For months we’ve been hearing about a looming recession, but when will it happen? No one knows for sure, but what we do know is that there are steps you can take now to put yourself in a strong financial position to weather an impending storm (2:10). Plus, tax guru Ben Hake joins John to divulge which credits you can still capitalize on to help maximize your 2022 tax return (13:48).
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 a head on today’s show, how to Invest with a potential recession on the horizon. New tax credit opportunities that very well may be available to benefit you and your family, as well as whether or not you should name your trust as a beneficiary. Now, join me as I help you rethink your money.
To begin, let’s talk about those old station wagons. Remember those things where couple kids would sit in essentially the trunk and face backward. One of my good friends had one of these, and I remember always wanting to sit back there as a kid. We’d make faces at the cars behind us and it’s kind of awkward. You’re at a red light for two minutes, just locking eyes with the driver behind you. You’re both kind of whistling. Woo, do do. Looking out to the side, this is kind of weird, but also as an elementary kid, kind of fun. But here’s what I learned. You saw things completely differently than when you normally rode in a car and looked forward. And I see this same phenomenon of fixing our gaze rearward as a consistent challenge for many of us when it comes to making wise money moves.
Let’s take the economy, for example. If you are assessing the economy and your subsequent financial moves, how you’re going to invest money, for example, by a review of the past six months, you are royally screwed because that’s akin to you being my elementary kid’s self in the eighties, sitting in the back of that wood paneled station wagon, hoping you don’t get rear-ended. Looking at the exit the already passed, and watching that gas station get smaller and smaller as you continue to drive and become less and less relevant for your road trip or in this case for your money moves.
By contrast, the stock market is approaching new things. The stock market’s looking out the windshield, everything is getting larger and coming into focus because it’s always forward looking. Unlike the economy, the Bloomberg Economic Survey said the odds of a recession by fall of this year in 2023 was 100%, huh! 100 not 99. I know economists love making bold predictions that so often are completely wrong, but a hundred percent feels kind of crazy.
But because of this narrative, clients keep asking me, what if we go into a recession, John, what should we be doing with our money? Well, let’s look at this. And by the way, I’m not downplaying that we may go into a recession, but right now the unemployment rate is at the lowest level since the 1960s. Real disposable income is growing and this is happening to the extent where the Fed continues to raise rates to try to slow down an economy that in many ways is doing really well in an attempt to cool off inflation. Housing’s a perfect example of this. Mortgage rates went from 3% all the way to 7% in 2022, and it just froze out the entire market because unless someone had to sell, job change, major family formation issue, divorce, for example, you weren’t giving up your 3% mortgage to buy another house at 7%.
Now mortgage rates have dropped from seven down to six, and some are estimating that it may even drop down to five. How can that be while the Fed continues to raise rates? And the answer is that mortgage rates are not tied to the Fed funds rate, but far more closely are correlated to the 10 year treasury rate. And this is logical if you think about it, because the average homeowner stays in their home about seven years.
So that duration more closely matches up to a 10 year treasury than some sort of overnight rate. And I think most expect mortgage rates to drop at some point, maybe in 2024 or 2025, who knows when, but they’ll likely not stay this high for an extended period of time. But inventory in 2022 went from only 250,000 homes in America for sale and doubled over a six month period, and it actually topped out at 600,000 homes according to Altru’s research.
But with interest rates having dropped even a little, and builders now starting to buy down rates, we are seen inventory compress. Mortgage applications are up about 25% from December lows. And if you look at the largest home builder stocks, Lamar, D.R. Horton, they’re up 30% or 40% from their October lows. And by the way, part of that was commodity cost reductions on things like lumber and supply chains being worked out.
But again, by the time you know this data, it’s all priced in. You’ve already passed the rest stop, looking out the back window. And the same is true when it comes to your financial plan, your investment portfolio. You’re not going to be able to break for an accident ahead when you’re looking backward. And if you have questions around your money, estate planning taxes, investments, retirement, insurance, whatever is on your mind and you aren’t sure where to turn here at Creative Planning, we’ve been helping families since 1983.
Visit us now at creativeplanning.com/radio to schedule a complimentary visit with one of our fiduciary financial advisors that isn’t looking to sell you something, but rather give you a clear and an understandable breakdown of exactly where you stand with your hard-earned dollars. Again, that’s creativeplanning.com/radio.
So you’re thinking, all right, John, I got it looking through the windshield, you made your point. Now, as I look through that windshield, I’m pretty sure up ahead I see a recession. It’s what it looks like anyhow, and if it does, in fact, hit us, what money moves should I be making to protect myself and my family from negative financial consequences? Let’s talk about this and let me start by just saying it’s never a bad time whether you think a recession’s coming or not to set yourself up in the strongest financial position possible.
But because we’re humans, we tend to think about this more when we’re worried, when we’re concerned. But an important reminder is to control what you can control and then minimize the risk of what you can’t control. And that’s where a really good financial advisor or an attorney or a CPA that has a lot of experience and knowledge can help you identify how to minimize some of those risks that you just might not even be aware of.
Now, how bad could this recession be? Probably, mild, probably pretty short, but again, we’ll wait and see, even if we were correct on that, there are far too many variables that can occur in the future that would impact any sort of projection. But unlike the 1980s, we’re in a really healthy labor market. But if we just go back to 1945 and look at the 13 recessions that we’ve encountered, it might surprise you that we’ve actually had six positive years in the S&P 500 during those 13 recessions. And in 10 of the 13 recessions the year following the end of the recession, the market was up, in most cases, up a lot. Recessions look backward at past data. The market’s looking forward, they’re not timed together, and you can’t find a perfect pattern. And so therefore, it’s really difficult to time. The market was terrible in 2022.
A lot of that’s because it was already pricing in the likelihood of a recession that may or may not occur at some point during 2023, which is why the markets typically bottom out and rebound months before the end of a recession. So while I have no idea which direction the market is going to move the next three months or six months or 12 months, a lot of this negative sentiment has already been priced in.
Here are five money moves to make in a recessionary environment. The first is take another look at your spending and create a budget. Now, I know when I say that you might be rolling your eyes and saying, I’d rather watch paint dry. Making a budget stinks. Well, I understand that, but it’s important to know your cash flow situation. Make sure you have an emergency fund of around six months of spending needs, and of course, absolutely get rid of any and all credit card debt that’s hitting you with high interest rates.
Second, move to make with a recession in mind, stay the course with your investments and think long-term. Don’t make knee-jerk reactions with your investments because remember, investing is a long-term game, especially in growth-oriented investments, but you need to set realistic expectations. You’re going to need to stomach a recession and the stock market dropping 30%, 40% at various times over your life because that’s normal.
That’s how you receive the return premium and why the markets have averaged about 10% a year for a hundred years? Because of that volatility and uncertainty in the short term. If you want certainty in the short term, you go into treasuries and right now you don’t outpace inflation, never make changes to your investments that jeopardize your financial security based on one recession. And even if you’re listening thinking, I get that for younger people, John, but I’m almost at retirement. Nowadays, your retirement is likely to last 25 or 30 years. For most people, they can’t go bury that in the backyard because it’s safe and watch an erosion of purchasing power over 2, 3, 4 decades of retirement. It’s only going to make you go broke slowly.
Number three, consider converting IRAs to Roth IRAs. Now, a Roth IRA is just the exact opposite from a tax standpoint as a traditional IRA or a traditional 401k, and that you pay taxes now, ideally, you know, if you’re doing this, it’s at a lower rate than you expect to pay later. And there are many considerations that must be weighed in terms of whether you should do this, how much you should do, if any, and this conversion is irreversible. So don’t go about that alone. Talk to your CPA. If you don’t have one or have confidence in yours that they understand what’s going on with the rest of your plan. You can contact us here at Creative Planning as well and we will help you walk through this.
But in short, if a recession occurred and the market dropped in value, that would be dovetailing with some of the most historically low tax rates due to the Trump tax reform that we’ve seen in 50 years. And so painting with a broad brush, those are the converging factors that make Roth IRA conversions worth investigating.
Number four, don’t underestimate the power of bonds in your retirement portfolio. Now, the idea of someone saying, gosh, I just love looking at my statement and seeing bonds, they’re so fun. Said, no one ever. Bonds are boring, but bonds generally speaking, especially if you own the right ones with shorter durations and high credit qualities tend to move inversely with the stock market, provide volatility dampening, and their purpose is to be a buffer. I can’t say this enough. Your time horizons within your financial plan is what directly should be driving your asset allocation, how much in stocks, how much in bonds, it’s all about how much money you need and when you need it.
My fifth and final money move to make with a recession in mind is don’t be afraid of bear markets. And most importantly, do not try to time them. Bear markets are when the stock market drops 20% or more from its high, the S&P slid into a bear market in mid-June of 2022. And the reason I’m telling you not to fear them is because you’d be fearing something that happens about every five years. So if you invest for 20 years or 30 years or 40 years or 50 years, you’re going to encounter a lot of bear markets, you better get comfortable with it. They’re going to happen.
But here’s a word of encouragement, they don’t last forever. Every single previous bear market has made way to new highs in a bull market. And one of the things that I coach investors on is that when you’re in the midst of a bear market refrain from making outsized asset allocation adjustments because if you are properly diversified, you’ll weather the storm.
The worst thing you can do is try to time some market bottom, sorry, you’re not going to be able to do it, not because you’re not smart, but because no one can do that consistently and predictably. And here’s what’s really cool, and I don’t want you to miss this. Now that we’ve gone into a bear market, the odds of you having great future returns are increased. Unlike a casino, the stock market’s odds are stacked massively in your favor.
Historically speaking, you are more likely to be up 20% or more over the next 12 months than down even 1%. And the reason that basically no one can accurately time the stock market is that when bear markets turn, they tend to quickly. Creative Planning President Peter Mallouk tweeted, if you’re sitting in cash waiting for markets to stabilize, you may miss part of the downside, but you will almost certainly miss the recovery. Why does he say that? Because the next 12 months following the last 13 bear markets have seen an average growth in the S&P 500 of 47.5%.
And so to recap, those five money moves to make with a recession in mind. Take another look at your cash flow, think long-term and don’t make knee-jerk reactions. Consider a Roth conversion. Maintain a bond allocation to ensure that you have a buffer for stock market volatility. And don’t try to time the bottom of a bear market.
If you are feeling any uncertainty around what you’ve worked a lifetime to save my colleagues and I here at Creative Planning, 300 plus certified financial planners, around 50 attorneys, nearly a hundred CPAs, we are all passionate about helping you succeed, ensuring that you have peace of mind and an understanding of why you’re doing what you’re doing. Because after all, you saved this money so that it could be a positive impact in your life. You do not need to go about this alone. Go to creativeplanning.com/radio to meet with a local advisor. We work with tens of thousands of families across all 50 states and 85 countries around the world just like you. Why not give your wealth a second look? Go to creativeplanning.com/radio to schedule your complimentary, no obligation consultation.
My extra special guest today is Ben Hake, senior managing tax director here at Creative Planning and a regular guest on Rethink Your Money. And I even pulled them away from tax returns for just a few minutes so that we could learn a bit more on the new tax credits to ensure that you’re informed and that you take advantage of which ones are available to you. Ben Hake, thank you for joining me on Rethink Your Money.
Ben Hake: Yeah, Thanks John. Thanks for having me. I’m excited to be back.
John: Let’s dive into these new energy credits regarding specifically who they impact and what sort of purchases do they apply to.
Ben: So there was a ton of stuff in there that impacts a lot of things, but for most of our individual clients, it’s really targeting two groups of people. The first is going to be homeowners, and the second is going to be people who are looking to purchase new vehicles, specifically electric ones. So if you’re renting a house and exclusively bike, this might not be the segment for you.
John: That’s great. So as a homeowner, what considerations are there?
Ben: So the big thing is generally speaking, if it’s going to make it so you have to spend less on your utility bills and the IRS is trying to incentivize you to make those improvements. So a lot of the things historically have been changing out windows, doors, HVAC, so heating, air conditioning, those sorts of things. The killer was at the old credit, basically said, Hey, you get a credit of 500 bucks and no matter when you hit that in your lifetime, you’re capped out. So you don’t get any improvements for doing anything. So if you got early nineties, you swapped out all your windows, the IRS says as much energy improvements as you’re going to get a benefit out of which long term didn’t make a lot of sense. So with the new rules, they basically said instead of being a lifetime limit, they made it an annual limit of about 1200 bucks, and that’s being driven by what you spend.
So you get a credit of 30% on your windows, doors, all those sorts of things. And there’s some buckets for each of those, but there’s some incentive now for clients to maybe instead of replacing all the windows in one year, maybe you split it over a year or two. That way you’re doubling up on that credit. So some of the other things, HVAC, ACs, those sorts of things, a lot of the times the installers, they know if it’s going to qualify or not, but that is something that you’ll want to have them confirm and they should be able to show it on the invoice or give you the model number.
John: Yeah, you’d think the salesperson for whatever company it is would be very adapted explaining all these different credits as they’re a big incentive to get some of the cost back. That’s great. So how about for new vehicles?
Ben: Well, so this is an area where the new rules make things a little bit more complicated, but it’s opening it up to a ton of people. So most people, the way it used to work is that each manufacturer has a set number of cars, they’d end up getting a smaller credit. So it starts a $7,500. And so that means the more popular brands like Tesla for example, they quit getting credits for Tesla purchases in like 2019 and it phased out pretty quickly. So there’s been a number of manufacturers that basically for the last four or five years, you haven’t been able to get any credit whatsoever.
So now with this, they’ve made it so they’ve removed that cap. So now if the manufacturers sell 500 of cars, they’re not dinged for that, but they’ve made a couple provisions, so they want to make it so it’s a little more affordable, and they’re trying to make it target so that it’s not quite the high income earner. So by more affordable, if you’re looking at a car, it’s got to cost 55 grand or less. If you’re looking at a truck or an SUV, it’s 80K or less. And that first question I get from a lot of clients is, can my dealer just say, Hey, instead of this car be in $81,000 and let’s make it 79,500 and now at qualifies. And unfortunately that’s not the case. So it’s going to be whatever the sticker price is on the manufacturer’s website. So the individual dealers can’t discount the price to get under those.
John: Can’t manipulate it.
Ben: It. And then the other is going to be the income threshold. So it used to be you can bake any amount of income and be able to qualify for these. Now if you’re single, it’s 150 grand or married filing joint 300 grand or less. So another consideration is if you’re looking to that, do you want to try and target it in a year that possibly you’re under those thresholds.
John: Interesting. So somebody making a lot of money or wanting to buy a nice car, may as well just buy a gas guzzling F350 and who cares about the environment because they’re not going to get any benefits.
Ben: Yeah, they’ll definitely want dooleys the whole nine yards. I mean miles per gallon will be ignored on those.
John: Obviously joking.
Ben: Yes. The other complexity in this is that it no longer is just like, Hey, it’s a car that runs on a battery, so you get the credit. So they’ve started to add these other rules for 2023. So if you’re looking to buy a car this year where it has to be finished manufactured in the United States, as well as have a certain number of components manufactured within the United States, and the complication here is it may be varying on trim level, so maybe they make some of them in Spartansburg, South Carolina and other ones are being made in Germany. So the IRS and the Department of Energy have put together a tool on their website where if you throw the VIN number for the car you’re looking at, it’ll have all that information already in there and it’ll definitively confirm if you’ll qualify for the credit or not. So it’s not something that a lot of people are going to have to be doing a lot of their own investigative work on.
John: Oh, well that’s helpful because I could see that being extremely confusing. So when do you claim this credit?
Ben: So you claim it during the year you actually take possession of the vehicle, which is relevant now because it seems like everyone orders a car and six months later they get it. But assuming you get your car in 2023, you would claim that credit on your individual tax return. And then in the future, and I want to say it’s 2024, they’re going to have a provision where instead of getting a tax credit, you could just take that as a discount from your dealer. So if the car is 50 grand, they’ll give you the credit for 7,500. So your sticker price or what you’re paying at the point of sale is 42,500. So that’s still in the works. I don’t think all the details have been ironed out on that. Not shocking, but eventually that’ll be another way to do it that makes it a little bit faster for taxpayers.
John: Well, that’d be fantastic for somebody buying, taking possession in January. Obviously not to have to wait 12 months or 14 months to receive that money. Now are these all federally driven? I mean are there any differences state to state?
Ben: So there are state to state difference. That’s probably, there’s tons of details there, but some states will do it as rebates. Some of them will do it as discounts when property taxes, things of that nature. And almost every single state, a lot of the big ones we’ve looked at as California and places like that, a lot of them are going to have that same income threshold or even slightly lower than what the Fed has here. So fortunately a lot of the states want people to get EV vehicles and have a lot of the information on the Department of Revenue or Department of Transportation’s websites at the state level.
John: Well, this is really helpful, Ben. And so we basically have learned that we’re going to benefit from buying an electric vehicle, but it can’t be the Porsche take in.
Ben: Exactly. I was going to say, if you’re looking for a Rivian or apparently any of these super high end lucid vehicles, probably not going to be getting the credit for those.
John: All right. So go out and buy a Nissan Leaf. I love it. Sounds good. Hey, thank you so much for your time as always, Ben.
Ben: Thank you John.
John: That Was Ben Hake, senior managing tax director. If you have more questions on these tax credits and aren’t sure who to speak with, go to creativeplanning.com/radio. You don’t want to miss out on free money, especially coming from the government.
Let me transition over to a couple of client situations that recently happened because there were tax implications for both, one negative, one positive and they’re very common and may apply to you as well. So the first was a brand new client came on board and we were looking at their tax situation and they had aggressively Roth converted. That’s the transfer that I talked about earlier where you move money from traditional deferred retirement accounts into a Roth IRA, and you pay tax at potentially a lower rate than you expect to get it out later. And then all the future growth, assuming you adhere to a few rules is tax exempt.
You don’t have RMDs, it passes to the next generation tax free and that income doesn’t affect social security taxation either, but this is one of those scenarios where sometimes knowing just enough is in fact dangerous. This advisor that they had worked with kind of didn’t know what they were doing, but understood, hey, taxes are really low historically speaking, this client’s having a low income year, so therefore they’re in a low bracket. This might be a great time to take some of their deferred retirement dollars and get them into a Roth and pay tax today.
The problem was they converted way too much in one year, all of that conversion stacked on top of their income, and while it not only accelerated significantly their tax brackets, they had gone over the limits for what Medicare part B and D cost because those are means tested based upon how much money you make. And now this person made a lot of money because of this conversion. They hadn’t even considered this.
This was nearly $5,000 getting pulled out of their social security checks, not going to them but going to the government because they were high income earners. And so the lesson for you is that while conversions are potentially a very good opportunity right now, make sure that a tax professional is involved because it’s irreversible and can impact things that might not even be on your radar.
Second example, and this one’s going to be a positive one thankfully, is that a radio listener came in asking for a wealth path analysis, that one page roadmap that we occasionally offer that will overview your entire situation. And one of the things that I brought to their attention is that because they were in the 12% tax bracket and had a lot of room before they were going to jump into 22, I suggested that they started selling some of their stocks that had unrealized long-term capital gains. And they said, wait, John, we like that ETF, we like that index fund. We want to continue to hold that for the next 20 years. And I said, that’s great, sell it and rebuy it the next day.
You see, effectively, that just provided them with a free step up in cost basis because as long as you remain within the 12% tax bracket, long-term capital gains are taxed at zero. There is no taxation. So they basically just got to reset what they paid for that security without the need to pay any federal income tax on that sale. And if you’re thinking about the 30 day wash sale rule where you cannot repurchase for 30 days, that only applies when you’re trying to realize losses not gains.
These are just two examples of many that I see on a weekly basis, and the reality is a huge part of your success or failure when it comes to your investments and your taxes and your estate planning, we’ll call it your overall financial life, is the quality of the advice and the quality of the professionals that are providing that advice for you. If you’re not 100% confident you don’t have conviction in your written documented dynamic financial plan and you’d like to speak with a fiduciary that’s not looking to sell you something, but rather provide clarity around your life savings, then don’t wait any longer. We’ve got local advisors just like myself ready to speak with you, schedule your meeting by going to creativeplanning.com/radio. Why not give your wealth a second look.
I have a confession to make. The other day I was driving with a few of my kids and our kindergartner, Jude kind of peeked around in his booster seat, looked at my speedometer and said, dad, you’re breaking the law. And I said, wait, what are you talking about? He said, you’re speeding. And you know what? He was right. I was going 76 in a 70. Now you’ve never done that, right? You’re always right at 68 in that scenario. It’s just staying right below to make sure you never crest above the speed limit.
Now, of course, that’s tongue in cheek because we all speed a little bit, and Jude is also not wrong in saying you are breaking the law. That is the speed limit. But I think what happens as we age and mature, we gain more experience. I don’t think it’s necessarily that our morals become corrupted or our values are less important to us, but we understand there’s more gray out there than necessarily black and white, binary things, especially when we’re kids, they’re comforting to us to be able to cleanly put in a box, this is right, this is wrong when there’s nuance. Well, now we’ve got to start thinking a bit, and I find this to be true when I listen to the financial pundits because entertainment and getting ratings and being interesting a lot of times requires you to take a really strong stand. Whether you truly believe it or not is sort of irrelevant. I mean, I can think of a few different examples of polarizing opinions on the exact right strategy for how to invest or all annuities or all life insurance.
I’ve heard a famous personal finance radio host basically say that permanent life insurance is the devil, the worst possible thing. And while I would actually agree that in most cases for most people, permanent life insurance is not appropriate, you buy term insurance to protect against risks and you invest the rest and what you expect to be much more flexible, much more liquid, higher performing, historically speaking investments.
For most people that is right. But if for example, you’re a high net worth family who has a giant farm in the Midwest and all of your children are going to be inheriting the farm and work the farm, and that’s the legacy, and you have every intention of passing that farm in its entirety down to future generations, but the farm’s worth $50 million.
Now I know, you’re like, man, I’m moving to Nebraska. I’m farming, let’s go. I’m leaving the big city. That sounds pretty good, but my point is they may owe eight figures in estate taxes when the parents pass away. If they don’t want to sell off any of the farm, how are they possibly going to pay that tax bill. They’re likely going to need life insurance and they don’t want term life insurance because if the parents don’t die until 98 years old, they don’t want the insurance to term out.
They need it to be permanent. And there’s an estate planning example of where permanent life insurance can in fact be wise. So you can’t make these blanket rules for every scenario. Should the person who’s just getting started, who shows up at one of the big life insurance companies that we see advertising all the time and haven’t started saving in their 401k, have no emergency fund, and they’re sold a whole life insurance policy as the great first step, the foundational piece of this 25 year old’s financial plan. Well, yeah, that’s malpractice, that’s idiotic. And so that’s why we need to be careful and have a keen ear when we hear oftentimes in a very compelling fashion why things are absolutely right or absolutely wrong. Words like always and never tend to appear in this sort of entertainment.
The problem is that financial advice is far more contextualized than that. Personal finance is way more personal than it is finance, and it’s very rare actually that I can say things like always and never because having a great financial plan means plain probabilities. It means adjusting and tweaking. And more importantly, a good financial plan is dynamic. It means that your answer to a question or my advice to a client right now may in fact be the correct answer given the information and circumstances that we’re presently sitting in.
But I better not anchor to that because if that person didn’t plan to retire for 15 years and three years from now they’re laid off the financial advice and their financial plan has to change. It doesn’t mean it was wrong before, but it means it’s wrong now. Well, it’s time for an all new game of rethink or reaffirm where I will break down common wisdom or a hot take from the financial headlines and decide whether you should rethink it or reaffirm it. And our first examination is whether riskier investments will be compensated with a higher return. You’ve probably heard risk and return are correlated, and I think we’d all agree to some extent that is true, but let’s investigate that a bit more and I think we’ll conclude that it’s certainly not always the case.
Charlie Bilello here at Creative Planning wrote a piece entitled Not All Risk is Rewarded. It is fantastic. I’ll post that at creativeplanning.com/radio if you’d like to read through it in its entirety. Also, if you love seeing simple charts, the breakdown financial concepts and aspects of the economy, Charlie is a fantastic follow on Twitter, which is why he has over a half million people reading his tweets. And so while higher risk, higher reward is one of the most repeated maxims in all of investing, and by the way, based on Nobel Prize-winning research like Modern Portfolio theory, I think it’s additionally intuitive, riskier investments should be compensated with a higher return. Why would I take more risk if I’m not going to expect a higher return. But what should happen and what actually happens, those aren’t the same thing. And while I know I make all you gold bugs mad at me, gold is the perfect example of this.
In May of 2006, gold was all the rage. It was up 155% during the preceding five years. At the same time, the US housing market was on fire up 77% the last five years. And so of course, because we’re typically very bad at this and emotional, most people were extremely bullish on both Gold and Housing. And as a result, two brand new ETFs tracking the gold miners and the US Construction Index were born. What’s happened in the last 16 years, both of these ETFs had significantly higher volatility than the S&P 500. The maximum drawdowns, in fact, of both of those ETFs were more than 80%. While the S&P peaked the trough was down 55% during that great financial crisis, and since we’ve now concluded that they were in fact riskier, we’d think per conventional wisdom that it would translate into a higher reward.
Well, you know where I’m going with this. Not exactly the S&P 500 has returned 9.4% annualized versus 3.4% for the US Home Construction ETF, and oh sadly, a negative return for the Gold Miners Index. So in this case, higher risk equaled lower return. The takeaway here is that while no big reward will come without risk, it also doesn’t mean that all big risks are rewarded. Think Layman, Enron, WorldCom, some of the riskiest individual stocks are the ones that eventually go to zero. And as we’ve also seen, high risk industries can underperform for long periods of time, but I think the most important tenant here is focusing on the importance of diversifying. None of us know what the future’s going to bring.
The prospects of the gold miners and the US Housing Construction ETFs, I mean just seem great in May of 2006, but you can always make the case after a strong run in performance. Diversification and rebalancing to maintain that asset allocation is the best protection to hedge against many of the uncertainties that neither you or I can control.
And so the idea that riskier investments should be compensated with a higher return is a reaffirm, but also with the caveat that it doesn’t apply in all situations. And on that note, the most important driver of your expected returns and the volatility that you are likely to encounter along the way is driven by how your portfolio is diversified, how much do you have in stocks versus how much do you have in bonds versus how much do you have in cash? And then one layer deeper. Which types of bonds, duration, credit quality, geography with your stock, so the US or foreign small companies or large companies, microcap companies, growth value, that decision which should be informed by your written document and financial plan will absolutely be the greatest driver of what you experience as an investor.
If you have any questions around how you’re diversified, when you’re rebalancing, are you rebalancing, those would be some of the most important ones to ensure that you get answered. If you’re not sure where to turn, go to creativeplanning.com/radio to speak with a local advisor just like me. Again, that’s creativeplanning.com/radio to schedule your meeting.
Number two, I would save more if I made more. Saving is a habit and it’s one that as Americans were not very good at, and this is why on last week’s show I spent a lot of time breaking down the Secure Act 2.0 as well as the original Secure Act with Adam Hoops. And if you’d like to go back and listen to that episode, you can find that on the radio page of our website that I just referenced, the Secure Act and the Secure Act 2.0, were put in place for the ultimate purpose to help Americans save enough for a secure retirement. And some of the retirement statistics are a little discouraging to be honest. Average retirement savings, $73,000.
So if you’re taking let’s say a 5% withdrawal rate from that, it means you can generate less than $4,000 a year out of those investments. If they’re IRAs, that’d be pre-tax and you’d be taxed on that 4,000, you wouldn’t even be able to keep all of that. Only 30% of Americans feel they’re on track for retirement. 25% of Americans have no retirement savings at all, zero or a negative net worth. 71% of Americans worry that social security will run out in their lifetime.
I’ve spoken about this, that shouldn’t be a concern, but it is underfunded and could in fact be reduced if one of the many proposals weren’t to take place. By the way, that’s about 10 years away still from happening. My suspicion is that it will likely be changed because it’s too vital given these stats for eradicating true old age poverty, which is what it’s set out to do, 40% of American retirees rely only on social security for their income.
And here’s the biggest challenge. Americans believe that they’ll need at least $1.9 million to retire comfortably. Remember my first stat, the average person has $73,000 saved for retirement. That is quite the gap. I want to encourage you, wherever you are at in life, you’re rolling and making a ton of money, you’re struggling just to get by. Savings is a habit. This is what I’ve tried to teach my kids. Every $10 they make, they’re giving a portion to start. They are saving at least $1, at least 10%, preferably 20%, because if you can’t save with a little, you likely won’t save with a lot either. And if you don’t prioritize it and pay yourself first so to speak, it will be very tough to get ahead. I encourage you to automate all of your savings to remove as much friction as possible so that you are not the average American, but yet someone who has been able to get ahead through the discipline of savings.
So to answer the question, I would save more if I made more. That is a rethink. And our final rethink or reaffirm for today, financial scams are obvious. So over my time as a financial advisor, I have seen a lot of investors be quasi scammed, but now we’re all of their money is taken from them, although I’ve seen that as well and that’s devastating. But what is far more pervasive is the terrible advice generally to earn very high commissions by the broker or insurance agent that’s selling it, but it doesn’t fully maybe go into the category of scam, but unfortunately derails the maximum potential for the person’s situation, basically convincing them to buy something that is awful.
Now, you probably heard the term Ponzi scheme, right? It’s when you pay old investors off with new money that is coming in, but you may or may not know that that is named after an actual person. Charles Ponzi. He was an Italian immigrant in Boston, five foot two inches, and in 1903, he came to America. He did a bunch of odd jobs. He was looking to figure out how he could hustle and make some money and a lot of these scams, it started with sort of an ingenious idea.
There were these international reply stamps to letters, and what he realized is that he could buy three times as many of these in Italy based upon the price of the Lira as compared to America. So he could bring them back over here and basically sell them at a profit due to the difference in the exchange rate. Well, in theory, he maybe actually could have done it, but there is no evidence that he ever actually purchased a single one. He just went around telling people about this idea and folks would say, wow, that actually does make sense. Like that’s really smart. And he promised 50% interest in 90 days. Think about that.
A hundred dollars turns into $150 in three months. And so your first red flag of most scams that there’s some secret sauce, Madoff did the same thing. How are you getting these crazy returns in ’08-09 when everyone else is losing money. Oh, that’s my black box. I can’t tell you that because then I’d have to kill you, basically is what they say. That’s how we make all this money. We’ll never divulge how in fact we’re doing it. There’s your first red flag.
Second red flag, the two good to be true argument, 50% in three months. In the end, Charles Ponzi fled to Brazil where he died with about $75 to his name. Be very careful not to get caught up in FOMO. I mean that fear of missing out is incredibly powerful. And with social media, FOMO is at peak levels right now. Good disciplined, long-term investing should be boring. It shouldn’t excite you. Get your thrills other ways, but not for the money that you and your family will depend on for financial independence.
So the answer to financial scams are obvious. No, it’s a rethink. They’re often not obvious and in fact, much more subtle than even the most notorious scams of our history. If you’d like a second opinion on what you’ve worked so hard to save, we are a law firm or a tax practice and a wealth management firm managing or advising on $225 billion. We’ve been helping families since 1983. Why not give your wealth a second look by visiting creativeplanning.com/radio now to schedule your complimentary and personalized consultation.
My first listener question for today comes from Leah in Millersville, Virginia. Is student loan forgiveness going to actually happen? That’s a great question. Let me give you an update. First, you should know that President Biden’s student loan forgiveness plan may or may not come to fruition in 2023. We’re not certain yet. It really all comes down to what the Supreme Court decides after hearing formal arguments that are expected to happen here in the next couple of weeks.
While the federal student loan repayment pause has been extended several times already, we’ve seen that it’s almost certain that borrowers with federal student loans are going to have to begin making payments at some point in 2023, and the date on when those payments pick back up again hinges on this decision by the Supreme Court. In fact, I pulled this from the US Department of Education’s website and I quote, “the student loan payment pause is extended until the US Department of Education is permitted to implement the debt relief program or the litigation is resolved, payments will restart 60 days later. If the debt relief program has not been implemented and the litigation has not been resolved by June 30th, 2023, payments will resume 60 days after that. We will notify borrowers before payments restart.”
So the answer is there is a lot of uncertainty still around this. But Leah, per your financial plan, I would be advising you and anyone else with student loans to begin to budget and prepare as if you’ll need to start making payments in the fall of this year.
Next question comes from Amber in Minneapolis, Minnesota with interest rates high. Do you think real estate is a good place to invest? Well, it absolutely depends on what type of real estate investment you are referencing. Real estate like retail got hammered during Covid. Other sectors weren’t impacted nearly as much. If you just look at public REITs, which by the way, REITs, all capital R-E-I-T-S, real Estate investment trusts publicly traded REITs.
So those that are traded on an exchange, they were down 25% from the peak last April, but now are up about 5% here in 2023. And they’re extremely sensitive to economic factors and oftentimes have similar volatility level of stocks. And so as rates spiked, REITs had plenty of room to fall. And the reason that those rising rates hurt REITs is that most have significant leverage. Many might raise $500 million and buy $5 billion worth of properties. And so the interest rate of their financing at is significant to their success and ultimately the rates of return that they can provide for the investors that gave them that $500 million.
REITs are also competing with other yield generating sort of income oriented type investments for investors’ attention. And when you can go get a government treasury at 4% or 5%, the risk of buying real estate for maybe the potential at a slightly higher yield isn’t worth it to certain investors, and therefore you have outflows of those investments, more sellers than buyers also decreasing the share price.
Now, it’s worth mentioning that private real estate, non-traded real estate can respond very differently and real estate that you might own locally. Well, let’s just use the Minneapolis example. Maybe you have three residential rental properties in Minnesota. If you’ve got solid renters paying rent and you’re increasing that with inflation, do you really care what your Zestimate is when you go to Zillow? Yeah, it’s probably down in value rates have risen, the market softened, but you don’t plan on selling it. And so because private real estate, and by the way, that doesn’t need to be individual properties, a private REIT might actually own five or 10 or 20 or even more billion worth of real estate. And while the value of those properties may go down, if they’re tenants are paying rent, your yield may remain strong. You hear that and say, well, why wouldn’t everyone own private real estate?
Primarily because it’s illiquid, much tougher to get in and out of and oftentimes have minimums that require larger investments. So if you have a smaller portfolio and you only want 10% real estate, you probably won’t have enough to meet the minimums.
And our last question comes from Nick in Tampa, Florida, should I name my trust as my beneficiary? Well, Nick, like most things, there are pros and cons. So let me walk through. The considerations that I do with clients as to how we want to beneficiary accounts, and let’s use IRAs here as an example, because if it’s non-qualified monies and you have a trust, it should already be owned by that revocable trust. At a broad level, the pro of naming the trust is liability protection. At a broad level, the con of naming the trust is increased complexity. So let me unpack the pro first.
You and I don’t know the future, totally unknown. The last decade, a lot’s changed in our world, in our country. I went from having zero kids to seven kids. I moved six times. I started a business. My wife retired from her wedding photography business, and I had two kids graduate high school. This is the last 10 years, and my guess is that your life’s probably changed a lot too. So the reality is a lot happens that we’re not aware of. By using the trust, it provides layers of protection.
For example, how would you like to work your whole life, leave a legacy. It goes to your son. Six months after they inherit the money, their wife leaves them, and because the monies were commingled and there was no trust runs off with half of the inheritance in the divorce. What if your child’s going through bankruptcy or as creditor issues and has to use a bunch of their inheritance to pay off debts? And all of those monies get pulled in.
Another pro to naming a trust is that you can control how and when the money is actually distributed. Now, this used to be a lot more valuable when the monies were being stretched for 30 or 40 years, but the Secure Act compressed that a bit. I have a lot of clients who say, it’s not going to be in the best interest of my kid. They’ve had some addiction issues. They’re not great with money. I don’t want them to have access to the entire lump sum all at once. A trust can help with that.
The cons to naming a trust as the beneficiary is that the Secure Act, which I just mentioned, made it a lot less valuable. It’s only a 10 year period stretch IRAs where you’d use conduit trusts and have all sorts of protection while making small incremental distributions isn’t relevant anymore.
Most non-spouses have to empty it by the end of the 10th year. Trust tax rates are much higher than individual rates. Maybe more importantly, you hit those rates at much lower income levels. Another con would be, who are you going to use as your trustee? Oftentimes people name a family member. Does that family member really understand all the levels of complexity and time commitment and liability that they’re personally taking as the trustee? And so here’s my summary, Nick, if you don’t have a very large balance, and I don’t know the definition of large balance, but let’s just say a million dollars in the IRA, you probably do want to think hard about whether it makes sense to add those levels of complexity for a $250,000 IRA. The larger the number gets probably more worth considering adding those layers because of the amount of money that you are in fact, protecting.
And one final point on the trust, make sure that it qualifies as a look through or see through under IRS regulations. If that means nothing to you, which I expect most listening or going, what is that? Speak with an attorney. We have 50 of them here at Creative Planning to help you as they do for our clients. And if I piqued your interest, talking about the liability around a trustee, we are also a trust company here at Creative Planning and can act as those fiduciaries post-mortem so that you don’t need to put that burden on a family member or a friend, but rather have a professional organization assist on your estate plan should anything happen to you.
We have offices in DC, Minneapolis, as well as Tampa. And so Leah, Amber, and Nick, if you’d like to speak with one of our local financial advisors, go to creativeplanning.com/radio to schedule that meeting. And if you’d like to submit your questions directly to me, email firstname.lastname@example.org.
Well, Martin Luther King Jr. has a lot of famous quotes, just an incredible orator, but one of my favorites is when he said, “you don’t have to see the whole staircase. Just take the first step.” And while this quote isn’t about money per se, it is about taking positive steps to make changes. That’s what we’re all about here at Creative Planning. That’s what I’m all about, in helping the clients that I work directly with and what I try to instill more broadly in life to my seven children. If your finances aren’t where you’d like them to be and you feel overwhelmed and you hear ideas like the ones I share on the show and you think, ah, it just stresses me out because I’m not where I always thought I would be, it’s okay. Join the club.
We all have things we wish we had done different. Now is the time to start making changes, not I’ll do it later. I’ll call when I have more money. Now is the time to take the first step. You don’t have to have everything figured out. In fact, that’s why you reach out to a team like us at Creative Planning because you don’t have it figured out and you need advice. Every great journey, every great accomplishment has started with some at the time, seemingly insignificant first step Jobs in Wozniak are bombing around in their garage building things. Did anyone make note of that at the time? Oh, we’ve got these two young guys that look half homeless doing stuff in that garage. No, people were probably worried about having them as neighbors, but in fact, they were taking the first step in building the largest company in the world.
All great legacies can be traced back to simple first steps. And while you and I are probably never going to be Steve Jobs, that’s okay. We can all take simple first steps in the direction of accomplishing our goals. Whether you have $10,000 or $10 million or somewhere in between, myself and our team here at Creative Planning are eager and excited to help you pursue your goals and accomplish everything that you want out of your life when it comes to your money. That is our passion. That is our mission because we know that when you have confidence around your finances, you have more peace of mind, which ultimately allows you to focus on the things in your life and the people in your life that are most important.
Schedule your meeting today by going to creativeplanning.com/radio. And 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 Earth’s 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 in 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.
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