This week, John shares the story behind the current crypto meltdown and the lessons we can learn from it. He’s also joined by Creative Planning International Wealth Manager Nancy Metzger to discuss the tax implications and financial nuances that go along with living abroad.
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!
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John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show, the story behind the crypto meltdown and the lessons we can learn from it, as well as the steps to protect against the four most common threats to your wealth. Finally, the three serious problems related to the 4% withdrawal rule. Now, join me as I help you rethink your money. Let’s start with 2008. If you remember, it was then that Warren Buffett struck a bet with a hedge fund manager. Buffet bet on the S&P 500, and the hedge fund manager picked five hedge funds of his choice. Well, Buffett won hands down, crushed him. I bring this up because we have another wager going on that’s about a year-and-a-half in now. It’s between Creative Planning President, Peter Mallouk, and billionaire, Dallas Maverick’s owner and Shark Tank host, Mark Cuban.
Now, let me paint the picture of what happened here because I can tell you firsthand, even with all of Peter’s success, he truly is a legend in our industry in the wealth management space. He’s a humble guy, and he’s definitely not one looking for the spotlight, but he just couldn’t help himself in this situation and got into a Twitter argument with Cuban that ended up leading to their bet, which in turn, was picked up by every financial media outlet and blasted all over the place. But when the bet was placed in the spring of 2021, Peter spoke about what bothered him in particular, regarding Cuban’s investing tweets. I’ll let you have a listen.
Peter Mallouk: Well, it’s nothing personal with Mark Cuban, his success speaks for itself, and I think you can actually learn a lot from him. My kids learned a lot about investing in startup and private businesses watching Shark Tank. His success speaks for himself. I find him very entertaining, but there were basically two different occurrences. I think it was a combination of them that finally got me engaged. First, when we were going through the pandemic, a lot of clients were pointing to CNBC articles where Mark Cuban was talking about going to cash or he was hedging or he was being defensive and so on. He’s really smart and that’s what he’s doing, and that’s what we should do. I can go through all the data and statistics that say, “You should be buying more as we go through this. We should be selling bonds and buying stocks. We should be tax harvesting. We should be staying in the game. We’re going to come out ahead if we do those things,” and that’s what we did and that’s what happened.
But to get through it, this topic came up so much with our wealth managers and planners that we actually went back three years and just took every prediction we could find in the public that Mark had made from 2017 to 2020. Look, if you follow that advice, you dramatically lacked in the market. But when you follow him on social, you get the impression that he’s all in on two stocks and a big portion of his net worth is in Doge coin and things like that. The second thing that happened is, I teach a lot of students. Yesterday, I was at a university, taught two business classes and occasionally, go to a high school or a grade school and I talk about money and we talk about needs-based investing. Most people are not multi-billionaires, so they have a certain earning power, they have a certain amount of money, and they’re trying to accomplish things. They’re trying to retire at a certain age. They’re trying to become economically free. They want to do charitable things, whatever.
So you pick a combination of stocks and bonds and real estate and if you’ve got a lot of money, maybe you include alternative investments like private equity and private real estate and so on, and so we talk about those concepts. We talk about cryptocurrency and how it’s an emerging asset class and there will probably be winners in this space, but then the inevitable questions become, “But Mark Cuban saying buy Doge coin,” and it basically the conversation, because it’s Twitter, quickly descended where he said, “Only a fool would buy 100 stocks.” As I you and I know, 100 stocks makes up an index, right? 100 stocks, whether you want to take the S&P 500 or the S&P 100, they do about 99% the same. We know that over five years, the S&P 500 or the S&P 100 will beat about 80% of professional managers picking individual stocks. Of course, if we do it over 10 years, the odds are even better.
So when he said only a fool would do that, I said, “Well, I’m happy to be that fool. I’ll take those stocks. You pick whatever stocks you want.” So anyway, this wound up getting into two bets. One bet was he’s taking Amazon and Netflix and I’m going to have the S&P 500 for 10 years. In one bet, he’s going to pick two cryptocurrencies, which I will point out, he has abandoned the cryptocurrency that he started out touting on his Twitter account, which is Doge coin. All of a sudden, he’s not interested in investing his own money on that, despite encouraging his followers to do that, which I thought was really, really interesting. By the way, for the record, he can buy whatever cryptocurrency he wants. So if he wants to add Doge coin, he’s welcome to do that. So we ended up with these two 10-year bets and we’ll see how they play out.
John: Again, that was Creative Planning president, Peter Mallouk. Now let’s be clear, I’m not looking for Peter to take a victory lap 18 months into a 120-month bet, but for those of us keeping score at home, it’s fun, like watching this bet from the outside looking in. Bitcoin’s down about 65%, Ether’s down about 50%, Netflix is down about 55%, Amazon’s down about 40%. Meanwhile, I’m not saying the S&P 500 has been doing anything to write home about, but looks pretty good relatively, doesn’t it? Being only down about 3% since the beginning of May of 2021. But the reality is, and this is important, the odds are in Peter’s favor, and the longer the bet terms are, and in this case that’s 10 years, the more the odds just continue to tilt in his direction. By the way, there’s a lesson in here for you and I as long-term disciplined investors as well, and I’ll get there here in a moment. But it certainly doesn’t mean Peter will win the bet for sure, because a broken clock still tells the right time twice a day.
Put this another way, you would choose not to hit on a 20 in blackjack ever, but especially if the dealer was showing a five, and yeah, they might turn over a face card and then a six and finish on 21 and beat you. But that doesn’t mean that it was unwise to have not hit on a 20 of course. Speaking of Amazon, Jeff Bezos himself, we can all agree, total genius. He said, “Most companies are around about 30 years, they’re not around 100.” Competition catches up. It’s really hard to stay on top. Amazon at the time of the bet was trading around 80 times earnings. What was crypto trading at? Well, that’s right, it doesn’t have any earnings. Infinite. It’s speculative. So maybe Amazon still doubles or triples or quadruples or goes up 10 times, certainly possible, but it’s unlikely. You might say, “Well, John, but Amazon, they’re just the 800-pound gorilla.” Well, remember the top five companies in 2000? The 800-pound gorillas of that day just over 20 years ago, General Electric, where are they at? Exxon, Pfizer, Citigroup, and Cisco. A decade later in 2010, it was Apple, Microsoft, Berkshire Hathaway.
Then 10 years later, Amazon, Google, Facebook, and even look now, the artist formerly known as Facebook, now Meta, down about 70%, poof, $800 billion of market cap gone, largest drop in the market’s history from a valuation standpoint. Some of the best words in investing for all of us to learn, I don’t know. You see, we get in trouble, and I’ve seen this with brokers as well as individual retail investors, where we fall victim to the illusion that we know something that, and I don’t want you to miss this, isn’t just unknown, it’s unknowable. That’s why trying to outperform broad markets through selecting individual stocks or the next emerging technology like cryptocurrency is so incredibly difficult. Now, fortunately for all of us, our success doesn’t rely upon this mirage. As I just mentioned, this isn’t just hard for you and I, it’s hard for billionaires that own MBA teams and are on Shark Tank. They can’t do it either. Let’s shift the conversation more specifically to crypto. If you haven’t been following this, we have had aftershocks from the massive earthquake in the trillion dollar crypto industry a little over a week ago.
It has just continued to reverberate with FTX, one of the biggest and most powerful players in the entire industry filing for bankruptcy as they were about $8 billion short on their liabilities. This thing has a little bit of a woeful Wall Street feel to it with Sam Bankman freed, the founder of FTX, really indulging on his excess riches down in The Bahamas. At one point, his estimated net worth was about $25 billion. He started this business in his twenties and in about three years, it was supposedly worth $30 billion. Binance, FTX’s largest competitor and the largest crypto exchange in the world, had reached a tentative rescue deal, but that transaction almost immediately fell apart when they examined FTX’s balance sheet and realized, “You’re not even close. What is collateralizing all of these accounts?” Of course, this will lead to a criminal investigation as there’s been significant alleged fraud and many, many people are going to lose way more than they could ever have afforded to. I think it’s important to remind ourselves, looking back, of just how hot and how enticing crypto was.
There may still end up being one or two coins that emerge victorious, but we were having client after client saying, “Why can’t we make this more of a central part of our strategy? This is new technology, this is the future.” While Creative Planning president Peter Mallouk is being quoted on CNBC saying, “We’re going to most likely see cryptocurrencies collapse and there’s no way that a fraction of these virtual currencies are going to be able to survive.” Instead, you want to invest in things that are going to pay you. You own real estate, you collect rent, you own stocks, you’re collecting the dividends, and you’re participating in their profits. You own bonds, you’re collecting the yield. As a general rule of thumb, you don’t want to own something that’s not going to pay you. That doesn’t mean you can’t ever make money, but if you own fine art, you’re banking on someone paying you more for that art. If you own a collectible car or baseball cards, you’re just hoping that someone down the road will say, “That’s worth more to me than what you paid for it.”
If you’re thinking to yourself, “Well, the blockchain is a real thing. That’s legit technology, John.” I agree. But there’s a huge difference between acknowledging in 2000 that the internet is here to stay and that technology is real versus investing all of your money in AOL. So let’s recap my three rules for investing because they’re as true today as they were five years ago as they were in 1983. Number one, own stocks. You want ownership in the largest companies around the world that are producing goods and services. That strategy has made an approximate 10% per year for 100 years. Now, those profits vary and their prices rise and fall over the short term. But going back to the Great Depression, 98% of all 10-year periods have finished positive. 91% of all five-year periods have finished positive. Coming off of a bear market, the average return over the next five years is over 70%. If that feels risky to you, imagine thousands of the largest companies around the world simultaneously going bankrupt and discontinuing to produce goods and services.
If that happens, the last thing you and I care about is our investment portfolio because the world’s over. Get your guns and cigarettes and whatever else you can trade. Rule number two, diversify for your risk tolerance, for your time horizons, for your need for income, for your legacy aspirations. Rule number three, rebalance that diversified portfolio. If you are well diversified, that means your investments will move dissimilarly to one another. As they do, rebalancing allows you to systematically, per a rules-based approach, sell high and buy low. You’re able to make that trade with most Americans who can’t get out of their own way chasing fear and greed without any sort of written, documented, measurable plan as to how they’re going to invest. So again, those three rules, buy stocks, diversify, rebalance, and then repeat for the rest of your life while making strategic tax moves, being properly insured, and having a fantastic estate plan. It’s not sexy, it’s not exciting, it’s not as much fun as buying a couple cryptocurrencies like Cuban’s advocating for, but it is shown to be, historically speaking, incredibly effective.
Simple rules simply aren’t always easy to follow though. If you are looking for more clarity around your financial situation, you’ve got questions around your investments, your taxes, your estate plan, there’s a reason Barons has called us a family office for all. 85 CPAs, 45 attorneys, over 300 certified financial planners, all acting in your best interests as fiduciaries, not duly registered as brokers as well because we believe your money works harder when it works together. Visit creativeplanning.com right now to speak with a local fiduciary who isn’t looking to sell you something. Again, that’s creativeplanning.com. Why not give your wealth a second look?
Announcer: Are you only thinking about your taxes around April 15th? If so, you might be leaving a lot of your hard earned money on the table. From tax loss harvesting to making tax marked charitable contributions, there are many ways to save on taxes and boost your wealth. At Creative Planning, our wealth managers work with in-house CPAs and attorneys to proactively look for tax efficiencies in every element of your financial plan, helping ensure your money is working as hard as it can for you day in and day out. To see where you could be saving more on taxes, go to creativeplanning.com/radio to set up a visit with one of our wealth managers. We’ll review your plan and identify opportunities to save you a bundle on taxes. If you’ve never had a financial advisor review your tax return, now is the time to go to creativeplanning.com/radio to set up a free introductory visit. Find out now what you could be doing to minimize your tax burden and maximize your wealth because it’s what you keep that matters. That’s creativeplanning.com/radio. Now, back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: I’m joined by an extra special guest today. Her name is Nancy Metzger. She is an attorney and certified financial planner here at Creative Planning, specializing in our international division where she works hand-in-hand with US citizens living abroad with regard to the tax implications and financial planning nuances that go along with that. She has a bachelor’s degree from Georgetown University and a law degree from George Washington University. With that said, thank you for joining us here on Rethink Your Money, Nancy.
Nancy Matzger: My pleasure. Glad to be here.
John: Let’s jump right into retirement accounts. Many Americans listening have IRAs or 401ks. What happens if they move abroad regarding how that income is taxed
Nancy: That’s usually the most common question we get. In general, there are two primary ways that your US retirement income from your 401K or IRA are going to be taxed. Usually, it is residency-based taxation, and that means if you live as a resident in that country and you receive income from the US, then you are taxed on that income, ordinary income tax rates. Okay. So just like it would be as if you were living in the US. The second way is when you live in one of the countries that doesn’t use residency-based taxation, but they use territorial taxation, that is only if that income is from that particular country will you be taxed on it regardless of whether you live there or not. So if it’s coming from the US, then you would not be taxed on it in those type of countries. Those are places like Hong Kong, United Arab Emirates, a lot of the Middle East, many places in Latin America as well. The first one is more common, the residency-based taxation. You’ll find that in a lot of places in Western Europe for example.
Then there is a third category and those are the exceptions to the rule. Exceptions to the rule are really important because those are usually ones where the US government has negotiated a treaty, an income tax treaty, with that particular country. Even though you’re a resident in that country, they carve out an exception for your US employment-based retirement income. France is an excellent example of that. You can retire in France, draw your US retirement income from the US, and it is not taxed in France because of a specific part article 24 of the US France tax Treaty. That’s a pretty sweet deal.
John: So did everyone catch that? Nancy, you’re telling us that if we want to reduce our taxes regarding IRA distributions, all we need to do is move ourselves to the south of France, kick up our feet, and sip some nice local Malbec.
Nancy: That’s exactly right.
John: So that’s pretty good. You’re saying that it’s fairly rare that Americans are taxed in both the US and their resident country when they live abroad?
Nancy: I’d say that’s fairly rare because if they are taxed, usually the purpose of these US and foreign country income tax treaties is to relieve you of the double taxation burden. So you might be taxed by one country and the other country will give you a tax credit for what you paid. So even though theoretically you’re still filing and reporting what you owe and will pay an income tax, you don’t actually pay it because you’re getting a credit from the country where you did pay it. Usually, that’s your country where you live.
John: I bet many listening right now are surprised at the huge potential tax savings to live abroad in retirement.
Nancy: The best part of that is you also usually as a resident there will qualify for the national health insurance or if not, you buy one of these private health insurance coverages that’s a supplement to the national health insurance and it is very inexpensive. So when you look at the cost of healthcare in the United States, for example, that’s the largest part of your retirement expense other than maybe your home and you go over there, you pay less taxes and you get relatively inexpensive healthcare. It’s a huge tax savings even if it’s only for a period of time in your retirement.
John: Very interesting. So let’s transition over to discuss social security and Medicare. Are Americans still able to receive those benefits while living in say France or Italy or Portugal, you name it. Living somewhere abroad, can they receive those benefits?
Nancy: So on the question of social security, the answer is yes, you can receive social security almost anywhere and everywhere. I think there’s only like two exceptions. One is Cuba, one’s North Korea, and who knows how long Cuba will be on that list. But yes, you can receive your social security benefits anywhere. Medicare is a little more complicated than that. It’s not that you can’t be covered by Medicare while you live overseas, it’s just that it won’t pay for those services. Those services that are covered by Medicare are delivered in the US. However, Medicare is a complicated topic and it is one that we would recommend that you get some advisory assistance on before you depart regarding your Medicare, especially if you have some chronic conditions or preexisting conditions because part B and any supplement information is affected by how you go overseas both in eligibility and coverage of those conditions. I would say Creative Planning does have a good Medicare advisory service and it is open to the public.
You don’t have to be a client of Creative Planning. People are familiar with the issues about going overseas. There’s a lot of advisors that are not familiar about going overseas in Medicare, but it is definitely recommended to sign up for at least Medicare A, which is the hospitalization. Everybody should be asking themselves before they retire overseas, what would happen if something really serious happened to me medically? Would I go back to the US? The second one is what would happen if my spouse or partner with whom I may have retired would pass away? Would I stay in that country? Those are really important considerations when you’re thinking about Medicare.
John: Nancy, I’m disappointed. My wife Brittany and I have plans for our retirement and they involve North Korea. That’s where we planned on going. But now, you’re telling me that we can’t even keep our social security benefits if we head off to North Korea for retirement. So I guess we’re going to have to pivot there and go somewhere else.
Nancy: You can keep it. You just can’t collect it. Doesn’t mean you’re not eligible for it.
John: I’m talking with Nancy Metzker, attorney and certified financial planner here at Creative Planning. She specializes in international work for our clients. I think you’ve already heard this is complex and you want attorneys, you want CFPs, you want accountants who handle these types of international situations day in and day out and not just some generalist financial advisor who doesn’t understand the various nuances of international investing. So if you live abroad or you’re considering living abroad, contact us now at createaplanning.com to ensure that you have all the information that you need to make informed choices regarding where you set up residency. Again, that’s creativeplanning.com. Visit us now. So Nancy, what happens regarding inheritance tax on assets in the US if you are living abroad?
Nancy: Okay, like everything that’s of that depends, but we talked before about residency-based taxation, which is a dominant way that the US government and foreign governments are taxing most individuals in terms of the tax treaties. So when you are a resident in that country, you are subject to the inheritance laws in those worldwide income tax jurisdictions. Those are mostly in Western Europe, for example, or Eastern Europe and other places in Asia. If you’re subject to those laws, the question is, is there an estate and gift tax treaty negotiated between the US government and that host country? If there is, you may be able to take advantage of some tax credits that will apply as we talked before about foreign tax credits.
It’s called the Prorata rule or the Prorata approach that gives you a portion of your US estate and give tax unified credit and allowance and allows you to apply it to your US assets so that when you are overseas and there’s an inheritance tax, you can use that tax credit as if you have paid the inheritance tax on those assets. That, again, is complicated treaty work and it’s important that you and your advisor have a discussion about that. Before you leave is ideal. But if you’re already overseas, it’s not too late.
John: Well, you and I both have an obvious bias toward everyone in America having a great wealth manager and a fantastic comprehensive financial plan. But in particular when someone’s looking to move overseas as an American, I personally just can’t imagine them trying to Google or research for themselves these types of topics and try to execute them on their own. Would you mind sharing with us, and I am putting you on the spot here because we didn’t talk about this ahead of time, some common mistakes that you have seen that could have been potentially avoided had they been advised by a team like yours who understands the ins and outs of living abroad?
Nancy: Well, a very common one is that we talked about residency-based taxation and that is the standard usually worldwide, but the US is one of the only places in the world that uses citizenship-based taxation. That means if you’re a US citizen, your US tax requirements for filing, reporting, et cetera, follow you everywhere in the world. If you’re a French or a German citizen and you leave your country, that obligation does not follow you. So you’ll go to the country and think just like everybody else in Europe when you’re living there, “I don’t have to file in the US.” That’s not true. Not only do you not have to file, there’s a lot of extensive reporting requirements of all your assets and your accounts overseas, but I’d say that is a very basic one. Another one is don’t invest in foreign investments. There are very attractive tax advantage products overseas, just like we have say a Roth IRA here, they will have a similar type of tax advantaged investment and those, as a US taxpayer, are not tax-friendly to you.
Even though everyone in your office or everyone in your neighborhood has one and tells you how great they are, and you should have one, don’t think about buying that without consulting a well-versed advisor that will help the tax implications of that. Since there is citizenship-based taxation, that is exactly the point of these type of specialized advisory services. The IRS follows you everywhere you live, okay? So you must know the tax implications on both sides, the host country where you live and the US.
John: I’m telling you, I could see someone coming back after living abroad for 15 years and saying, “Wait a second, the last 15 years I was supposed to be filing tax returns in America while I was living abroad?” I could just see this happening.
Nancy: Yeah, especially if you went for marriage 30 years ago, your kids are grown up and you’re the only one who’s the US citizen. So the burden’s on you to know.
John: Wow, yeah, I could absolutely see that happening. We’ve got 30 years of forgotten tax returns that were never filed and imagine the surprise that would be. That’s for sure. Well, Nancy, thank you so much for joining us. This has been great insight and again, if you’re listening and considering moving abroad, maybe you already did and you’re joining us on iHeartRadio or on the podcast and you’d like more information around your situation, you can reach out to Nancy and her team directly by visiting creativeplanning.com for your personalized guidance around your situation. Thanks again so much for joining us here today, Nancy.
Nancy: Thanks, John.
Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs, as our team is structured to cover all areas of your financial life. Why not give your wealth a second look? Visit creativeplanning.com. Now, back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: There has been a lot going on in the last couple of weeks when it comes to news, hasn’t there? We’ve got Elon and the whole Twitter saga, crypto melting down as I spoke about earlier in the show. We had the midterm elections which turned into a red trickle instead of the wave that many expected. Along those lines, Trump announcing his presidency bid. We’ve got Facebook laying off 11,000 people in the midst of a 70% drawdown, and the market just as volatile as ever, both up and down in direction. Really, if you zoom out even a little further, things have been pretty wild just in general all the way since the pandemic. Fastest bear market ever, market comes screaming back, then we’ve got runaway inflation due to rates being kept too low for far too long, then the federal government starts giving away money like Jim Carey and Jeff Daniels in Dumb and Dumber to the bellman and the valet drivers. “Here you go. Here you go.” They’re blowing their nose with their $100 bills. That’s basically what it was.
Then we’re really surprised that we have persistent inflation, even though economics 101 is too much money chasing too few of goods equals inflation. Then a little over a week ago, we had a day where the market was up over 5%. What happened there? Well, inflation data came in lower than expected because remember, it’s not good or bad information that moves the market, it’s better or worse. It’s all about the information relative to expectations. Since 1950, a 5% up day has only happened 23 times. That’s in over 18,000 trading days. It’s happened only 0.12% of those days. Here’s the myth that I’d like to bust, that these sort of spikes, these pops of 5% or more is a clear signal that the market’s bottomed. I’ve had multiple clients since a week ago last Thursday, asking me, “Hey, John, coast clear? Is the bottom now set?” On one hand you say, “Well, March 9 of ’09 was one of those other trading days where the market was up over 5% and we know that was the bottom of the great financial crisis. Market was up over 70% 12 months later.”
“Oh, great. So you’re telling me the worst behind us, we’re good?” “Well, not so fast because another one of those days was during 2008. We weren’t even close to the bottom. Another one of those times was in 2000 when the market subsequently continued to fall.” So is this just a bear market, dead cat bounce given us a little head fake out on the perimeter or is this truly the bottom? I have no idea. I wish I knew, and if I did, I’d tell you, but I don’t. That is the very reason why our investing success hinges far more on our behavior than our intelligence. In particular, the quality of our decisions, the consistency of our discipline when faced with adversity will define us as investors. As I just outlined, I think we’d all agree, we’ve faced major adversity the last few years and now we’re sitting in the worst year for a 60/40 stock and bond portfolio in decades. Creative Planning President Peter Mallouk was quoted on the front page of the Wall Street Journal this week saying, “There’s nowhere to hide for a 60/40 portfolio.”
Everything on that statement is blood red, all of it’s down in value. But I do want to encourage you this too shall pass. When it does, the decisions that you’ve made during years like 2022, during times like the pandemic, during times like oh ’08, ’09 will determine whether or not you have success long-term with your money. Isn’t this true really when we reflect on life more broadly? It’s easy to be in a good mood when your kid just hit a walk off home, run at the little league game. How do you respond when they’re rung up on a terrible strike three call to end the game? That’s a much more accurate reflection of who you really are. It’s interesting, people say that alcohol is a truth serum. People will say things they wouldn’t otherwise say. They’re overly honest, they don’t have a filter maybe. I think adversity is the real true serum. I saw my wife who I fell in love with when times were easy, couple kids broke and in love.
But I tell you what, when we adopted four kids and had three biological kids in a 10-year period, some with trauma, and just all the normal stuff that comes along with having kids and I’m seeing her dead tired, with spit up on her shirt, helping a kid with homework at the kitchen table while cooking dinner, while exhibiting a spirit of gratitude, of positivity, of patience. I remember thinking many days when I got home from the office, “I’m a blessed man because if she can respond like this in this type of adversity, in these sorts of struggles, I know who she really is. I can count on her.” So my question for you when it comes to your financial plan is how would you honestly assess your response in the midst of this adversity? Has your financial plan informed your decisions in a way that’s led to positive outcomes? Have you reviewed your plan for tax opportunities? Has your advisor, if you have one, been reviewing your tax return on a regular basis? If they haven’t, fire them. “John, that’s harsh.” No, it’s not.
You should be expecting the absolute best for what you’re paying. Did you rebalance and buy more during the pandemic? Did you aggressively Roth convert while tax rates were the lowest they’ve been in 50 years and the market’s been down? I know, I talk about Roth converting a lot. I know I talk about tax loss harvesting a lot or having a financial plan, but I know some of you out there listening, you’ve never heard this show before and this is the first time you’re hearing it. I want to make sure you hear this because it’s critical to your success with everything you’ve worked a lifetime to save. There’s a reason Barons has called us a family office for all, 85 CPAs, 45 attorneys, 300 plus certified financial planners, been helping families since 1983. We’ve got clients in all 50 states in 75 countries around the world. We’ve seen bear markets, bull markets, and everything in between. All along the way, our message has been the same. Buy stocks, diversify, and rebalance all while having a fantastic financial plan informing all of those decisions.
If you’ve never taken me up on our offer here at Creative Planning to meet with a local advisory that’s complimentary, there’s no pressure to become a client. Visit us right now at creativeplanning.com to request that second opinion. Do what thousands of others have done. Go to creativeplanning.com to request a sit down with a credentialed fiduciary that’s thankfully not looking to sell you something, but rather give you a clear breakdown of exactly where you stand with your money. Wouldn’t that be refreshing to receive a different perspective around all that you’ve saved? Taxes, estate investing, whatever’s on your mind. One last time, go to creativeplanning.com. Elene John, a certified financial planner and wealth manager here in Arizona. In fact, he and I just had lunch a couple of weeks ago, a fantastic wealth manager and a great all around guy, wrote an article that I’ll post to our website at creativeplanning.com/radio where he highlights how to protect your wealth from four common threats. I’d like to share with you some of these highlights because I think they’re relevant for what we are encountering right now in the midst of this adversity.
The reality is you’ve worked long and hard to accumulate this nest egg that you have and it’s grown to a size that would be difficult if not impossible to replace if you’re anywhere near retirement, certainly, if you’re in retirement. So from market drops to lawsuits, there are a lot of risks in an uncertain world that can threaten that savings. So here are the steps you can take today to reduce your risk and to protect your wealth in the future. So the first of these common threats, running out of money in retirement, duh. “John, really? I’m listening to your show and you just said that’s a threat? Of course it’s a threat.” I know, I know, Captain Obvious, right? The number one thing as a wealth manager that I’m asked about, even people that have millions and millions of dollars, they’re like, “Hey, I don’t want to end up living in my kids’ basement. I want to be financially independent for the rest of my life.”
So this is the paramount threat to anyone’s plan if they think at some point they’re either not going to want to work anymore or they’ll be unable to work. So the solution is establish a financial plan and stick to it. “Boring. John talking about a financial plan again. This guy won’t stop.” No, I won’t. If you hear nothing else I ever talk about, the one thing I want you to take away from this show is that you have to have a measurable, written, documented financial plan and not just to build that plan. There’s value in that, but the primary value is not in building the plan, it’s in changing the plan. So a very good way to ensure you don’t run out of money is have a plan that accounts for things like how much you’re going to spend each month, fluctuations in the market, impact of inflation on spending power over time, required minimum distribution planning, when to take social security, whether or not to pay off your home, whether or not to purchase a vacation home, how much you might receive from selling a business or any other liquidity events.
Do you have a pension? If so, what are the survivor benefit options? So whether you’re a long way off from retirement or you’re right there about to retire or you already have, a financial plan is the key to ensuring you don’t run out of money. By the way, an added benefit, having a good plan that you actually understand is going to help you sleep better at night knowing that you and your family aren’t in fact going to run out of money and that the plan works. Common threat number two is a sudden market drop. After the dot com bubble burst in the early two thousands, just crushing many people’s portfolios, it took about 10 years for US large stocks to recover and about 15 years for tech companies to come back. But the solution for sudden market drops, and it doesn’t solve it entirely, but certainly can help cushion it, is to develop a diversified investment portfolio with appropriate strategies. Coming out of that dot com bubble bursting, not all areas of the US stock market were down.
Midsize companies grew by over 6%. Small companies grew by over 6%. Emerging market companies, almost 10%, and bonds 6.3%. So investors with a diversified portfolio had the potential to still experience significant growth during what’s often referred to as the lost decade. No, it was the lost decade for large US stocks. So you’re worried about a sudden market drop? Be well diversified. By the way, the same principles apply when looking at US first international stocks as well. Common threat number three is losing control of your assets. The solution? Have estate planning documents in place long before you need them. I know oftentimes we think, “Oh, I’m not going to buy life insurance because if I buy life insurance, I know I’m going to die. If I don’t have it, I know I’m not going to die. That is just a bad omen.” No, that’s stupid. That doesn’t make any sense. But I do understand that no one enjoys planning for worst case scenarios, but that’s part of being a grownup. I remember telling one of my buddies about two years ago, they had a bunch of kids, they had no estate plan.
I looked at them and said, “Grow up, man. Go do what you need to do. You’ve got plenty of money and it doesn’t take that much time. What are you doing? Get your guardianships in place, figure everything out. I know you’ll love your kids. Get this done.” He and I are close and we can say things like that to each other. So I did because he needed to hear it and now he’s done it. Common threat number four is an accident or legal action. The solution for that is have appropriate insurance and legal documents in place. Do you have an umbrella policy? Is it the right size? They’re generally pretty inexpensive. You may say, “John, why do I need that?” I don’t know. You’ve got one of your kids’ friends over at your house like we do often, jumping on the trampoline or doing back flips into the swimming pool? I’m telling you, when I watch my kids play, rough housing out there with their friends on my property, I’m always thinking, “Man, I need to call right now and up my umbrella policy. It’s dangerous out there.”
But I don’t want to be the helicopter parent. I want them to have their fun. But man, kids, especially boys, crazy physical. You need life insurance, you need disability insurance, maybe workers’ compensation, and possibly trusts and/or LLCs. So again, the four ways to protect your wealth from these common threats establish a financial plan and stick to it, develop a diversified portfolio, have updated estate planning documents, and as I just mentioned, have appropriate insurance and legal documents in place. Are you listening to me sharing these things and thinking to yourself, “I’m not 100% confident that I have these things in place.” I might, or maybe you’re thinking, “John, I do not have some of those boxes checked. We’ve done a pretty good job saving, but I don’t think my plan’s that dialed in.” Well, if you want it to be, you can.
If you’re not sure where to turn, we here at Creative Planning have been helping families check all of those boxes so that you can have confidence that not only you but your family is going to be okay as you navigate life and all the complexities and nuances and uncertainty that surrounds that. Visit us today at creativeplanning.com to request a second opinion. We’d love to sit down and talk with you. I have the opportunity as a managing director and a wealth manager here at Creative Planning to sit down with people just like you in my office on Zoom each and every week. I love hearing your story and what’s on your mind. I can assure you, my colleagues and I, there’s no pressure to become a client of Creative Planning. But rather our objective is to give you a clear, understandable breakdown of exactly where you stand with your money. You be the judge whether you’d like to pursue an ongoing relationship with us, and certainly we’re happy to help if that makes mutual sense. But either way, we want you to get tremendous value out of this hour.
Maybe it’s the first time you’ve ever sat down with anyone in finance that’s not looking to sell you something. Wouldn’t that be refreshing? Well, we’re not dually registered, we’re not brokers, we’re not manufacturing products. We are independent, working directly for you. That’s very different than how most firms have been operating for decades and how most still today, unfortunately, are still operating. So why not give your wealth a second look? Visit us now at creativeplanning.com to speak with a local financial advisor. Again, that’s creativeplanning.com to get your questions answered.
Announcer: Do you worry about outliving your savings? Americans are living longer than ever, and that means your financial plan must support you well into your eighties, nineties, or beyond. If you are not sure you have a sustainable retirement plan, it’s time to speak with a professional. At Creative Planning, we help you live a richer way to wealth by providing a clear roadmap for the long term. No more guessing or hoping for the best. We’re here to help make sure you’ll have a plan to support your desired lifestyle and an advisor to give you assurance throughout your retirement years. To get your plan or to get a second opinion on one you already have, just go to creativeplanning.com/radio to set up a visit with us. Our team will integrate all aspects of your financial life into a single comprehensive plan designed to help you achieve your retirement goals and give you clarity about your future. Don’t wait. Get a plan today. Visit creativeplanning.com/radio to schedule your introductory meeting. That’s creativeplanning.com/radio. Now, back to Rethink Your Money, presented by Creative Planning with your host, John Hagensen.
John: Throughout the show, if you have questions, you can email our radio inbox at email@example.com and I personally review those questions and comments and I’ll do my best to answer each and every one of those questions. If your question happens to be something I think would be pertinent for the show and for all the listeners, I may even share it on the air. This week, I had a question around the validity of the 4% retirement withdrawal rule. If you’re not sure what I’m referencing, it’s really for years, experts have relied on this 4% rule to help determine if you had enough savings to actually retire and if you’d be able to sustain those assets while driving income. The rule states that if you begin by withdrawing 4% of your nest egg’s value in that first year retirement, and then you adjust those subsequent withdrawals for inflation, you’ll historically avoid running out of money for 30 years. Now, the problem is it’s a really nice clean little rule, the 4% rule, and it’s been tested and proven, and I’m putting that up in air quotes, successful time and time again.
The problem is there’s a lot of data now that shows there are far too many variables to just stick to this 4% rule. The three serious problems that I have with it is, number one, it makes assumptions about your investment mix. So the initial study around this 4% rule just took a 60/40 stock bond portfolio and there wasn’t wiggle room around your risk tolerance or time horizons or really anything around that formula. So for example, if you’re a really risk averse investor and you wanted 80% of your portfolio in bonds, you’re not going to see the same growth as someone obviously who’s in a heavier stock mix. You’re also going to be significantly more impacted by whatever current interest rates are and whether those increase or decrease over the 30 years of your retirement and how that impacts not only your current income, but the price of your bonds. Number two, it’s incredibly outdated. I’ve heard the person who initially came up with this interviewed many times. He’s just making an interview circuit for decades now on this 4% rule and he seems like a smart person and thoughtful.
But this was developed during the 1990s at which point bond interest rates were significantly higher than what they’ve been the past number of years. Now of course, rates have risen again as the Fed looks to cool inflation. The third problem with a 4% rule is it doesn’t take into account any of your individual needs or goals or desires. You see, if one of our clients comes to me and says, “Hey John, I want at least as much as I have right now to go to my beneficiaries. I want my kids to at least get this much. I want the plan in retirement built around that,” then the distribution percentages that we choose to take will factor that in. If the exact same person on paper says, “Hey John, I don’t even like my kids. I don’t want them to get anything. I wish I could make the check to the morgue bounce.” Well, they can probably spend a little bit more in retirement because they have a desire to leave zero inheritance.
Someone else might say, “I need to be in a private room at the assisted living facility in La Jolla overlooking Seal Beach. That’s what I need. That’s what I’m expecting. So I want to take such a minimal withdrawal rate early in retirement to ensure that I’ve got plenty of money for whatever comes my way down the road.” Another person might say, “Medicaid’s good with me, just spend this thing down. If I’m broke and I qualify for Medicaid, put me in a shared room. I like socializing anyways.” Here’s another factor that’s individualized. What about your health? If everyone in your family lives to 100 and your mom’s still toodling around in the garden on no medication at 97 years old, that’s probably going to inform your withdrawal rate versus someone who says, “Everyone in my family dies at 70 and I’ve already had two bouts with cancer.” Not as much longevity. Probably can take a higher withdrawal rate.
So because of this, we need to be very cautious when creating these blanket rules of thumb that might be decent for real broad estimates of where we’re at, but are certainly not a substitute for a well-built, documented, measurable, written, updated, adapted financial plan like we here at Creative Planning have been building for our clients and doing so since 1983. So as I often say, you don’t need to work with Creative Planning to have that plan built. I know that we build really thorough, detailed financial plans where you walk out with a binder that has every aspect of your financial life inside of it and organized. But if you can get that somewhere else from a fiduciary that’s independent, that’s credentialed, that’s not looking to sell you something, I’m great with that. I want to make sure you have that so you don’t end up falling victim to some generalized rule and research from the 1990s that may or may not have any application for your situation. I have a very simple call to action for you. Do you have a written, documented financial plan that’s being updated regularly?
If your answer to that is no, and you want one, I’m going to make it really simple to get started. Go to creativeplanning.com. It costs nothing. There’s no obligation to become a client. Sit down with us just as thousands of others have done in the past and let’s build this thing out for you. Let’s go through your financial plan. My colleagues and I love giving you clarity around what we know you’ve worked so hard for. Again, visit creativeplanning.com right now. Well, Abraham Maslow famously said that when all you have is a hammer, everything looks like a nail. Isn’t that true? As humans, we follow incentives and conflicts of interests are really difficult to overcome and for us to remain objective when we are confronted with them. Frankly, when we are aware of these conflicts of interests in those around us, maybe business relationships, government, whatever it might be, it makes us really uncomfortable, doesn’t it? When it comes to finance, I can tell you firsthand as a reformed broker myself, these conflicts of interest have massively degraded the quality of objective advice for far too long.
It’s one of the biggest challenges that we need to overcome if we’re hoping for better guidance and ultimately better outcomes for hardworking Americans. There’s a reason why we here at Creative Planning do not manufacture our own investments, that we don’t receive third party kickbacks and revenue sharing from investment companies. We’d make a lot more money if we did, but it would make it far harder for us to deliver the results that our clients are looking for with objective advice. But these sorts of conflicts of interest have been a part of the broker dealer compensation structure for decades. Here is a perfect example of this. Jesse Reed, the top gun aviator that I had as a guest on the show maybe a month ago, he began his career as a financial advisor at a major brokerage house that will remain nameless, but one of the biggest that you’d be very familiar with.
As a new advisor, his manager asked him to sell his parents market linked notes that were issued by the parent company, the bank, so that he could make more money, hit his quotas because his fee based like advisory business, acting as a fiduciary and just charging fees and doing planning as registered investment advisory firms like us here at Creative Planning, how we operate, well, he had a small book. He was just getting started and he wasn’t making enough money. I don’t want you to miss this. The manager literally said, “Well, your parents have money. They’re clients. Go sell them these products that are manufactured by the company that are sold for high commissions.” Which is why I always advise to people, “Find an independent credentialed fiduciary with a lot of experience for your situation.” Doesn’t mean they’re going to be great, doesn’t guarantee that, but it sure tilts the odds in your favor versus someone who is peddling products on behalf of their broker dealer. By the way, if you’re wondering, “Well, why doesn’t everyone do it that way?”
Because of what I just told you about Jesse. He would’ve made a heck of a lot more money selling these products for commissions versus aligning the incentives with his clients in an advisory relationship. That’s why more people don’t do it. But before we conclude today, I need to ask a very serious question. This is important. I think we all understand here that we’re a divided country on this. We felt that more than ever the last couple of weeks. This topic’s pulled families apart really for generations. You know what I’m going to ask with November 8th now having come and gone, and that is, are you someone who already has your Christmas tree up? Yeah. No, I said it. Are your Christmas lights up right now on your house? Because I’m looking around our neighborhood after an epic Halloween, and a lot of my friends in the neighborhood here, they took down their Halloween decorations, and as they went into the bends in the garage, they were sliding out those black and yellow bends out of their garage.
All of a sudden, before it, here comes Santa Claus, “Here comes Santa Claus, right down Santa Claus Lane.” Oh gosh, I promised I wouldn’t sing again. I took like eight weeks off. Apologize. But we just jumped right over Thanksgiving. We just skipped it, like, “Oh, cool, yeah, no, we’ll do the turkey thing. That’s good. Maybe you’ve gotten a sign that says pumpkin spice and everything nice, but in reality, there’s not a lot of decorations for Thanksgiving. So I’m being tongue in cheek here regarding that. Although, I do think if you’re somebody that plays Christmas music in September, you can’t be trusted. That’s not tongue in cheek. But I know for myself, I do this a lot with important parts of my life, like not silly decorations out front, but I tend to just jump over things that are important. The saying goes that life’s what happens while we’re busy making plans. But I think the holiday this week is really one of the most important. Think about it. There’s no gifts, there’s no trick or treating and candy.
It’s a time where we get together with people close to us, break bread, and reflect on all the things big and small that we have to be thankful for. If you’re like me, it’s self-inflicted. We’re always so busy. How often do we really truly pause to remind ourselves of the blessings that we’ve been bestowed? So for me as a grandson who lost my final three grandparents, one after another recently, I’m thankful for family. I’m thankful for the seven incredible kids that God’s blessed me with. A family that is so imperfectly perfect, a life so much more winding and unpredictable than anything I could have ever imagined. What a blessing that’s been.
I suspect for many of you, as you sit around that Thanksgiving table on Thursday and you’ll look at the faces of those around you who mean the most to you, that there is no greater blessing than that. So I wish you and your family a very happy Thanksgiving, and I am personally grateful for you investing some of your valuable time each week hanging out with me here on Rethink Your Money. Remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter. If you enjoy the podcast, please subscribe, share, and leave us a rating.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on $225 billion in assets. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA, or financial planner directly for customized legal, tax, or financial advice that accounts for your personal risk tolerance, objectives, and suitability. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.