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Inside Look: A Wealth Planning Case Study (Part 2 of 3)

Published on February 19, 2024

John Hagensen

Continue to follow along with our case study of the Smiths as John digs into the next step of the planning process, where he examines their financials and explains how they’re progressing toward achieving their retirement goals. (7:46) Plus, we talk pensions (12:12) and Nvidia. (22:19)

Episode Notes:

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

John Hagensen: Welcome to the Rethink Your Money podcast, presented by Creative Planning. I’m John Hagensen. And ahead on today’s show, 11 of my money musings, the second part of our financial planning case study, and how sunscreen and umbrellas relate to your investment allocation. Now, join me as I help you rethink your money.

Well, the shooting that occurred at the Super Bowl parade on Tuesday was tragic and unthinkable. Creative Planning is headquartered in Overland Park, Kansas, and about half of my 2,000-plus colleagues live in the Kansas City area, some of whom were there celebrating the Chiefs’ victory downtown with friends and family. And to the loved ones of those injured and to the family of the mother of two who was killed in this devastating shooting, we’re thinking about you and praying for you during the aftermath of what seems like an all-too-frequent occurrence here in America.

Benjamin Franklin famously said, “A penny saved is a penny earned.” Your parents ever tell you, “Money doesn’t grow on trees,” when you asked for an action figure or an extra 20 to go to the movies with your friends? How about, “Cut your coat according to your cloth,” or “A fool and his money are soon parted”? Probably the most famous in the Good Book is that money is the root of all evil, but no, it’s not that. It is for the love of money that is the root of all evil. Easy come, easy go. Save for a rainy day. Put your money where your mouth is. A bird in the hand is worth two in the bush.

You see, whether you know it or not, from the time you were young, others’ ideas around money were communicated to you, and it got me thinking, “I have some ideas that I’ve learned about money in meeting with thousands of families and discussing the most important and intimate aspects of their financial life.” And so, here are 11 of my money musings, in no particular order. The first take: Huge risks in life, but not with your investments.

You see, broadly speaking, risk and return are correlated, but not always. And in fact, most of the people that I see taking the biggest risks will never be compensated anywhere near proportionally, relative to the possibility of blowing up their entire plan as a result of that risk. This is intuitive, if you really stop and think about it. You have to be right over and over and never be really wrong when swinging for the fences with your investments.

For example, if you were the greatest stock picker in the entire world for 30 years, you tripled market returns, but in 2001, you had everything in AOL and Yahoo, or in 2008, you love the Rodeo Grandmas, those Washington Mutual commercials, free checking. Those were great, weren’t they? Yeah, I hope you didn’t have all your money in those, because even if you were the greatest investor in the history of the world up to that point, you lost everything. However, to the contrary, most of the greatest things in your life required you to get out of your comfort zone and take a chance.

Next, be a good tipper. Yes, I’m a little bit judgy right now. But if you are someone who has a lot of financial flexibility, and you have your server running back and forth and refilling your iced tea, and at the end of all of it, on a $100 bill, you’re giving him a five under the saltshaker on the table? Yeah. Come on. Just be a good tipper.

And by the way, I know of our 75,000-plus clients here at Creative Planning, some of you are really bad tippers and some of you are probably really good clients of ours, and I’m sorry if I offended you. But be a good tipper. Number three, all wealth is relative. I remember as a college graduate thinking, “I need 35 grand a year, and I’m rolling.” But generally speaking, as you increase your net worth, you tend to move to a nicer house. Well, who are your neighbors? Other people that have similar net worths. You interact with people at work that may be in a similar financial situation to you. And in the end, it normalizes it.

And furthermore, unless you won the lottery, it doesn’t happen all at once. It’s subtle over many years or decades, which makes it less noteworthy that you’re actually doing pretty well. Next, it’ll be hard to get way ahead if you’re a low-income earner. Now, it’s great to live below your means and do the best job saving whatever it is that you make. Those are fantastic principles. But if you never make more than $25,000 a year, I mean, if you’re making $15 an hour, the number one financial objective you should have is to figure out a way to earn more money.

There are two things people will spend obscene amounts of money on, kids and pets. So if you’re someone with a lower income and you’re thinking, “How do I make more money?” start a business that caters to kids or pets. I’ve seen plenty of people not be able to retire because they wanted to drop 60 grand on their kids’ wedding, or go into debt to pay for 100% of their college.

The last time I was around my mother-in-law, she was mixing wet food from the refrigerator, like making a four-course meal for her little five-pound teacup Pomeranian, and it was better than I eat. Couldn’t believe it. If you have financial flexibility, pay for others. Pick up the check. Be generous, because if you’re like most people, certainly myself, you remember times where someone paying for your coffee and you’re like, “Man, actually, that was really nice. That helps me out.”

And my next money musing is that wealthy people are actually harder to identify than sort of wealthy people. Those who I know that have had the most financial success, not high-income earners, not credit card millionaires with the fake Gucci bags. I mean, the legit wealthy people are normally the people that don’t talk about their money. They’re secure in their financial situation, and have gotten completely beyond the point where they’re trying to impress others.

Next up, if you continually increase your savings rate, even by a tiny amount each year, you will save more money than you ever thought possible. Next up, time is your most valuable commodity, so delegate as much as possible. This one’s controversial, but I pretty strongly believe it. Retirement is overrated. Now, every situation is different. But generally speaking, this idea that the golden goose, the pinnacle of my life is when I don’t have to do anything, and I just wake up whenever I want and binge on Netflix and golf every day.

Unless you figure out some purposeful actions that make it fulfilling, this idea of retirement, especially for 30 years, from 65 to 95, may not actually live up to your expectations. And finally, the phrase “money doesn’t matter” is generally said by those who have it. If you struggle to pay bills, you’re riddled with debt, you lost your job, having a little more money absolutely matters. So even if you’re on the mountaintop, remember that there are some in the valley who probably feel a lot different in terms of the value of money in their life.

I want to transition over to our second week looking at John and Jane Smith, an active case study in financial planning and retirement planning so that you can gain perspective by evaluating someone else’s situation. To catch you up from last week, John and Jane are 63 and 61, want to retire in the next five years, with the goals of having financial independence, building a legacy, and funding education.

The purpose of this visit is not to give detailed recommendations. It’s to take all the information that they shared in our first visit, to gather all the documents, and then, together in front of John and Jane Smith, build out their financial plan. You see, here at Creative Planning, we don’t go in a back office and build everything out, and then spit off a 100-page report and say, “Here’s your financial plan,” because while the numbers may be accurate, we found that very few people truly connect with that plan.

The primary goal at the end of this visit is for all of us to be on the same page with exactly where they stand. Right? It’s like that star in the mall, “You are here.” Then we can begin making recommendations specific to their situation of how to improve the probability of their outcomes. In creating their personal balance sheet, John has 275,000 in a Roth IRA. Jane has 400,000 in a Roth IRA. He has 800,000 in his 401(k) at Fidelity that is still active. Jane has 600,000 in her 401(k), also active. She’s still employed as well.

They have taxable investments of about $900,000 at Charles Schwab. Their home is worth 740 grand, and they still owe $325,000, but at a really attractive 3.25% interest rate on a 30-year fixed-rate mortgage. When you add up their assets and reduce their liabilities, the only one of those being that mortgage, they have a total net worth of 3.390.

Now, in this visit, we also find out that they’re really good savers, always have been, and that’s one of the reasons that they’re in the situation that they are. John’s maxing out his plan, and Jane is contributing up to the match in hers. And they plan to continue doing that until 2028, which is when they intend to retire. For Social Security and pensions, John has a benefit of $3,800 a month at age 68 when he goes to retire. Now, we don’t know for sure, again, if that’s what we will recommend, but we’re plugging that in right now for the base facts without exhausting all of our Social Security options and strategies.

Jane’s going to receive $2,445 a month beginning at age 66, if they were to do a simultaneous retirement, again, in year 2028. Fortunately, Social Security benefits increase with inflation, and then they’ll also receive a pension that’s approximately 2,000 a month upon retirement, and that is the number, assuming that they take a 100% survivor benefit. Important to note, it does not have any inflation adjustments.

Using a 7% rate of return on investments until retirement and 6% after retirement, along with a 2% inflation rate, our software showed the Smiths that they are on track to achieve their goal of having $200,000 a year in retirement. Furthermore, they’ll have a projected surplus of about 1.1 million at retirement. And due to that surplus, I already know that from a legacy-building standpoint, investing in vacations with their children, helping with a down payment, and also having something left over when they pass away for their kids and grandkids is absolutely doable.

And regarding funding education, about 150,000 for each of their two grandchildren, 300,000 total. Again, the surplus is there for them to achieve those things. So this is a great visit, because it ends with them seeing for themselves that the sacrifices they’ve made in working hard and being diligent savers has paid off. They can confidently retire and fulfill the objectives that are important to them. But there are several areas of their plan that can be improved. And next week, I’ll go through specific recommendations relative to their investments, their estate planning, their risk management, so that they optimize what they’ve worked for a lifetime to save.

Only about one in 10 Americans working within the private sector today participates in a defined benefit pension plan. But that’s very different than a few decades ago, where most Americans approaching retirement were dependent on companies’ pensions to support their retirement income. And to discuss this further, I’m joined by Creative Planning wealth manager Nic Santana.

Nic is a Certified Financial Planner as well as a Chartered Financial Analyst, and it’s through that unique combination of experience and knowledge that I’ve asked him on today as the perfect guest to discuss pension strategy and, ultimately, how it fits into a retirement income picture. Nic Santana, thank you for joining me on Rethink Your Money.

Nic Santata: Yeah. Appreciate you having me on here, John.

John: Well, I thought we’d start by talking a bit about proper outside investment allocations to work in conjunction with a pension.

Nic: This pension income that you’re going to be receiving is a safer form. You don’t have to worry about the volatility and the ups and downs that happen. But at the same time, most pensions out there that aren’t provided from the federal government or maybe from a county doesn’t have a cost-of-living adjustment.

So if you’re making $2,000 a month now, you’re going to get $2,000 20 years down the road every single month, and you’re going to lose that purchasing power. So you really need to work that in conjunction with your other investments, whether it’s IRAs or nonqualified assets or Roth accounts, that you’re seeing growth in these outside areas to offset the purchasing power decline you have on the pension.

John: If someone retires at 62 and they take a pension of 2,000 a month, it’s worth 1,000 a month when they’re 82, and people underestimate the impact of that. Certainly, then you play that out to somebody living into their 90s or 100, now it’s 500 a month.

Nic: You can hardly buy anything at that point in time. People who have pensions, though, have this false narrative that then with their investments, they can be more conservative. You do have federal employees who get a cost-of-living adjustment at least on their pensions, but that is not guaranteed. That’s decided by Congress. So they could, at some point, say, “We’re not going to do an increase this year,” even though, really, the CPI went up maybe 2 or 3% over that time frame.

John: So, when you’re building out a portfolio for a client who has a pension, do you treat the pension itself as a fixed-income part of the overall portfolio, or is that completely separate and you build the portfolio independent of that pension?

Nic: It’s a mix of both. I do include it as part of their fixed-income reserves, essentially. I also notice that they need to have more bonds in the portfolio. They can’t just have all equities and then consider their pension as the bond side of the equation, because what if they need to have a large distribution from their account when the market’s down in value? We need to still have some bonds in there. So it’s kind of a balance between both of those.

John: And I think it’s interesting that in your experience, people say, “Well, I’m going to even be more conservative, because now I’ve got this pension.” To me, that’s backwards. If anything, that’s a piece that, essentially, you’ve bought an annuity. Now you’ve pensionized this big part of your portfolio. And so, if the client has $2 million in their TSP and IRAs and everything else, and then they have this pension maybe paying $2,500 a month, that has significant value. They think of it more like that. They feel a lot better about their retirement, because instead of having the $2 million, they say, “Oh, really? I have 4 million. And it’s almost like I retired with 4 million and I took 2 million and bought an annuity.”

Nic: And I show that. Whenever we have a new client that’s coming on board who has a pension, I say, “All right. Here’s the present value. Your annuity is the same as having an extra million or $2 million in the account. So yeah, you might be a millionaire, but realistically, you have $3 million in assets. You just can’t touch 2 million of it, because you’re going to have that income stream for the rest of your life.”

John: And this is a great topic for you as not only a CFP, but also a CFA. So I know you’re a math guy as well, which is great when talking about pensions. How do you treat survivor scenarios?

Nic: A lot of the pensions out there, they’re not going to give you a lump-sum option. They’re not going to say, “Hey, you can take all of the money once you retire at 65, take it and roll it into an IRA.” Unfortunately, they don’t, because there’s a lot of instances where that makes sense, and we can talk about that further.

But they’re going to say, “You can take a benefit for your entire life. And once you pass away, it’s done,” or “You could take a benefit for your whole life. And once you pass away, your spouse is going to get 50% or 75% or 100%. But the greater the benefit your spouse is going to receive when you pass, you’re going to get a smaller payout for your entire life and for their life. That’s the trade-off.” So if you suddenly pass away two years after you started your pension, and you chose no survivor benefit, you get concerned about how the spouse is going to live their life.

John: And this speaks to clearly why a written, documented, dynamic financial plan that considers all of those various factors, including things like health and longevity, and even for the spouse. What’s your age difference between spouses? What’s your opinion, Nic, on when people do take a single-life and they’re in good health at the moment, and they run the math and decide to buy a life insurance policy for 10 or 20 years on a term policy so that if they pass away during the 10 or 20 years, it’ll pay out a lump-sum, tax-free death benefit to the spouse?

Obviously, we’re both Certified Financial Planners that are running these sorts of scenarios for clients. In some cases, depending upon their health and the underwriting guidelines, we can use the difference of income to pay the premiums, and they end up in a better situation for the spouse as well as more income in the short term. Have you seen that work in some cases for clients?

Nic: I have. Yeah. The downside is, yeah, you’re 21, you pass away, and then the pension still goes away. But by the time you get there, you’re usually in your 80s or 90s. Your costs have dropped down drastically. Maybe you’ve downsized the house that you’re living in. So it becomes an easier conversation, say, “All right. 10, 20 years, let’s buy a life insurance policy.” Term life, not a whole life or anything. You don’t need that, and cover that difference between what the spousal benefit would be versus the single-life annuity.

John: If you’d like to speak with someone like Nic or myself or one of our colleagues here, a certified financial planner that can help put a plan together, if you’re making a pension decision, we’re happy to help, as we have for thousands of families just like you. You can visit creativeplanning.com/radio to request that. Nic, let’s transition over to this lump sum that you teased a little bit here a moment ago. What do you think should be considered when evaluating a lump sum versus taking the income stream?

Nic: And this is where the CFA side comes in. It’s present value. You want to be running the probability statistically of, how long do you think this person’s going to live? What’s the inflation rate? Because most of the pensions that offer a lump sum are not going to have a cost-of-living adjustment. Traditionally, you see them from corporate jobs, where they will let you take the lump sum and they’re not going to give you cost of living. So what’s that inflation factor, and then what’s the rate of return you’re going to be getting on your money if you take the lump sum versus taking the pension?

So you plug all of that in, and we actually have some software that we utilize to do this, because otherwise, it would take months to calculate this out, but thank God for Excel. That’s how everything works in finance. And you run through the different statistics and probabilities. Okay. If you take this pension lump sum and it’s invested, you’re earning 5, 6, 7%, whatever it might be, and you have inflation at 2, 3%, what’s the probability that it’s a better option to take a lump sum versus a single-life annuity, and calculating what the breakeven is? How long do you have to live for it to make more sense to take the lump sum versus the annuity option?

I’ll give you an example. I had a client, unfortunately. They were in their mid-60s. They retired. They didn’t save a lot of money in their IRAs, but they spent quite a bit of money, so they knew the annuity option wasn’t going to work. He chose to do the lump-sum payout, put it into an IRA, and he passed away five years later. So this was money then that the spouse was able to live on.

It wasn’t as if the pension had just, all of a sudden, stopped five years down the road. She’s still a client to this day, lives off the cash that’s generated from the investments themselves so that she’s going to have a fine life, and she knows there’s going to be money left for the kids, because you think of a pension, even if you choose a benefit option for your wife to get 50%, when she passes away, it’s gone. And if that’s all the money you have, there’s nothing going on for inheritance down to the kids or the grandkids.

John: Anytime someone chooses a single-life annuity payout who is married, they better think long and hard, because that can be a very precarious situation. What are some of the other mistakes that you see that you want someone listening who maybe has a pension to be aware of?

Nic: I’m shocked that when they send out the pension paperwork, they don’t automatically have a financial advisor for you to talk to, because this is a life-altering decision that you are making.

John: But Nic, you can call HR and they’ll tell you which spot on the form you’re supposed to fill out. Right?

Nic: Yeah. “It’s line 14. Didn’t you know that? And then you elect the tax withholding.” Yeah. “Oh, you have a tax question? Sorry, we can’t help you with that. Go talk with an advisor.”

John: No. No.

Nic: The biggest mistake is not talking with a fiduciary and financial advisor to get the second opinion and to run it, because, frankly, most of these people, they don’t handle finances or tax on a day-to-day basis. That’s not their profession. That’s not what they have done their whole entire life, and not what they do well.

So why are you and me here, John? Because this is what we do day in, day out. We love this stuff. We’re nerds when it comes to math and getting these calculations done. And if you’re not trying to put your best foot forward in what’s really the largest financial decision that you will have in your entire life, you’re making the biggest mistake.

John: And I’ll add one more thing, Nic. Do not approach retirement if you’re in your 40s or 50s, relying entirely on this pension that it’s going to support you. In a previous life, I was an airline pilot, and I flew with a lot of seasoned captains who would lament for the four-day trip in the cockpit about losing their pension and how it completely changed their entire retirement.

Nic: Right. They could freeze it. They could stop it at any point in time. And a lot of corporations do that, because it’s a liability on their books. And if things start getting tight, how do we try to make the bottom line look better? Well, there you go.

John: Nic Santana, thank you so much for joining me here on Rethink Your Money. I’m going to try to get down to the palm trees and the aqua water down there in Florida by you. Enjoy yourself, and I’ll talk to you soon.

Nic: Yeah. Thanks, John. Come on down whenever.

John: Recently, NVIDIA surpassed e-commerce giant Amazon in terms of market value, and it propelled the chipmaker into the fourth position among American companies by value in the S&P 500. The last instance that NVIDIA surpassed Amazon in market value dates all the way back to 2002 when, you’ll love this, both companies were valued at less than 6 billion each.

But this recent resurgence just underscores NVIDIA’s meteoric rise in the technology landscape, and it led Michael Batnick to recently ask the question, I think it’s a good one, “Is NVIDIA the new energy?” I mean, it is now larger than the entire energy sector within the S&P 500. There are 23 stocks with a combined market cap of 1.58 trillion, which is about 10% less than NVIDIA’s market cap, according to Creative Planning’s chief market strategist, Charlie Bilello.

So you take the energy sector of the S&P, names like Exxon, Chevron, ConocoPhillips, Halliburton, SLB, Occidental Petroleum. Those represent about 3.8% of the index, which, again, is less than NVIDIA, one company. It would’ve been wild 10 or 20 years ago to have imagined that one company in the microchip arena would, again, be bigger than the entire energy sector. I mean, no one would’ve believed it.

Here’s another wild stat. NVIDIA’s growth in one year was almost as large as Tesla’s entire market cap, and Tesla is as large as the next five automakers combined. That’s how big NVIDIA is. And it’s really easy in these moments to ask yourself, “Why don’t I own more NVIDIA? Why didn’t I buy this thing 10 years ago or five years ago? What was I thinking?” Because it’s really tempting when stocks go nuts and become huge to kick yourself, thinking, “How did I not see this coming?” It was so obvious, of course, with our hindsight bias, when in reality, it wasn’t obvious.

And that’s why, generally, you want to own more than one individual stock, because you don’t know Apple before they’re Apple or Amazon before they’re Amazon, or NVIDIA before they’re NVIDIA. But I think the common wisdom that the more stocks you own, the more diversified your portfolio will be is one that we should rethink.

Let’s suppose you lived in a beach town. Let’s say it’s Zihuatanejo. You’re down there with Morgan Freeman and Tim Robbins, working on an old boat, and you see that whenever it’s sunny, everyone goes to the local store or into their hotel and they buy sunscreen, because they’re burning up. So you thought to yourself, “All right. I’m going to sell some sunscreen on a stand here at the beach, and I’m going to crush it. I mean, this is so easy. Everybody needs it.” So that’s what you do.

But the problem was, whenever the weather turned bad, had a little rainy stretch, your sales were zero. You went from having a line at your stand to no revenue, so you thought, “I know what I’m going to do. I’m going to diversify. This is crazy that I’m only selling sunscreen.” So you decided to sell multiple brands of sunscreen and various SPF levels. You were like, “Yeah. I need variety. That’s what I need.” Of course, this is stupid, because it doesn’t provide any level of risk mitigation to your sales.

The problem on a rainy day wasn’t that your SPF was only 15 or one brand, it’s all still sunscreen that’s needed on sunny days. So now, being the business genius that you are, you’re like, “You know what? It’s winter. Forget about sunscreen. It’s been raining a lot. I know what I’m going to do. I’m going to open an umbrella stand.” And, of course, on rainy days, you’re selling a bunch of umbrellas, and on sunny days, you’re not.

And so, again, you think to yourself, “I need to diversify. I’m going to get one of those curly handled umbrellas, like the Penguin in Batman uses. I’m going to get the giant golf umbrellas,” and you even get five different colors of umbrellas. “Who wants just black? Let’s do a bunch of other colors.” Of course, that doesn’t help, because when it’s sunny, nobody wants an umbrella. And you know where I’m going with this. I know. Just let me get there, taking a while here.

But you set up a stand with umbrellas and sunscreen, and you win regardless of the weather. When investing money, I regularly see this sort of crazy thought process where people own five different umbrella colors and sizes, and they tell me, “John, I am diversified. I don’t just own one stock. Look at all this stuff I own.” Yeah. Owning a lot of stuff doesn’t make you diversified. How often do certain things zig when others zag? That’s diversification.

And so, yes, every Certified Financial Planner you ever talk to is going to emphasize and point out the value of diversification, and it’s an annoying buzzword we hear all the time. But to truly be diversified, it’s a lot more academic than just, “Let’s sort of throw a bunch of stuff into the portfolio and say that we’re diversified.”

But here’s the downside to being properly diversified: having dissimilar price movement amongst your investments. You will never ever have all of your money in the best performer. But the silver lining, of course, is that you’ll also never have everything in the lowest performer. I tell my clients all the time, “You’ll be properly diversified to reduce risk. And because of that, I am never going to have to tell you that I’m sorry, but I’m always going to have to tell you that I’m sorry.”

If you have questions about your asset allocation, the way that you’re invested, your risk, your return, and how that aligns with your financial objectives, meet with us at Creative Planning for a free consultation by visiting creativeplanning.com/radio, because we believe your money works harder when it works together. One of the big reasons investors tend to be under-diversified is that they’re seeking the home run. They are focused, first and foremost, on investment returns.

And by the way, it’s great to desire good returns. It certainly impacts your financial success and your ability to retire and give to causes that you care about. But I contend that the focus should be less on investment returns and more on your savings rate. Let me give you a few figures to illustrate just how important our savings rate is. So let’s start with you saving $500 a month. Seems pretty reasonable. For 30 years, you save $500 a month, and you make 8% per year on your money. You go to retire with 745 grand, just a little less than three-quarters of a million.

But now let’s say you get a little more serious about saving. Instead of saving 500 a month, you’re going to save 1,000 per month for 30 years, but you don’t earn 8%. You only make 7. Do you think you end up with more or less than the 745,000? Well, if you answered more, you’re correct. You have more by a lot, $1.2 million, even though you earned, for 30 years, 1% less on your money. You just saved 500 more a month. Totally within your control.

And we can play this out even further. If you saved 1,500 a month, but you only made 6%, so even worse returns, you didn’t have 1.2 million. You had 1.5 million. And let’s use an extreme example. You save $3,000 a month, but for 30 years, you only made 5% on your money. Not great returns. I mean, that would historically, certainly for the stock market, be just atrocious returns. You still retired with $2.5 million.

Now, fortunately, your investment returns and your savings rate aren’t mutually exclusive. You can actually have both. But superior returns aren’t, again, entirely within your control like your savings rate is. And certainly, whether you put your money in index funds or a money market is very much within your control, and you should have a great investment strategy in place to provide for the highest probability of accomplishing your goals.

But most financially stable people who are set up with financial independence, in my experience meeting with thousands of them as a financial advisor, have one thing in common, and it’s not that they all made it rain with their income or sold a business for a bunch of money or inherited millions of dollars. No. The one commonality in almost all of them is that they spent less than they made, year after year and decade after decade, and they didn’t run up unnecessary debt.

And I don’t just mean credit cards. I mean the $100,000 luxury SUV, that now, instead of saving 2,000 a month, you can only save 1,000 a month, because of a four-figure monthly car payment. I don’t know about you, but I know very few people who bought Apple stock back in the ’80s, and that’s why they have $50 million today. No, they didn’t figure out a way to make 20% per year. Buffett hasn’t even pulled that off over the last 25 years, but they did have a great emphasis on saving money and saving money consistently.

So be mindful of returns. Make sure your investment strategy is good. But once that’s in place, you don’t need to continually fixate on it. So that common wisdom that investment returns are the primary focus for financially savvy individuals, that’s a notion that we have to rethink. If I gave you $10,000 and you decided to invest it all in the Magnificent Seven stocks, or you took all 10 grand and you bought crypto, it would certainly be a gamble. You’re not diversified. You’re creating a lot more risk on a concentrated bet.

But while I don’t know your individual financial situation, it’s probably not going to change your life if it doesn’t work out or it underperforms, or worst-case scenario, you lose it all. Now, I’m not saying you should be frivolous and just throw money around, but it’s probably not going to destroy you. But if I gave you $10 million, like instead of 10 grand, I said, “Here’s $10 million,” and you took that and put 100% of it into crypto or seven individual large-cap stocks, most people would agree you’re pretty dumb. That’s a major risk.

In that extreme example, it becomes obvious that our financial decisions and the way you invest money and your risk tolerance has to be relative to your situation and to your objectives. The idea that you need one investment philosophy, that is an idea that we must rethink. I meet with people all the time, “I’m a conservative investor. I’m an aggressive investor. I’m a growth investor. I’m a value investor. I’m a dividend investor.”

No. Warren Buffett is a value investor. That’s his job. He manages money. Cathie Wood, who runs the ARK funds, she’s a growth investor. But you’re not a money manager. You’re an individual who is squirreling away money to be used for some priority in the future. So what’s neat is, you can be a growth investor and a value investor. You can be a domestic and a foreign investor. You can be a stock and a bond investor. You can own private investments. You should be a diversified investor.

Well, it’s time for this week’s one simple task, where each of the 52 weeks in 2024, I’m offering you an easy-to-execute step in improving your financial life. If you’ve missed the previous tasks or would like to reference back to ensure that you’ve completed those, there is a section on the Radio page of our website that will be up for the entire year for your reference.

Today’s tip: Set up your phone’s legacy contact. We live in a digital world. If you need directions on how to do so, you can contact us at Creative Planning, or I’ll post an article to that simple task section of our website that’ll walk you through the steps to accomplish this. In summary, if something were to happen to you, it provides authorization for a designated third party to access your phone’s data. Well, it’s time for listener questions, and one of my producers, Lauren, will be reading those today. Hey, Lauren, who do we have up first?

Lauren Newman: Hi, John. The first question I have today is from Janet in Austin, Texas. She wrote in and asked, “I’ve been looking into some options for me when it comes to tax benefits. An attorney in my town recommended a charitable remainder trust, since I’m actively involved in my community and serve on the board of a local nonprofit. What do you think about these?”

John: Well, thank you, Janet, for the question and for your involvement with that local nonprofit. I love hearing about people giving back, and I think your question is consistent with that, because first and foremost, a charitable remainder trust, which we’ll hear referred to as a CRT for short, is completely useless. The strategy doesn’t work unless you’re charitably inclined.

I’ve had clients come in and say, “Hey, I’ve heard about this charitable remainder trust. It can give me a big tax break.” And then through the conversation, I realized they have no desire to give any money to charities. They were just looking for the tax break, and that doesn’t work. So I’ll just walk you through some of the basics of a CRT, but the biggest benefit relates to taxes.

So it’s someone who’s charitably inclined, but they also come with some rules and restrictions that you should know certainly before setting one up, because it’s an irrevocable trust, where you contribute assets that either yourself or a different chosen beneficiary can use as a stream of income. And then the R in CRT, the remainder of the funds go to charity or charities of your choice. Placing assets in a CRT reduces your individual taxable income. And so, this strategy can work well for people with appreciated assets, where they choose to make a CRT part of their estate planning strategy.

And Janet, you can fund that CRT with cash, with publicly traded securities, with real estate, and even, in some cases, closely held stock, but there are some caveats to that. You can also decide whether the annuities are paid out annually, semiannually, quarterly, monthly. So there’s a lot of flexibility there. However, the total payout for each year must be at least 5% of the account’s assets, and it can’t be more than 50%. Pretty wide range, but there are some restrictions when it comes to that.

And when the beneficiary’s term ends, the remainder of the assets are then donated to a charity or multiple charities of your choice, and those charities, of course, must be IRS-approved to qualify for your CRT donation. It can’t be, “My daughter set up this organization, which she runs, and is essentially a shell to try to get tax-advantaged monies to family members.” Can’t do that. And it’s really important to know that your contributions are completely irrevocable.

So the pro is that you convert lump sums into an income stream that’s tax-advantaged. The biggest con is that, what I just mentioned, it’s totally inflexible. So you set the thing up and you’re going to get 20,000 a year in income, and all of a sudden, in year four, you realize, “I really need 30,000 a year of income.” Sorry, not happening. And the cousin to CRTs are what’s called a charitable lead trust, which is essentially the opposite of a CRT. Rather than paying set amounts to a beneficiary and then donating the rest to charity, a lead trust donates set amounts to a charity over a period of time and then transfers the remainder to you.

At the end of the day, you need a financial plan, you need an estate plan, and a really good attorney and CFP working together to evaluate your options relative to your goals, to see not only, “Does this fit in? Does this make sense? If it does, how much should we contribute, and how much of it should be designated to charity?” Because the more you designate to charity, obviously, the higher the tax benefits, but the less income you’ll have.

These can work extremely well for the right situation, but should only be done after getting comprehensive guidance. We have multiple offices there in the State of Texas. So if you’d like to visit with one of my colleagues, you can request that meeting at creativeplanning.com/radio. All right. Lauren, who’s next?

Lauren: Thomas from Milwaukee, Wisconsin wrote, “My mother is 80 and has 350,000 left on her mortgage. Her home is worth around 980,000. Should she take out a reverse mortgage?”

John: Well, so first off, I’m going to assume that she really wants to stay in the home. Otherwise, the question will be irrelevant. So I’m guessing that that’s the case. And because she still has 350 left on her mortgage, I’m assuming that payment’s eating up some of her cash flow. And if that’s the case, options like home equity loans or a traditional refinance won’t be viable, because she’s still going to have a payment.

And furthermore, she’s in her 80s, so I’m guessing also that your mom doesn’t have enough income, because she’s retired, for the debt-to-income ratio to even qualify her for potentially one of those loans. So this is the scenario where a reverse mortgage can make sense. Again, this isn’t advice. I don’t know her whole situation. But the newer reverse mortgages aren’t as fee-heavy, and they do offer some survivor benefits once the home sells.

A reverse mortgage would be great if you’re looking for your mom to consolidate that $350,000 balance, and maybe even grab another 100, 200, $300,000 of equity to add to her liquid assets to support her in retirement and drive a bit more income, provide more liquidity and flexibility, as long as you maximizing your inheritance isn’t the main priority, and based on your question, assuming that it’s not, as it seems like you’re really trying to figure out how you can help your mom stay in her home and not drain all of her assets. So if that’s the case, it’s a viable strategy.

And generally, when she passes away, you can pay off the reverse mortgage, so that balance of the loan, if you want to keep the home. But more commonly, what I see is you, and if you have any siblings, will sell the home, pay off the reverse mortgage, and then the beneficiaries will receive what’s left. Now, reverse mortgages, for a time, you avoided them like the plague. I mean, they were basically a four-letter word, because you’d receive no equity. The up-front costs and fees were just insane. They were really inflexible if anything came up along the way.

So while there’s still a big financial decision, and one that you should do within the context of a financial plan, they aren’t to be avoided at all costs any longer, because if it’s someone like in your mom’s case who doesn’t want to make a mortgage payment and/or needs access to the equity in their home and wants to stay in their home late into retirement, a reverse mortgage may actually be a great tool. Thank you for those questions. If you have a question of your own that you’d like answered by me on the air, you can submit that to radio@creativeplanning.com.

A couple of my children are in an entrepreneur club through their school, and they’ve done a couple of different businesses over the years, but one thing their school encourages them to do is give part of their proceeds back to an organization that they care about. Four of my seven children are adopted, and the two who do the market are both adopted.

And so, I think it’s really neat that they’ve chosen to give back proceeds from their business each year to a local adoption agency that, actually, our sixth-grader came to us through. So now, he’s helping other children find forever families. It’s a beautiful act of love by our son to see this thing go full circle. And as a parent, there’s almost nothing that makes me more proud and more grateful than when I see my children showing love to those who have less than them, by making it a priority to give back to others.

And that’s a common question that I receive from clients. And you’ve probably asked yourself this if you have children or grandchildren, and you have some financial flexibility, like, “How do I get my kids interested in philanthropy? How do I give them perspective of the need that exists both here domestically as well as across the globe?” I’m going to give you five tips that I’ve found helpful not only in my own life, but with families who I help that I feel have done this really well.

First is, lead by example. You want to get your kids interested in others. Remember that far more is caught than taught. You’ve got little eyes watching for the signals that tell them, “This is what Mom and Dad prioritize. Not what they say is important. What they show me is important.” Next, involve your children in charitable decisions. We were at a concert earlier this year, and Compassion International was walking around. It was a big priority of the group who was performing.

And so, the three kids that I had at the concert all grabbed one of the cards and now sponsors a different child in a different part of the world so that they can have education and food, and it’s pretty cool. Through Compassion, they write letters back and forth to one another, and have them doing chores to help pay for that sponsorship each month.

So when they’re picking up dog poop in the backyard or taking out the garbages, they know, “Hey, I’m doing this to help somebody else who needs it.” Next, volunteer together. I think so often, parents do these incredible things, but their kids aren’t even really aware of it. How can that rub off on them when they don’t see firsthand the impact that you’re making?

Next month, I’m taking a few of my kids down to Mexico, across the border, to build a home for a family who has been awarded, through their hard work and community involvement, a home. And I hope that spending some time hammering nails together and seeing the faces of these individuals when they get the keys to their front door brings our interest in philanthropy as a family even closer together.

Also, help your children develop their own charitable goals, not just the ones that you care about. Have an open discussion. What do you care about? This is one that I need to get a lot better at. I say, “This is what’s important. Here’s how Mom and I think that we could be helping as a family.” But I probably need to ask them a bit more like, “What are things that you’re passionate about? What are areas of need that you see through their vantage point as kids?”

And lastly, encourage your children to donate their own money. My producer, Lauren, who just read those questions, shared with me that every year at Thanksgiving, her parents give everyone in the family, so the adult kids and the grandkids, $100 to do something for someone else during the holidays. And then at Christmas, when they’re back together, they all share what they did with it and the impact that it made. I love that. Good job, Lauren’s parents. If you’re listening, I may steal that in the Hagensen household.

And so, to recap the five tips for getting children interested in philanthropy, lead by example, involve your children in charitable decisions, volunteer together, help them develop their own charitable goals, and encourage them to donate their own money. At the end of the day, let’s face it, how blessed are we? It doesn’t mean we don’t have challenges and problems, and everyone has their own unique situation, certainly, but a lower-middle-class American is still in the top 10% of the world regarding income and wealth.

If you’re middle class, you’re in the top 5%. And if you’re doing pretty well in America, you’re easily in the top 1% of the billions of people across the globe. If you want to find joy and you want to find peace with your finances, which I believe we all do, then develop a spirit of generosity, because remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.

Disclaimer: The proceeding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1st, 2023. 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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