Hosted by Creative Planning Director of Financial Education, Jonathan Clements and President, Peter Mallouk this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
Time Stamps:
[0:00] – When to revisit your estate plan and beneficiary designations
[4:40] – What life insurance is – and isn’t
[7:00] – How to spend February 29, your extra day this year
[11:40] – Jonathan Clements’ tip of the month
[13:30] – Peter Mallouk’s tip of the month
Transcript:
Jonathan Clements: This is Jonathan Clements, director of financial education here at Creative Planning in Overland Park, Kansas. With me is my co-host Peter Mallouk, president of the company, and we are down the middle. Peter it’s February 3rd. We are in the middle of winter. Everybody’s cuddled up around the fire, and we want to talk about estate planning and life insurance, but specifically, when should you revisit your estate plan? When should you rethink the life insurance that you have?
Peter Mallouk: So, an estate plan, will, trust, just saying things for those who don’t know what that is. Who’s going to raise your kids, the guardians. Who’s the executor, that’s the person that’ll sell your estate. Who’s going to inherit the money, those are the beneficiaries. Who’s going to oversee the money until they get it, those are the trustees. Oftentimes, people have a financial power of attorney and healthcare power of attorney where you designate folks to handle those affairs for you if you can’t make decisions for yourself.
So there’s two ways I look at reviewing this. One is you should just have a periodic calendar based review. So every year, sit down and look at all those people, and make sure that those are still the people you want to do those things. Here at Creative Planning, we do that every year. We force clients to look at their estate plan and what you find is year one, they go, “Oh, yeah. That’s great.” Year two, they go, “Oh, yeah. That’s great.” Year three, they go, “Yeah, that’s great. Year four, they go, “Oh, my God. I would never want that person doing this.” So it kind of sneaks up on you. So just having every year saying, “Look, this is going to govern my life,” if it’s the power of attorney coming into play, or, “Everything I’ve ever worked for,” if it’s the will or trust coming into play. “Are these really the right people to be doing this right now?” So having that calendar based review, make sure it never gets away from you.
I can tell you that our estate planning firm has done probably over 20,000 wills and trusts for clients all over the country, and so folks are passing all the time, and you see people handling the affairs that you wonder were those really still the people they want to handle those affairs. So at Creative Planning we force that periodic review every year. Now, separate from that if a life event changes, or if you’re aware of a big change, you should revisit things. So if you live in California and your power of attorney is your brother and your brother’s in California, but then you move to New York, well, maybe you want a different financial power of attorney. Maybe you want a different healthcare power of attorney.
If you really trusted your brother-in-law to be the executor, but now your brother-in-law has divorced your sister, maybe you don’t want them to be the executor anymore. You might have named guardians and the guardians have moved, or the guardians have separated, or the guardians have suddenly revealed themselves to not be the parents that you would want your kids with. So looking at those life events, combined with a periodic review to make sure if the life events escape you, that you find a way to capture that, is the best way to approach the estate plan.
Jonathan: Of course, we are not just talking about the people who are going to be making decisions on your behalf, we’re also thinking about the people who you’re trying to help. I mean, who constitutes your family and obviously, the arrival of children is a big one when it comes to both your estate plan and the amount of insurance that you have. Obviously, if there is a change in the marital situation and your spouse is no longer your spouse, that may lead to some big changes. Of course, the arrival of grandchildren that may cause you to rethink your estate plan and who you want to benefit and how you want everything to be divvied up after you pass.
Peter: Yes. All of those things are great examples and the kind of thing that if you don’t catch them, the periodic review hopefully helps you to look at them.
Jonathan: So, when you’re doing that, I guess, the other thing that can change the calculus here is not only moving state, not only changes in your family, but also big changes in your net worth. If you’re suddenly worth substantially more, presumably that’s also going to be a moment to revisit, not just your estate plan, but also your life insurance.
Peter: That’s right. So, from an estate planning perspective, we see a lot of people say, “Oh, I’m going to give my money to my kids, a little bit when they’re 25, a little bit when they’re 30, and a little bit when they’re 35.” From a personal standpoint, sometimes their kids become near 25, and they go, “Oh, my God. If I die don’t want all my kids to get a third of my money when they’re 25,” so they want to change it. But also if people have a big event, financial event and they wind up worth more than they thought they go, “Oh, maybe this is too big of something to give to a 25 year old,” and they push out those ages. That’s when the kids will inherit the money. So net worth or family can both result those changes.
Jonathan: Meanwhile, if your net worth is going up, it can go both ways on this, but it may change your life insurance plans as well, right?
Peter: Yes. So life insurance is interesting because it means a lot of things to a lot of people. A lot of people look at it as an investment vehicle. Philosophically, Creative Planning across the board, we do not view life insurance as an investment vehicle or anything that should ever be used as an investment vehicle. There’s a lot more efficient ways to save and earn and grow your wealth. But we do look at it from estate planning or survivor needs perspective and survivor needs is really what applies to almost everybody, which is saying, “Hey, if you are gone and the income that you bring is gone with you, can the family still do what they need to do? Can you pay off the house? Can you fund the kids’ education? Can you provide the family the income that they need to maintain their lifestyle.” That, we need to back into a pool of money to accomplish those things.
Let’s say that pool of money is $700,000. You’ve saved $200,000. Well, we need to have $500,000 of insurance. That could probably be a term insurance policy, because if you’re doing some math on your own or with a financial advisor, you might figure out that, hey, at your savings rate, over 20 years, you’ll have the $500,000. So you probably need a 20 year term insurance policy. So let’s say you go buy that 20 year term insurance policy for $500,000. You’ve been a good steward of the family. If something happens to you, hey look, everyone can still go to school. House can be paid for that. No one’s got to go to work or work longer than they needed to. Then three weeks later you inherit a million dollars because your parents pass. Well, you no longer need the term insurance, probably. So there are lots of things that can happen in your life that might necessitate you needing more insurance.
Maybe you buy a bigger home, maybe your spouse stops working. So now you’ve got to replace a lot of income if you’re gone. Or maybe you inherent money or your wealth grows quicker than expected, or you get a bigger bonus than expected or a new job that pays more. All of those things can cause you to dial up or dial down your insurance. Like the estate plan, it’s ideal to at least review this once a year so it never gets away from you. But if you have a big event and also the family type things, you talked about having kids and so on, you have that big event, it’s time to revisit the insurance plan.
Jonathan: Just one thing we didn’t mention before we move on to the next topic, is beneficiary designations and of course that applies to retirement account. It’ll apply to your life insurance. You’ll also have beneficiaries on any trust that you set up and as your family changes, you’re going to want to revisit some of those beneficiary designations. You do not want your ex-spouse to be inheriting your million dollar IRA.
Peter: Yes, and those things happen. Those things really happen. I’ve seen them happen.
Jonathan: So, it’s February and this is a leap year, which means that this year we get an extra day. We are going to get a February 29th in 2020.
Peter: What do you think we should do with extra day?
Jonathan: Well, that’s a good question. Of course, for most people, it’s just going to be an ordinary day. You’re going to go to work. It’s not going to make a whole lot of difference to their lives, but still it’s an interesting notion to me. You have an extra day and let’s say you had nothing scheduled for that day. What should you do with it? I was sitting here and thinking about it and saying, “Well, one of the things that we don’t do enough of, I believe, is to step back and say, are we leading the life that we want? Are we pursuing the goals that we really care about? Are we spending our money in ways that make us happy or not?”
So if I was given an entire day, one of the things that I would want to do is to take a couple hours and maybe go and sit in a coffee shop or sit in the library with a notebook and just think about my life, think about what I really enjoy doing and what I really don’t like doing and whether I can figure out a way to spend more time doing the things I really enjoy and less time doing the stuff that is really not a high point in my life.
So one of the things that the research tells us, is that one of the best ways to spend money is to use it to buy ourselves out of activities that we don’t like. So if you really don’t enjoy cutting the lawn, hire somebody to do it. If you really don’t like cleaning the house, hire somebody to do it. That is an excellent use of your time, particularly because there’s a mirror side to that, which is, if you are spending less time mowing the law on and cleaning the house, that’s more time you can devote to the stuff that you really enjoy.
Peter: You’re going to run out of time before you run out of the money, usually. So anytime you can figure out how to be thoughtful about how you spend the days that you’ve got remaining, whether you’re 20 or 80, is time well spent.
Jonathan: So, two other things that I would suggest for this day where you get to do it any way you want, is when to unplug. Leave the cell phone at home. Don’t go on the computer. Don’t look at your email. We are addicted to technology. We all know it.
Peter: Oh, yeah. I’m addicted to… We’re all addicted for sure.
Jonathan: We’re sitting here recording this podcast. We both have our phones out on the table. At least, unlike Peter, I have my face down.
Peter: I think you tweeted five times while we were talking.
Jonathan: That was only because I wasn’t finding what you were saying very interesting, Peter. Only kidding. Only kidding. So yeah, I would unplug. I think that’s a valuable thing to do. We lived without cell phones until not very long ago.
Peter: 2008.
Jonathan: Yeah.
Peter: Well, I mean, iPhones, iPhones.
Jonathan: Yeah. We had cell phones, but still, we were not so connected as we are today. I mean, I remember when I started working in London in the mid-1980s, we would make plans from the office for the weekend because we had access to a telephone and then we just presumed that everybody was going to meet at the pub in Charing Cross at 12 o’clock on Sunday and that was the plan. If anybody changed their plans…
Peter: Too bad.
Jonathan: It as too bad. We don’t seem to be able to do that anymore.
Peter: No.
Jonathan: So, to get back, at least for a day, to a technology free 24 hours, I don’t think that would be a bad thing.
Peter: It wouldn’t be a bad thing. It’s also, I think, the one piece of advice we’ve given on this podcast that no one that’s listening is going to follow. It’s just too difficult, too difficult.
Jonathan: The other thing that I would just mention to do with this entirely free day, this extra day that you’re going to get in 2020, is take an hour or two and get in contact with people you haven’t spoken to in a while. One of the things that you learn as you grow older is how invaluable friends are and I feel we’re none of us that good about keeping up with our friends. We lose contact with people who we knew early in our career, we knew at college and as you get older and particularly as you approach retirement, one of the things you discover is that friends are like gold. They’re the things that really keep you going. So to the extent that you can strengthen that network of friends, as you head into your retirement years, that will pay bigger dividends than any stock you can buy.
Peter: That’s great advice.
Jonathan: So, it’s our tip of the month, Peter.
Peter: Well, that was very profound. So how am I supposed to follow that with the tip of the month.
Jonathan: Okay. Then I’ll go with my tip of the month first.
Peter: You go with your tip of the month first.
Jonathan: Because it’s a really trashy one.
Peter: All right.
Jonathan: My tip of the month is to throw stuff out, literally throw stuff out. We all have too much stuff and one of the things that happens with all of our stuff, if we don’t deal with it, is our kids are going to have to deal with it for us. As I’ve joked before, basements or museums dedicated to the stuff that we bought, regret, and can’t bring ourselves to throw out, throw it out because if you don’t throw it out, your kids are going to deal with it. Not only going to have to deal with it, they’re going to think it’s really much more important than it is. If you aren’t interested anymore, why should your kids be? Toss it out. If you can’t bring yourselves to toss it out, at least try to get to the point where for everything you buy, something else leaves the house so you don’t at least accumulate more stuff.
Peter: I like that and I’m going to make my entire family listen to this because for me, they make fun of me. If it’s not chained down, I will get rid of it. I don’t want any clutter around me at any time. I’m one of those crazy people that if I’ve got an hour, my whole closet gets turned upside down. I wind up with two shirts and a pair of shorts. So that’s one piece of advice that you’ve given that I already follow, but that I think is very, very good advice. I’ve also seen the opposite happen when kids inherit what their parents have. Their parents thought all this stuff was important. The kids just see a bunch of stuff and they just get rid of it all, in an estate sale. They keep the one ring and they get rid of everything else. So if you really do have things that you think are very important, you might share that in a note or tell your kids so that they have a sense of that as well.
So my tip of the day, I thought, well, see, we talked a little about estate planning insurance before, is to look at the insurance you have through your work plan and make sure it’s factored into your financial plan correctly because it’s a big mistake I see made. So a lot of people take that example we talked about earlier where the family needs $500,000 of term insurance. They say, “Oh, well, I’ve got $300,000 through work. So I’ll just go buy $200,000.” That’s a very dangerous thing to do because most of us don’t stay in the same job forever and you could get terminated from your job, might not be able to control that. You might elect to switch to another job. The employer might decide not to have the insurance anymore, because it’s too expensive or people don’t like it or care about it as much as other benefits.
All of a sudden, boom, you lose the few hundred thousand of insurance and now you need to go get some, but now you might not be insurable. It may be something has happened and you can’t get insurance and now the family’s just in a position where there’s not a solution. So term insurance is very inexpensive. When you’re figuring out how much the family needs to be set for forever, don’t factor in the work term insurance as part of the equation.
Jonathan: That’s great advice, Peter. So that brings us to the end of this podcast. This is Jonathan Clements, director of financial education here at Creative Planning. With me is Peter Mallouk, the president of the firm and we are down the middle.
Disclosure: This commentary is provided for general information purposes only and should not be construed as investment tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed to be reliable, but is not guaranteed.
