middle of the town and starts dropping $100 bills down. I mean, for an entire day, just raining down $100 bills on the village. So all the people in the village are standing there, collecting the bills and they take them to their homes. Over the following months, because there’s way more money in the village, the cost of everything goes up until you reach equilibrium. It’s not as if everyone in the village is now rich. It’s just that everything in the village will cost more money now proportional with what everyone now has accumulated.

I mean, it’s crazy to think back on now, but there was once a time when the Federal Reserve Chairman Ben Bernanke would walk into a building and everyone would look at how thick his briefcase was, just to try to deduce what the Fed policy was going to be, what they might be thinking. Well, now, since then, they’ve become extremely communicative and transparent, which has been very much a double edge sword.

And so if you missed it in a 10-minute speech at the annual Jackson Hall Economic Symposium, current Fed Chief Jerome Powell said returning the economy to price stability will take, and I quote, “sometime” and will require bringing, quote, “some pain to households and businesses,” which he called “the unfortunate costs of reducing inflation.”

And on that news specifically bringing some pain, the market dropped 3%. Now, whether or not we should have the entire stock market moving a thousand points in a day on one person’s 10-minute speech is a conversation for another day. But I want to provide some broad context on where we’re sitting with the economy because I’m being asked this a lot right now by clients. It’s top of mind. It’s on every news channel.

So let’s take a look at the history of what got us to where we sit today, because make no mistake, it has major implications on the way you should be thinking about your financial plan, the way you should be strategizing your taxes and your investments and your estate and your gifting, and all other components of your personal financial situation are impacted greatly by what we are seeing right now in the economy and the trickle down to the markets.

So we’re clipping along at relatively low inflation for decades. We obviously have the pandemic. We then shut down businesses across the board. I’m not going to get into whether forcing businesses and schools to close was the right move, but I know you have a strong opinion one way or another on it, but regardless, that’s what we did. And so to ensure that we didn’t go into a depression, we sent stimulus checks and business loans. And the idea was to ensure that we didn’t have the highest unemployment in our nation’s history.

Regarding business loans and in particular PPP loans, I’ve heard many say, “Well, we forgave those PPP loans. What’s the big deal with forgiving student loan debt?” My answer to that is, “Well, you’re comparing apples to oranges because PPP loans were given to be used primarily for payroll as a result of federal and state governments demanding businesses close their doors.” So that’s not even slightly the same thing as someone voluntarily taking out a loan for college.

But back to the point at hand. We had tremendous money helicoptered into the system via the fiscal policy of just massive stimulus. Simultaneously, we had the Fed slamming rates to zero with extraordinarily loose monetary policy. And if you’re wondering what that does, think of even 1% to 2% interest rates as speed bumps in a parking lot. You’ve got to go a little bit slower as a result. But taking the rates to zero effectively removed every speed bump in the system. And when that happens, the cost of capital from a real rate standpoint turns negative, which is what we saw, and you end up with zombie businesses that should have gone under long ago, being propped up by the fact that they can borrow at near 0% rates to stay afloat.

But while some hardcore free market enthusiasts that I’ve talked to would contend that the fiscal policy and the government intervention was unnecessary, the consensus mostly agrees that in the middle of the pandemic, if you’re going to shut down businesses, there did need to be unprecedented monetary and fiscal policy or we would’ve potentially gone into a global depression that could have resembled or even been worse than the Great Depression.

But here’s where things got more nuanced and really led to the situation that we’re in right now. With markets and turmoil and runaway inflation, we continued to provide stimulus long after we knew the greatest pandemic impact was behind us. We continued to put a moratorium on student loan payments, and as of last week, of course, chose to forgive approximately $500 billion of student loans. The week before that passed the Climate Act that for a couple weeks was named easily the most ironic name in the history of a bill, the Inflation Reduction Act that doesn’t reduce inflation. That was just under $500 billion. And of course in March of 2021, we passed the largest economic stimulus package of all time for $1.9 trillion in the American Rescue Plan. And if you recall, that was four months following Pfizer releasing its vaccine. So there were a lot of signals that we were past the heart of the pandemic.

Lastly, on the monetary side of things, the Fed continued buying huge amounts of treasuries and mortgage backed securities. At one point in 2020, they were buying $80 billion and $40 billion per month of each respectively. And in hindsight, they waited far too long to taper. And so in short, we were just pumping money into the economy.

And then the straw that really broke the camel’s back was that we simultaneously have had huge supply chain disruptions like continued China shutdowns and the war in Ukraine. So take my earlier helicopter analogy and pretend that the village now only has two stores to buy food instead of four, like they used to, on top of having all the money helicoptered in. So that limited amount of bread and eggs with more money that was dropped out of the sky like mana will lead to runaway prices for the scarce items.

So let me pause briefly from my unrelenting criticism regarding the decisions made over the past year or two. This stuff is really hard. What I’m not contending is that if I had been in charge of all of this, we would’ve done way better. Hindsight is always 20/20, and it’s very easy for me to Monday morning quarterback the steps that were taken now that we’ve seen a lot of them were wrong.

So that’s what has gotten us to where we are. And here we sit today. What does it mean for you? Europe has a near 100% chance of a recession. Odds right now for us here in the US to enter a full-fledged recession are about 50%. So I guess you’re out of luck. You may as well give up and hold a sign on the off-ramp or your local interstate. There’s your personal finance recommendation for the day.

But of course, no, that’s not the answer. Fortunately, you’re not helpless, but you’re going to have to have a plan. You need to be realistic about where you are. This isn’t 2010 through 2017, where you invested in virtually anything and you made money. Remember, as the saying goes, “Don’t mistake being a genius with a bull market.” And the silver lining is while you’re not in control of what the federal government spends or the next Federal Reserve policy, you control a lot more about your success than I think you often realize.

And so here is exactly what I want you to do. Have a financial plan that it counts for variables like high inflation, bear markets, and recessions. What this means is taking advantage of current low tax rates, the market being well off of its highs. Can’t tell you how many years I heard, “I don’t want to invest. Market’s at an all time high.” Now we’re sitting in a bear market and I hear people go, “I don’t know, John. I don’t feel like this is a great time to invest. Are you seeing what’s going on out there?” Can’t have it both ways. Bond yields are now actually paying something. You’re getting reasonable interest on your bonds.

And so if you’ve just been gliding through sort of drafting off of this sustained bull market, this 125 month run up of year-over-year growth in the real estate market that I talked about last week, you’re likely entering a time right now, where there will be much more emphasis on having a plan and sticking to that plan.

Think of it this way. When you take an evening stroll around your neighborhood, like my wife and I do most nights after the kids are in bed, you don’t need a sherpa. I’m not looking for my guide to walk around the block. But if I’m out in the Himalayas, I’m not going about that alone. Sunny skies are gone, at least for the moment. And we’ve got storm clouds rolling in. Make sure you are prepared for the storm.

Announcer: At Creative Planning we provide custom tailored solutions for all your money management needs. Why not you give you wealth a second look at learn how the team at Creative Planning covers all areas of your financial life. Visit CreativePlanning.com

Now, back to Rethink Your Money, Presented by Creative Planning with your host, John Hagensen

John: As promised, Gary Pittsford is now joining me. He’s the Chief Valuation Officer at Creative Planning. Really talks all things that impact the financial future of business owners. And so with that introduction, thank you so much for joining me today, Gary.

Gary Pittsford: Thank you, John. It’s good to be with you again.

John: As we discussed the first time that you were on the show, there are a lot of mergers and acquisitions occurring right now, and there are a variety of reasons that are converging that account for that.

But I’d like to go a little different direction today and discuss more about what does someone do with the proceeds once their business sells? Even business owners with a high net worth may not have necessarily had a lot of liquidity to invest in certainly not all at once.

And so this can be a very different experience. When a business owner looks down at their bank account at the conclusion of a sale, and oftentimes what I’ve seen as a wealth manager is they’re wondering, “All right, now what? What do I do now?” Because it’s quite different than systematically and methodically investing over long periods of time as many business owners have done in the past.

So how do you recommend someone go about investing the sale proceeds to provide them and their family with income for years to come?

Gary: That’s a great question. And that is an important question to every baby boomer that’s listening that wants to sell in a year or two or next week, or whenever they want to sell.

What we tend to do with every client that we work with is we work through most of those ideas before the sale. I want every business owner to know about what the value of the company is while you’re negotiating with a buyer, decide a transition plan and what you’re going to do and how we’re going to transition this with your lawyers and your accountants. And then we want to look into the future, because a year from now or two years from now, you’re not going to have a salary and a bonus. You’re going to have interest in dividends and capital gains off of whatever your assets are.

You’ve got a bunch of cash coming from the sale. Maybe it’s a half a million, maybe it’s a million, maybe it’s 10 million, whatever it is, and we have to set aside some money for taxes. But the other money needs to be invested. But you need to work with someone ahead of time, a wealth manager, a CFP, somebody from Creative Planning or a company like Creative Planning that does very comprehensive work. Because when I work with a client, I need to know, well, do you own apartments or do you own farmland? Do you own some oil wells like our friends down in Texas? What other income do you have coming in? How does social security fit in? Okay. So let’s figure out what your total income is, and then let’s invest this cash in a very conservative way that’s going to give you interest in dividends for the rest of your life and for your kids and your grandkids.

So it’s a big decision and it’s especially important right now, John, because the stock market’s down, interest rates are coming up, everything’s upside down and you’ve got a bunch of cash. And I don’t want you to make a mistake when you invest that and try to start earning some interest in dividends. So it’s especially important right now this year to work with a real professional who doesn’t sell anything, doesn’t have an ax to grind, who’s very comprehensive in looking at all of your net worth. It’s really important.

John: Well, and so often you go through that process, and a business owner might determine this isn’t the right time to sell because when I look at my entire financial plan comprehensively and my income ceases to exist or significantly drops, sometimes the financial plan doesn’t look very good, Gary. And now they might be saying, “You know what? I’m probably in a better spot not to sell. And maybe I revisit this down the road.” But it doesn’t look like the plan can support enough income for me, or at a minimum it just might not be quite as good of a situation. So maybe I hold off or I structure the sale differently.

So I completely agree with you, Gary, that you really need to have that figured out as a business owner before you sell the business. But now let’s suppose that the business owner does have it figured out. It is going to work. The business owner decides to sell. This is more of a logistical question, but do you recommend that they wire the proceeds directly into their custodial account, an investment account? Or do you think it’s more efficient to have it sent straight to their bank account? Whether it’s a checking or a savings account. What do you recommend?

Gary: Most transactions at the time of closing, we normally have set up ahead of time and most clients should do this is to have the money wired to a custodian account rather than a bank account. And most buyers are aware of that. The lawyers that set this stuff up and all the paperwork involved, they’re aware of that. So they’d be very normal for you to hand them the wiring instructions. It’s usually one piece of paper and on that is the wiring instructions to get to your personal custodian account at a firm like Schwab or Fidelity, where there’s no commissions and it’s safe, it’s insured. And then you’ve got plenty of time that you can buy lots of different assets working with your advisors on how to structure it.

But that’s the best place to put it. Because if you did wire it to a bank, then within a few days, you’re going to wire it from the bank to the custodian. You’re not going to leave it at the bank. You’re not going to leave it in your checking account. So why go through two steps? Just have it wired straight to the custodian and then you and your advisors can figure out the best blueprint for you and your family.

John: That makes perfect sense to cut out that extra unnecessary step. And if you’ve just joined, I’m talking with Gary Pittsford, the Chief Valuation Officer here at Creative Planning. And if you’re a business owner with questions around selling your business, whether it’s maybe how much is my business worth, what are the tax implications, how would my financial plan need to be adjusted if I were to sell, or anything else, visit us at creativeplanning.com and connect for a complimentary visit. Between our 45 attorneys, 85 CPAs, and over 300 certified financial planners, we do have all the advice, all the expertise you need, all in-house. Again, you can go to creativeplanning.com to get your questions answered.

All right, Gary. So we’ve got the money. We’ve had it wired into the custodial account. We’d listened to you and did what you said. And we’re excited about this. It’s been a successful transaction. And then we look at our account, and as you just mentioned, rates are rising, inflation’s at a 40-year high, the markets are plummeting. What do we do to protect those proceeds once they’re out of the business and now we’ve got to generate income?

Gary: Well, there’s no one answer for everybody, John, but it depends on how much money is invested. If you got 500,000 and that’s all you’ve got to work with, that’s different than if you got 5 million or 10 million or 1 million.

Right now you could say that there’s a lot of big blue chip companies that are on sale because most of them are down 15%, 20%, 25%. They may go down some more, but they’re going to come back up. Recessions happen. Bear markets happen. But within a year or two or three, they’ll come back up. But you need to work with, like I said before, somebody who thoroughly knows all of your net worth and can help you make good decisions. It is so important because I’ve been doing this for 50 years and I don’t want a business owner to grow his company for 30 or 40 or 50 years, sell it for a big pile of cash, and then get bad advice on how to manage that cash, because that cash is what you’ve got left and you’ve got to hang onto it.

So it’s going to go up and down. 10 years from now, 15 years from now, it’s going to go up and down, the market, the interest rates, but there’s an intelligent way to manage the equity portion and the bond portion to take advantage of the situation that they’ve got now and to plan for two or three years from now.

It’s different. I can’t give you one answer, buy these three stocks and buy these three bonds. It doesn’t work that way for everybody. It’s like having a doctor. You’ve got a family doctor. He knows all about your health. You need a good solid wealth manager who is comprehensive, who knows everything about your assets, everything on your net worth statement, that wealth manager knows what’s there and can help you make decisions. That is so important.

John: Well, I’m disappointed, Gary. I really thought you were going to provide us with the one or two miracle stocks that we could all buy for infinite wealth. That’s what the listeners are looking for, Gary.

Gary: I keep those for myself.

John: All right. Well, that makes sense. I get it. I mean the reality is if you knew the exact stocks to buy, you wouldn’t be sharing it with all of us.

And I want to conclude with this. Gary, I mean my grandfather was an entrepreneur and a business owner. My father is a business owner. I was a business owner prior to joining Creative Planning. And I’ve seen firsthand selling your business can be a very emotional decision. And we know that our emotions can make it difficult to make objective money moves. So whether it’s us here at Creative Planning or another similar firm who can provide comprehensive tax, legal, valuation, investment advice, make sure as a business owner that you’re receiving the answers that you need.

And I want to thank you once again, Gary, for joining me here on Rethink Your Money.

Gary: You’re welcome, John. Take care. Talk to you soon.

John: That was Gary Pittsford, Chief Valuation Officer at Creative Planning. And if you want to dive in a bit deeper regarding his knowledge, I posted a short article Gary wrote for our clients that outlines the four buckets every business owner needs to pay attention to. That can be found on the radio page of our website at creativeplanning.com/radio.

And before we head to a break, I’d like to expand a bit on what Gary alluded to regarding how to invest the proceeds. Our philosophy at Creative Planning has always been to buffer your equities, which while we expect them to grow over long periods of time, we also know that they encounter short-term volatility as we’re seen right now, an average year. This isn’t even a bad year. Just an average year has a correction peak to trough of 14%, and every three or four calendar years on average, the market finishes lower on December 31st than it was on January 1st. Every five or six years historically there’s a full on bear market like we are seeing right now, which means the market’s down more than 20%.

So in light of that reality, our expectations should be that what we are experiencing right now in the stock market is going to happen and it’s going to happen again, hopefully to you, because that means you’ve lived another three, four, five years.

But at a higher level, if you believe that over long periods of time, 7 or 8 billion people on the planet are going to need to buy goods and services, then you own stocks for the long-term, but you’re also aware of this short-term uncertainty and you create safer investments within the plan to bridge these short periods. And here’s the key. By doing so, it allows you to avoid being forced to sell investments while they’re down in value. Because obviously the name of the game is to buy more if possible, while they’re on sale, through additional contributions and/or strategic rebalancing as we do for our clients.

But if you’re wondering what that allocation should be, the answer is that it always begins with your financial plan. That financial plan will determine in part what your income needs will be to cover expenses.

Piggybacking on my chat with Gary, if you’re a business owner, the plan will inform how much you’re going to need once your business sells. You certainly shouldn’t be starting with, “Do I need this annuity or this life insurance policy or fill in the blank with some other financial product oftentimes sold for a commission?” If you start hearing that in a first or second meeting, do not walk out of the office, run, because it always needs to be where is the plan pointing our investment allocation?

Unfortunately, I have seen far too often as a wealth manager, a client come in a few years after a successful exit of their business, but now they’re in a less than ideal situation because of bad advice with how to invest the proceeds.

Announcer: At Creative Planning their team can walk people through the intricacies of selling a business and investing the proceeds in a manner specific to their needs. To speak to an advisor, go to creativeplanning.com to set up a visit. That’s creativeplanning.com

Now, back to Rethink Your Money, Presented by Creative Planning with your host, John Hagensen

John: I’d like to start by circling back to what I referenced at the top of the show. I spent time talking about what’s gotten us to where we are today regarding high inflation, a bear market, and a sputtering economy. But I’d be remissed if I didn’t also remind you of the bigger picture. It’s easy for us to be caught up in the here and now, isn’t it? But in the 1930s and then ’40s, with the Great Depression and World War II, few probably would’ve dared dream or envision the prosperity that we now exist within here in the 21st century. I mean, when you’re going through the divorce or you just lost your job, it can be tough to see the light at the end of the tunnel.

But I do want to encourage you that this too shall pass. But the key here to not only survive difficult times in your life, or in the economy, or with the markets, but rather thrive and still have peace of mind and joy in the midst of those, will mostly be driven by our perspective. My kids would eat candy all day long if I let them. That’s the only thing they’d consume, sugar. Because, of course, they can’t see the forest through the trees. Their perspective is too limited in scope. They’re not focused on their long-term health, or for that matter, how many millions of dollars they could have saved by age 65 if they just got compounding, working in their advantage right now on the market by the age of 10. And if we’re being real with ourselves, this can be a challenge for us as adults too.

I find that when I’m tripped up, often it’s pointed to me being far too focused on the here and now and not the bigger picture. Why do we have the third drink when we know we’re going to wake up with a headache? It’s terrible for our long-term health. Because we’re focused on right now, we’re not focused on the bigger picture. And remember, the big picture when it comes to our investments and to the markets are really encouraging. So, if you need to, in the midst of this negative market outlook, remind yourself that nine out of 10 times the market’s up over five-year periods, and only twice since the Great Depression has a diversified portfolio been down over a 10-year period. So, if a hundred years of history with the market averaging 10% per year is any proxy for what we can expect, well, then why sometimes does it feel so hopeless when it comes to investing or getting ahead financially?

Well, the answer to that is found in my rule for money today. Ignore the noise. I know, you’re confused. “John, this is a radio show. Are you telling me to turn it off right now?” Well, I’d hope not, no. And I’d like to think that the theme of this show is on helping you do a great job with your money and reminding you of things like the three basic rules of investing success, buy stocks, diversify, and rebalance, rather than terrifying you into buying some commission-heavy product or saying whatever I can that’s polarizing to get ratings. And so, during tumultuous times, maybe the most important thing you can do for financial success and having peace of mind is to ignore the noise.

Let me give you two recent things that doom-and-gloomers got totally wrong. In 2011, famed economist, and I have no idea why he’s famed, his predictions are mostly awful, just absolutely atrocious, how many people have lost collectively billions of dollars by listening to him, said that the Dow would be at 3,000 between early 2012 and late 2013. I mean, he had charts, he had all sorts of reasons why he sounded so smart. And of course, even with the recent volatility and turmoil, the Dow is well over 30,000. If you’re wondering, there could be a short book written on Harry Dent’s disastrous predictions, but the one thing all of them have in common is that the sky’s falling and you should run for the hills. The second example I’ll use came courtesy of Peter Schiff, the CEO of Euro Pacific Capital. When he said back in 2009 that he wouldn’t be surprised if gold hit the 5,000 mark, and I quote in the next couple of years. And if you’re wondering, as we sit today, gold is still below $2,000 an ounce.

So the next time you hear something that’s really exciting or entertaining and scary and sensationalized, understand the motivation behind it. What bleeds leads. And stay the course to your financial plan.

Well, I want to transition over to the biggest mistakes investors make and how you can avoid them. And this just recently came up with a client who had an earnings record that was erroneously reported, meaning their social security benefits were off because of a mistake in how their employer had reported social security.

I want to help discuss what I found to be one of the most confusing and misunderstood and frankly important aspects in retirement planning, and what I’m referring to are your social security benefits. Now, if you’re someone who is already collecting social security benefits and you went through that process, you can attest to the fact that it’s a little bit of the wild west. You’re asking friends, you’re Googling information. Hopefully you’ve got a great financial advisor that’s helping integrate it with your financial plan. But so often, people are calling up or driving down in person to the social security office and asking, “Oh, how do I do this? What am I supposed to do?” And here’s why this is so important. The typical married couple consisting of a retired worker and a spouse, both of whom are claiming social security benefits, received about $2,700 per month as of April 2022, according to the USA Today.

When you annualize that benefit, it’s about $33,000 per year coming from social security. And so if we just step back and look at what type of lump sum would we need to pull $33,000 a year out of our portfolio to live on forever, as long as we both live, at a basic 4% withdrawal rate, it’s between eight and $900,000. For many couples that have longevity, that social security benefit ends up being worth one and a half to $2 million of income. And yet the election isn’t thought about any more than making a phone call one morning to the social security administration. I have seen hundreds of thousands of dollars, and even seven figures in some cases, lost by poor strategy and not knowing the rules. And I do not want that for you. Gabrielle Olya wrote a great piece just this week around the 11 social security mistakes that can cost you a fortune, and I’m going to run through each of those quickly.

And if you have any questions, you can always go to creativeplanning.com to meet with one of our credentialed fiduciaries. Mistake number one, not checking your earnings record. So even if you are younger, maybe you’re decades away from claiming social security, you could be making a big mistake if you’re not tracking your yearly earnings. Now, the reason for this is because your social security benefits depend upon your earnings record. So if that record’s incorrect, you’re not going to receive the benefits you’re entitled to. The next social security mistake, not working long enough. So to qualify for social security, retirement benefits, you need at least 40 work credits. You can earn, by the way, up to four credits each year, based upon your earnings. And if you’re wondering, you need about $5,500 per quarter of earnings to get the maximum four credits at the conclusion of the year.

In addition, your benefits are calculated based on the average of your 35 highest earning years. And so if you have fewer than 35 years of earnings, you’ll have some zeroes averaged in. And even if you have 35 total years, if a few of those were early on in your twenties and you were washing dishes in the back of a pizza restaurant like our 19 year old is right now, you may want to replace those with higher income years to bump up that average. So again, that mistake’s not working long enough. Next mistake, and this is a common one, taking social security too early. Sure, you can claim at 62. However, if you’re born after 1959, the reduction for claiming benefits at age 62 is 30% and those lower benefits are permanent.

Here’s the opposite. The next mistake, waiting too long to claim benefits. In the end, the number one factor in whether you claimed at the right time will be, when did you die? If you live to a hundred, of course you should have waited till 70. If you die at 68, well, hopefully you didn’t wait till 70, because you never got any. Every year you wait, your benefits increase by between seven and 8%. And that increase is permanent. The next mistake around social security that I see often is only considering your own benefits. If you file for the social security benefits you are entitled to based solely on your earnings record, you could be missing out on a larger benefit. This is especially important if you don’t have enough work credits to qualify based on your own earnings record. The example here is if you’re a stay at home parent while your spouse worked, you might not have earned the minimum 40 credits to qualify, or if you did, your benefit might be really small.

However, you can still qualify for social security benefits under your spouse’s work record. Again, if you have questions about this, let us know. We’ll help you. I’ve seen this missed for five and 10 years at a time, hundreds of thousands of dollars, because the one spouse who stayed at home and didn’t have enough credits was unaware that they could claim off of the working spouse. And in that same vein, the next mistake is not coordinating your benefits with your spouse. One spouse, like the working one in this scenario, might be planning individually to wait until 70 to claim benefits. But when you look at it collectively with the non-working spouse, who’s able to get half of that benefit, but only once the working spouse claims, it might make sense for that working spouse to claim at full retirement age of 67, because the collective benefit is significantly larger, because you can flip on that spousal benefit.

I know, clear as mud, right? Your eyes are glazed over. You’re like, “What are you talking about?” But stick with me here. The next mistake is not planning for taxes on social security benefits. If you’re single and you make over 25 grand or you’re married and you’re over $34,000, you’ll be taxed on your social security benefits. And sometimes through a holistic tax strategy, you’re able to minimize your not only income taxes, but your social security taxes at the same time. And it can make a huge impact on your bottom line. Next mistake, ignoring work rules for early benefits. Essentially, if you want to take benefits between 62 and 67, assuming that you were born after 1959, you’ll have a reduction of those benefits the moment you make over about $20,000. So if your plan is to work and make $50,000 a year and also collect social security, but you are not at full retirement age yet, you’re likely going to have to pay back a significant amount of those social security benefits.

Now, once you’re 67 or whatever your full retirement age is, you can make 20 million dollars a year. You don’t have to pay any of it back. Of course, it’ll be taxed, but you won’t be what’s called earnings restricted, as I just alluded to. The next mistake, remarrying without knowing how it will affect your benefits. Divorced seniors who are 62 and older can receive benefits on their ex-spouse’s record, but only if they’re unmarried. This is one that’s missed often, and there are some other rules around how long you needed to be married, but this is very important and something that’s irreversible once you make the mistake. Speaking of mistakes, I’ve seen this one multiple times too, waiting until 70 to collect spousal benefits. Delaying your benefits beyond full retirement age, which is around 67, will only qualify you for delayed retirement credits if you are the primary beneficiary. Social security benefits you receive as a spouse do not include delayed retirement credits.

So there’s no incentive to delay collecting social security past that full retirement age. If you wait, you’ll have just missed out on three years that you could have been collecting. The next mistake, assuming that social security benefits can fully cover your living expenses. They might be able to, but the average individual social security benefit for retired workers is around $1,500 a month. Maybe you can live on that, but you probably can’t. And so to recap, for many American retirees, social security is essentially the largest bucket of money they have in retirement. Don’t go about the planning alone. The strategies need to be coordinated with your investment plan as well.

Announcer: Social Security is apart of nearly everyone’s retirement income. At Creative Planning there are a team of advisors that help determine the best way for you to get the most from your social security benefits. To set up a visit today go to creativeplanng.com. That’s creativeplanning.com

Now, back to Rethink Your Money, Presented by Creative Planning with your host, John Hagensen

John: This past weekend, I was sitting in church and our pastor was talking about how we often want these cheat codes for our faith, ways to get around the hard stuff, ways to get the answer we want to our prayers. And the parallels are true when it comes to our money. We want those cheat codes. We want to figure out how to skip to the front of the line. We want that fast pass or that genie pass, whatever Disney’s calling it these days. I mean, back in the day with Nintendo, the original Nintendo, the games where you had to blow in the disc and then shake them around in the machine, to hope that they’d actually turn on. Well, one of the best games was Contra.

Now, Contra was a game where you’d run through these levels with different types of guns. And at the end of the level, kill the big bad boss. But the challenge was you started with three lives, which basically for all intents and purposes, made it impossible to beat the game. But here’s the thing, there was a cheat code. And somehow even without YouTube, we all knew it. And if you’re a Gen Xer and you’re a male, you know exactly what the cheat code is. You are saying it in your head right now. Up, up, down, down, left, right, left, right, B, A, start. Now, if you’re playing with two players, B, A, select, start. And if you did it right, you were given 30 lives. Now the game’s a whole lot easier to win, but isn’t it true that we’re all looking for a shortcut when it comes to our money, to wealth, just like we want to warp to world eight in Mario Brothers, sticking with the Nintendo theme.

I mean, we want to be rich without putting in the work. The problem is there is no cheat code, just as there isn’t with our faith, or at least there probably isn’t unless maybe you’re an heir or an heiress. Maybe you’re a member of the Royal Family, or one of the lucky few that hit the last Powerball. But I’m just going to assume, for the sake of the show in this segment, that you should probably build your plan assuming those things aren’t going to happen. Our president and CEO, Peter Mallouk, who is always a great follow on Twitter, and his handle is @petermallouk, had a tweet this week that showed what you see. And it had a circle that said wealth, and then next to it, it headlined the bigger picture. And it had another circle that had a bunch of layers to it.

And below the wealth circle, a stack of circles beneath said, risk, assets, investing, long term, hard work, consistency. And let’s be honest, the circle didn’t have this, but we should probably add the word luck to it as well, because that certainly plays a role. You go, “No, John, it’s no… No luck. It’s all just your own doing.” Well, how about the fact that we were born in America? Could have been born anywhere at any time in history. That, in and of itself, was winning the lottery when you really think about it. But so if you’re discouraged because you’re saying, “Well, John, I can’t do the up, up, left, left thing that you were talking about, like that Contra code’s not going to make me rich. There’s no cheat code.” It doesn’t mean that you’re helpless, that you can’t have financial freedom, because we don’t live in a archaic caste system here in America.

And in fact, most of us float between broke college kids and then with your first job. So you’re lower middle class, maybe at best. And then if you’re fortunate enough, you can elevate upward, which is what makes us one of the greatest countries in the history of the world. The opportunities exist, unlike anything we’ve ever seen. Well, if you’re wondering, the total number of millionaires in the United States is just over 20 million, and there are currently around 800 billionaires in the United States. But if you’re wondering what cheat code these people found, a recent Fidelity Investment study showed that 88% of all millionaires are self-made, meaning they did not inherit their wealth. So we’ve got a lot more control over our success than I think we often maybe think we do. But if you’ve ever thought to yourself, I want to be rich. Let me teach you right now in three steps.

And they’re likely not going to be the three steps that you were thinking. Number one, set a savings rate of 20% at a minimum. You want to be rich, save 20 cents of every dollar you ever make for your entire life. And I know it sounds simple, but simple things aren’t easy. I say that often on this show. If simple things were easy, we’d all have eight packs, because we’d eat less and move more. That’s pretty simple, not necessarily easy. Neither is saving 20% of everything you make for an entire lifetime. The second step in being rich, have a financial plan, so you aren’t missing opportunities that are right in front of you around your taxes and your estate planning and your investment strategies, et cetera. And I know you’re thinking right now, “John, your answer to everything every week on this show is to have a financial plan. We get it. You can stop saying it.”

No, I won’t stop saying it, because well over half of all Americans do not have a financial plan, according to the most recent studies. Most of the Americans that say they have a financial plan, even that have advisors that I meet with, don’t have what I would call a real financial plan. And so in reality, I could talk about whatever subjects we found entertaining for the hour show, and every five minutes, in case someone just popped in, say, hey, by the way, get a financial plan from an independent fiduciary who isn’t selling you something, who has tremendous experience in tax and estate and financial planning and are really good at what they do. And if you just followed that advice, you’d be way ahead of almost everyone around you. And so that’s why I bring it up so often.

And as I always make available, if you don’t know where that person is or who that person is or who that company is, go to creativeplanning.com and request to meet in your local area with one of our 300-plus certified financial planners. And my third step in teaching you how to be rich, spend all the rest of your energy and efforts investing in yourself. What I mean is, how can you make more money, advance your career, starting a side hustle, learning a new skill. There’s a reason that in that study, 44% of US-based millennial millionaires live in California, and 323,000 millionaire households live in New Jersey, and 25,000 ultra-rich, 30 million or more, millionaires live in New York City. There are careers in those places where on average, you can earn a lot more money, because even saving 20% and having a financial plan is only going to get you so far if you’re making $30,000 a year.

At some point, you’ve got to earn more. And so once you’re saving 20%, you’ve got a great financial plan. You look for opportunities to advance your income. And so while there’s no cheat code, there are three simple steps. And I can’t help you have the self-discipline to get that eight pack or to save, but my colleagues and I here at Creative Planning can help create that financial plan that clearly outlines how you get from point A to point B. And there are some other great fiduciary advisors out there who can help you as well. But I encourage you to check that box so that you can spend time focusing on truly what’s going to help you create more wealth. Well, I want to conclude with a question I received from a client who was really wrestling about purpose and how they could be used in retirement and for them, the context was around their money.

But I think we all experience this from time to time, that question around, are we ultimately maximizing our impact on others around us? Or maybe it’s just one of those scenarios where you can’t really see in the moment how you’re being used or how you will be used, and that can be discouraging. And we had a fantastic discussion around this, and it’s not unlike many other discussions I’ve had over the years with our clients. And I want to take a moment to just pause and really reflect on how grateful I am for the opportunity to have these real, authentic, true relationships with some incredible people, that if I hadn’t chosen this profession and they hadn’t found us or we hadn’t found each other, however, you want to look at it, I wouldn’t have experienced and I would’ve really missed out.

And so I know on behalf of all my colleagues at Creative Planning that had the opportunity to help families all across the country, it is not only you who hopefully are being served and helped and having more peace of mind. It is incredibly enriching for us. And I am really looking forward to our annual client conference in Kansas City. That is called Connect 22. It’s next weekend. And if you’re listening, come find me, introduce yourself, and I would love the chance to get to know you and your family. But back to this idea of not always knowing how we’re going to be used. One of our financial planners in our office, his name’s Johnny, and Johnny’s an incredible guy. He’ll be totally embarrassed that I’m sharing this, but I’m going to anyways. So early on in their marriage, his wife and him sold all their possessions, moved to Mexico, and worked with Deaf children in an orphanage. I know it sounds like, “Really? That sounds fake, John. Are you making this up?”

No, they really did this. Sold all their stuff and went down there. Oh, and fast forward, they adopted one of those children. But prior to any of that, they did a trip down to Mexico to build a home with an organization on a short-term trip. And it was funny, because Johnny doesn’t know the difference between a hammer and a screwdriver, but of course, since he’s there and he’s a guy, they’re like, “Oh yeah, pound this over here, do this.” And I think they realized pretty quickly like, “Oh, okay, this guy’s not super handy.” And as he was sharing with me this story, he was saying it was discouraging, because he was wondering, “Why am I here doing this project to build a house? This isn’t my thing. I wanted to help, but I don’t really see how I’m being used.” And as so often happens, he sees this lady off in the distance with kids crowded all around her, jumping up and down, crowded around her.

He goes over to see what the commotion is. And he realizes that she’s with this organization and she creates these balloon animals and the kids just go wild over it. And sort of part of their ministry down there is they build these houses and they play with the kids. He introduces himself to her and asks, “Is there anything I can do to help?” And she says, “Well, not unless you can create a bunch of balloon animals for me.” And Johnny looks at her and says, “Yeah, I know how to do balloon animals.” And she says, “You do?” And he’s like, “Yeah. It was really weird. When I was in junior high, I was bored one weekend and I went to Borders and rented a book to learn how to do it, and I spent the weekend making them. I haven’t really done it since, but yeah, I can still do them.” And he spends the next several hours interacting with these kids, making these balloon animals, and seeing the smiles on their face.

And of course, he’s bilingual, so he’s speaking in Spanish to their parents. And left that trip feeling so much joy and gratitude for having been put in a situation where he truly could use a very random gift. By the way, if you need a financial planner who makes balloon animals, Johnny’s your guy at Creative Planning. And it serves as such a great reminder that just because we can’t see the whole picture doesn’t mean that there’s not a great purpose in store for us. And remember, we are the wealthiest society in the history of Planet Earth. Let’s make our money matter.

Announcer: The preceding program is furnished by Creative Planning, an SCC registered investment advisory firm that manages or advises on 225 billion dollars in assets. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there could be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal, tax or financial advice that accounts for your personal risk tolerance, objectives and suitability. If you would like our help request a wealth path analysis by going to CreativePlanning.com/radio. Creative Planning tax and legal are separate entities that must be engaged independently.

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