On this week’s episode, we’re getting into the good, the bad and the ugly of Roth conversions. We also have a special guest interview with a U.S. Navy F/A-18 fighter pilot turned wealth manager to discuss how you can navigate turbulence on the way to your personal financial destination.
Episode Notes
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m your host, Jon Hagensen, and on this week’s episode, simplify, simplify, simplify, why your personal finances don’t need to be as complicated as they may often seem. I also use a special interview with a US Navy fighter pilot, a real life top gun turned wealth manager to discuss ways you can navigate turbulence to help you arrive safely at your destination. Now, join me as I help you Rethink Your Money.
There are many things in life that are neither good or bad inherently, they are amoral. Money is a perfect example of this. It’s not the root of all evil. The love of money is the root of all evil. Money can be used to fund terrorism, it can be used to manipulate people or it can be used to build a school in Africa for children that couldn’t otherwise be educated or to purchase an airplane ticket for you to create wonderful memories with loved ones.
Now, if you go a layer deeper, this is often also the case with specific financial strategies. Is a stock good or bad? How about a bond? Rebalancing a 401k? How about insurance? There are tools to accomplish objectives that you have in your life and the problem, frankly, usually rears its ugly head when we don’t make the main thing the main thing, which are your objectives, not the tools, not the strategies. You don’t buy a hammer because you want to snuggle with the hammer or gaze at its beauty. Man, it was just calling my name when I was in Home Depot, just incredible. Love that hammer. What are you going to do with it? Well, nothing. I just wanted the hammer to have the hammer. Of course not. You don’t buy it for its weight distribution or its shine. The value of a hammer is how effective it is at pounding in nails.
The same principle is true with a drill or a screwdriver, a saw or a tape measure, and you get the idea. A screwdriver isn’t helpful if you need to go dig a hole to plant a tree in the backyard, does that make a screwdriver terrible? No, it makes a screwdriver great when using it appropriately. Don’t make the same mistake when it comes to financial tools and financial strategies or listen to someone who makes blanket proclamations about the tools themselves because no, it’s not the tool. It’s generally the application and the inappropriateness of that application that leads to blisters. And let’s examine together one of the most notable financial strategies of the past several years, and by the way, it’s one that is potentially relevant for anyone saving money and specifically anyone saving money for retirement, which is why at a core level this has been so noisy and that pertains to Roth accounts and Roth conversions.
This is the bandwagon that everyone is jumping on. Let me back up briefly and lay the foundation for how a Roth is different than what often would be referred to as a traditional or a deferred IRA or a or 401k. So you make $100,000, you send 5,000 of it during the year out of your paycheck to your company’s retirement plan or maybe to an IRA. Well, by doing so, you only have to pay tax on $95,000. It’s as if you didn’t even earn that money. That sounds pretty great, right? Then you invest it for 30 or 40 years until retirement and maybe when you’re 70 years old that $5,000 has grown to $50,000 and here’s what’s cool. You still haven’t reported anything on your tax return. It’s kind of amazing. The drawback is now all $50,000 is taxed at ordinary income as you make withdrawals or if you don’t make the withdrawals and you pass away, when your kids inherit it.
Let me be clear, unless you give that $50,000 to charity, it’s going to be taxed at whatever the tax bracket is of the receiver. Now, what I’m not suggesting is that traditional IRAs or 401Ks are bad. It’s just that they’re not a unicorn and the savings that you potentially create comes from deferring income in a higher bracket and then getting it out at a lower bracket. And conventional wisdom was always saying, well, that’s how it’ll play out because while you’re working, you make a lot of money. You push that income off of your return and you put it back on your return when you’re in retirement, theoretically in a lower bracket. But that little detail is important and I see it throw people off. The savings isn’t just the initial deferral amount, because you’re not eliminating taxes. You’re simply requesting that you pay them later.
The amount you ultimately save is just the difference between what you would’ve had to pay and what you actually paid or again, what your beneficiaries actually paid. So you go back to the late nineties, a senator from Delaware named William Roth came up with the idea of essentially flip-flopping when you in fact pay taxes. He said, well, what if we had a different kind of retirement account where even if you put the $5,000 into that account, you still had to pay taxes on all $100,000 of your income. You don’t get any tax break. Sounds terrible, right? Great idea, Mr. Roth, thanks, but no thanks. But just as before, that’s not the end of the story. Assuming you follow some basic rules on retirement ages and how long you leave it in all the growth and all the distributions come out without paying tax, so you pay upfront, then you’re done. So who did this initially make sense for?
Let’s start conceptualizing this. Well, low income earners because they were in a lower tax bracket at that time. Why would they want to ask the IRS to pay later in a traditional account when they already know today it’s pretty doggone low. In fact, you can’t even make Roth IRA contributions unless you’re under certain income limits. You’re not even allowed to. Most moderate and high income earners looked at Roths when they were first introduced and for many years thereafter as pointless. Like I make too much money. Now, let’s fast-forward to today and how this applies for you. Most 401k plans now offer a Roth option so you can send it right out of your paycheck in the same way you do if you were deferring and you have no income restrictions so you can make a lot of money and still qualify to contribute to that Roth side of your 401k, which is different than IRAs and also the contribution limits are much higher in company retirement plans than in IRAs.
So that change happened. Also, we moved into the lowest tax environment that we’ve seen in decades with the Trump tax reform and have $35 trillion and counting of national debt. We have a federal government that spends money like drunken sailors. We spend trillions more each year than we bring in and we bring in trillions. This is not a revenue problem, it’s a spending problem, and because of this, savvy investors, they started rethinking whether it made sense to ask to pay taxes later in traditional accounts when taxes very well may be higher or even a lot higher in the future, and if nothing changes, the current low rates sunset at the end of next year, the end of 2025. So what that led to is not only many saving into a Roth and just taking their medicine today for tax-exempt monies down the road, but many others also doing what is referred to as a Roth conversion, and this is a little different than contributing to a Roth.
This is where you take current balances in your deferred retirement accounts and you transfer them into a Roth and whatever that amount is, stacks on top of your current income and you pay tax on it and it’s logical at a core. You can make $380,000 married filing jointly today, and you’re only in a 24% tax bracket. I’m going to pause there for a moment before I share with you some real life examples demonstrating the good, the bad, and the ugly of this application. How do you utilize Roths? But before I do know this, a Roth conversion is irreversible. Once you make the conversion, let’s say you realize it was wrong. Sorry, it’s over. So I absolutely advise find a great certified financial planner and CPA to help with this. So here we go, the good, the bad and the ugly. Let’s start with an example of someone who actually did this right, applied this tool correctly to the job.
Husband and wife came in 62 years old. They had about $2 million saved in their retirement accounts. All deferred. Hadn’t utilized Roths at all. They also, in addition to that, had about 750,000 in after tax monies in brokerage accounts and another 250,000 at their bank between checking, savings and a money market. It’s too much cash, but that’s not the focus for right now. They also had their home paid and that was worth about $400,000. They wanted to spend, which is fairly typical, about a $100,000 a year in retirement. They both had good social security benefits that they could claim now because they’re 62 years old and retired, but here’s what they did. They withdrew the $100,000 per year that they needed to live on from their cash and brokerage accounts. So that million dollars of combined monies that were not retirement accounts, that’s what they used to live on, and we did that for the next five years, meaning their taxable income was basically zero.
It was less than zero after their standard deduction. But rather than them stopping there and just paying nothing in taxes, we have this ticking time bomb of $2 million that’s deferred that as I mentioned earlier, is going to be taxed. They then converted about $200,000 each year for the next five years, so they transferred 1 million of that $2 million retirement balance over a five-year period into tax-exempt accounts at an effective rate of well less than 20%. So after five years they’re 67, the husband turned on his social security benefit, which was a little smaller than his wife’s and she turned hers on three years later at age 70 because remember, when one spouse passes away, the smaller of the two benefits is gone and the larger remains for the surviving spouse making it also the survivor benefit, which can be a good reason for deferring the larger benefit longer.
Remember also that social security benefit’s growing at 8% while they waited, which was a heck of a lot higher than their cash and money market were earning, and that’s what we were drawing down. In the end they had created tax diversification, minimized the risk of future tax rate increases on their bottom line and lifestyle, and this was a phenomenal strategy, especially when we factored in that most of their life while they were saving and deferring the $2 million, they were in a near 40% tax bracket, so they saved hundreds of thousands of dollars by playing that game of deferring and then aggressively converting while they were in a window of lower income that was parlayed with historically low tax rates. That’s one example of how Roth conversions can be a home run, but I said I was going to give you the good, the bad and the ugly.
I’m going to give you a series of bad examples. I had someone in the top tax bracket funding their Roth 401k instead of the deferred side because they heard that Roth accounts are better. They’re better, so that’s what I started doing. Their income was going to drop so substantially that it would be highly unlikely for their tax rate not to be lower once their in retirement. They should have been deferring. I saw someone else who converted their IRA to a Roth at 45 years old. They absolutely can do that and in and of itself was fine, but they didn’t have a way to pay the tax bill that was owed because they made this conversion so they simply withheld what they thought they would owe in taxes out of the IRA itself that they were converting. The problem with that is it’s considered an early distribution and subjected to a 10% early withdrawal penalty as retirement counts are that are hit before full retirement age. Ended up being bad.
The last example of how this can be done wrong was when I saw someone convert an individual stock that had moonshot up and so they made the conversion and wanted the future growth of that stock to be tax-exempt in the Roth. The problem was the stock did what most individual stocks do, especially after having had unbelievable over-performance, it dropped by 90% and they already paid tax at the time of the conversion at the present value and received zero benefit from losses inside of a Roth, really did the exact opposite of what they were hoping for.
And finally, the ugly, you’re probably thinking right now like, wait, wait, wait, John, those bad ones you just shared weren’t bad enough to be ugly. A couple of them bumped up against that line, which is blurred, but you’ll understand why I didn’t categorize them as ugly once I share with you this, someone was told that they should convert for all the reasons that I’ve outlined. They had a lot of deferred money. They were worried about future required minimum distributions and had heard that this is a unique opportunity because rates are low. This couple took over $4 million between their retirement accounts and they converted all of it, all $4 million at once, moving it from their traditional IRAs into Roths.
This cost them about 1.4 million in federal taxes alone, as well as six figures of state taxes since almost the entire conversion was taxed at the highest marginal tax rate. They of course, got hit with every high income earner phase out on earth as well. And the reason this isn’t just bad but ugly is that they had no kids and everything in their estate was earmarked for charity. They could have just taken out withdrawals for what they needed, paid 12 or 22% tax. They didn’t have an expensive lifestyle, eventually gifted the required minimum distributions while alive to charities to avoid higher tax rates, and when they died, all of the deferred tax would’ve been wiped away.
501c3s do not pay income tax when they inherit retirement dollars. They essentially diverted $1.4 million and all the compound growth of $1.4 million, which eventually will be probably over $10 million because they’re not that old yet, to the IRS instead of charities that they love and care about. When people ask me, what’s the value of a financial advisor, is it even worth paying for financial advice? Couldn’t I do this on my own? I’m biased, but I see people make decisions as I just outlined. As Mark Twain famously said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Well, we’ve made it to listener questions one of my favorite parts of the show and one of my producers, Britt is here to read those questions and help me out. Hey Britt, how’s it going? Who do we have up first?
Britt Von Roden: Hey John, it’s going great, thanks. So Randy from Idaho writes in that he and his wife had planned for lots of travel as part of their retirement. He says they are now hesitant given current circumstances and wants your recommendation. Should they hold onto the money they plan for traveling until it feels better to do so or should they find a better use of that money at this time?
John: Well, Randy, I’m not 100% certain of whether the circumstances are related to global unrest in certain parts of the world and you’re not wanting to travel for those purposes or if these are changes within your life, but this speaks to why personal finance is more personal than finance. In my opinion the value of a financial plan is not in building it, but in changing it. There are all sorts of variables, few of which you can forecast in advance that dictate changes and the plan just doesn’t often play out in reality the way that you simulate it and project it to be certainly when you’re looking out over decades. And this impacts your investments because the number one factor in how to invest money, which types of strategies you should use isn’t how you feel about money, the risk tolerance questionnaire, how would you feel if your accounts dropped 20% in a month?
For compliance, firms utilize these to have a feel for what your personal appetite for risk is. But most financial studies have shown your answers are much more of a reflection of recency bias than anything that a financial plan or investment allocation should be built upon. Because if I have you sitting in the lobby of our office and I ask you, how do you feel about risk and it’s 2008 and the market’s down the most it’s been since the Great Depression and you just lost your job and all you’re reading about is a complete financial collapse, you’re probably not excited about taking on a lot of risk. In fact, you may claim to be very conservative, but even if your situation were almost exactly the same but it were 2013 and instead of losing your job, you just received a promotion and the stock market was up 30% and everything’s humming along, you just picked up a mortgage at low interest rates and you’re like, man, life is good.
I’m not risk averse. You got a great appetite for risk. So it’s not your risk tolerance and it’s certainly not your age because two 70 year olds could have completely different objectives, even if on paper they look the same. Instead, it’s all about your goals. After all, that’s why you’re investing in the first place. It’s not just to have a bigger number. It’s because you have some stated objective off in the future that you need this money for. What are your time horizons? If this money may be used in 12 months for you to travel to somewhere else or for another priority, then it’d be risky to have that invested in stocks. Three out of every four years, historically, stocks go up, but that gives you a 25% chance of needing to sell those investments at a loss 12 months from now. And sometimes they can be down a lot.
If we go into a bear market, you might be selling at a big discount, so that’s not advised, but if you’re not going to travel and now you don’t need the money for 20 years, then having it not in stocks will most likely reduce your returns because the volatility isn’t impactful. What happens two years from now doesn’t matter because you’re not selling for another 18, you’re just looking for the portfolio to have grown as much as possible two decades from now. So I know it’s nauseating to hear me say it week after week, but I just don’t have enough information about your situation and my suggestion is you find a great CFP, have them build out a plan. If you’re not sure where to look, of course we’ll help here at Creative Planning. So thank you for that question Randy. All right, Britt, let’s go over to Peyton in New York.
Britt: You bet. Peyton from New York said that she heard Peter Mallouk state that the national debt is the biggest threat to the U.S. economy, but that we won’t feel that until there is a crisis. She wants to make sure she’s prepared for this crisis and is wondering if there are things she should be doing now to protect her and her family.
John: Well, Peyton, this is a great question. You are correct. You did hear Creative Planning president Peter Mallouk speaking about this recently.
Peter Mallouk:
My take on most things is, hey, this doesn’t matter as much as you think it does, and this is overblown and don’t get caught up in the media narrative and all of that. The national debt of the United States is the single biggest threat to the United States economy. It’s the single biggest threat to investors. It’s literally the single biggest threat to western civilization ahead of nuclear weapons. That’s how big of a deal the national debt is. I think the reason it doesn’t get any attention is because voters care about what they feel impacts them now. Are my tips going to be taxed? Is my social security going to be taxed? Is my interest rate on my house going to go down? Can I afford a house? We’re thinking about these things where there’s a direct, is my student loan going to be forgiven? Am I going to get a forgivable loan for my business?
All of these things like people get it and how it impacts them. Now, this is like credit card debt, but every single month we add credit card debt. The household adds credit card debt, but there’s no consequence. So of course the next person who gets the credit card for that four years is going to keep spending because someone else is going to deal with the crisis, but there will be a crisis. I would put this in the very, very big deal with bold neon letters category.
John: Well, thank you for that insight, Peter, and I think there’s one overarching theme Peyton, risks are everywhere and cannot be eliminated. In fact, I like the quote that, “Risk is what’s left over after you think you’ve thought of everything else.” So you don’t just throw your hands up in the air or lay down in the fetal position in the corner and suck your thumb, but the answer in my opinion is diversify, diversify, diversify. Don’t have any big bets in any one spot where some unknown event could massively derail your financial plan. It’s the biggest reason to potentially own international investments. U.S. is outperforming, why do I want international? I don’t know, because we’re one country, and by the way, that’s also where you live and where you earn your income. So if something goes wrong in your life in this country, you don’t want it to have an out-sized impact on your investments.
That doesn’t mean you don’t invest in some of the best companies in the world that happen to be here in the United States, but you may not want to go all in on those. Do you want to own some private investments that don’t trade on an exchange potentially? Do you have an adequate emergency fund built up? And this isn’t out of fear, this isn’t a doom and gloomer that the world’s going to end, but it’s having a healthy respect that there are unknown future events, countries and economies rise and fall. You want to make sure that you and your family will be okay. And by the way, in the end, as it’s been the last 14 years, you may diversify out of something that continues to go up and you think to yourself, I would’ve potentially earned a little better returns had I not been quite so diversified.
And that’s why it should be completely customized for you, but you’re trying to minimize risk. And if you’re in one sector, country or asset class or specific type of investment with the most obvious being in one single stock or a handful, you have the proverbial eggs in one basket scenario and that is risky. So I would tell you the best way to reduce risk is properly and broadly diversify. If you’re not sure how to do that, there are many great financial advisors out there who can help you evaluate your diversification. All right, Britt, let’s go to the last question.
Britt: Sure. Our last question is from Daniel in New Orleans. Daniel says that he’s always worried that his personal data is going to be compromised and he is wondering if there are any quick tips he should think about so he can feel comfortable enjoying his wealth.
John: Well, Daniel, you’re right. It’s not just about growing and transferring your wealth, but it’s also about protecting it. And here are some simple steps that you can begin implementing today. Number one, store personal data securely, lock the file cabinets, lock the home screen when you go to lunch, have a clear desk policy. There shouldn’t be loose folders or sticky notes laying around with sensitive information. Have a remote working policy. What are you going to do when you’re working from a coffee shop? Take care when redacting data, this is the classic reply all. Does everyone need to have this information? Use blank template documents and store them separately. If you’re a business owner, watch out for ex-employees. What do they still have access to? Have you changed everything over? And of course, some of the basic things like not using the same password and using dual authentication whenever possible for passwords as an added layer of security.
My special guest today has an incredible story and background. Jesse Reed is a private wealth manager specializing in helping pilots navigate their unique situations related to the aviation industry. Prior to joining Creative Planning, Jesse served as an airline pilot for a major U.S. legacy airline flying internationally for the better part of a decade. Now, I was an airline pilot too, but here’s the fun part of Jesse’s story. Very unique. He was an F/A 18 fighter pilot in the U.S. Navy. He was a graduate and instructor of the prestigious Navy Fighter Weapons School, which is more affectionately known as Top Gun. He then retired from the military as a commander in 2022. Jesse earned a bachelor’s degree from the United States Naval Academy and he is a certified financial planner. Jesse, thank you for joining me on Rethink Your Money.
Jesse: My pleasure. Good to be here again. Good to see you, John.
John: You as well. After having been a pilot, what do you see going on right now with the airline industry?
Jesse: I think a better question to ask is what isn’t going on in the airline industry?
John: Good point.
Jesse: Yeah, I compare it almost to how we talk about, and you do a great job of talking about short-term volatility in the markets. The airlines are almost the same kind of analogy, in the short term nobody knows what’s going to happen. There’s so many variables that affect what happens in the industry, whether it’s at a manufacturer level. I’m sure we all know about some of those stories recently. Sure enough, anybody who’s been in this industry long enough has experienced the highs, the incredible highs and the incredible lows that are potentially here. And I think that’s one of the things that we talk most to our airline clients about here is how to plan for some of this unpredictability.
John: You think about 9-11 or 2008 just to name a couple. And I think your comparison’s a really good one in terms of how the airline industry compares to the stock market because so much of what’s going to happen is based upon unknown future events. So Jesse, why do you think it’s important for airline pilots to have specialized financial planning assistance?
Jesse: That’s a great question. So the first one is already what we talked about, the fickleness of this industry. All you got to do is talk to some folks that are maybe in their sixties, we call them dead-zoners in the airline industry where they had all their eggs in a pension basket, a defined benefit plan. They may have been putting some money aside, maybe not. And now we all know the story close to 2010 timeframe.
John: I flew with plenty of them and they weren’t happy.
Jesse: And it’s legit and it’s tragic. It’s really sad to see these people that over the course of their lives, a captain at a major airline is making half a million a year maybe in today’s dollars. And to have that huge earnings potential and earnings track record throughout all their career and then get later on and have nothing set aside.
John: Well, and maybe a generalist advisor, Jesse to your point, isn’t quite as in tune with the facts of the unpredictability that some of these things aren’t just maybe going to happen like with other clients in various industries that are more stable. If you’re an airline pilot for 35 years this is a real thing that needs to be strategized because it’s, if it’s going to happen, it’s when is it going to happen and how do we plan for some of those disruptions?
Jesse:
Yes. And then there’s the fickleness of what it takes to be an airline pilot and to stay certified. I’m a classic example here. I’m a walking orthopedic nightmare. I’ve written an article about this for my aviation days and I’ve lost my medical a few times for various reasons. I lost it in the Navy a few times while I was flying. I lost it as an airline pilot to orthopedic injuries, to nerve injuries, some things that happen. And if you’re a pilot and you’re listening to this, you know have to have a permission slip to go to work from the government, it’s called your FAA Medical.
John: And that’s unique.
Jesse: It’s very unique and it’s perishable and it’s fragile. And so I’ve lost mine a few times. It’s scary. Lucky for me. I’ve always been in this industry as well post-navy, so I had a backup plan, but there’s a lot of people who don’t.
Going back to COVID is a great example where airlines folded and I remember talking to people that had thousands of hours, had full careers, worked for airlines that folded overnight, no COBRA benefits, no nothing. They just packed up and disappeared and very highly trained people went from flying airplanes to mowing lawns and stuff to make ends meet. And then conversely I’ve run into people that woke up one day and had a strange sensation, weren’t feeling great, go to the doctor and now they have a health condition that is downed them until further notice and that’s when the panic level sets in. One of the things we do just as a standard process for any of our airline clients, and I run into people that they’re working with other advisors and I’m kind of talking to them, they’re feeling us out and I say, well, has your other advisor done a long-term disability analysis for your company benefits?
And they go, what? So that’s standard process for my team here, and we can do that because we’re tied to the contracts, we understand the benefits, we understand what some of these third party benefits that they can opt into, and so we can run those numbers and help them decide, Hey, if you lost your medical tomorrow, you’re going to be okay. Or hey, you might want to have a plan B in case that does happen. So that’s just one of the examples. Another question we get a lot is we get a lot of pilots coming here that now they’ve upgraded to captains. And John, you’ve been in the industry, captain upgrade right now, timeframes will absolutely make you sick to your stomach. It is unreal how quickly someone can show up in an airline in your early to mid-twenties and be a captain and making captain money early on.
John: One of my buddies, Jesse was hired at Horizon in his young twenties, had his whole plan to get over to Alaska within a year or two. That was right before 9-11, 10 years later, he was just upgrading to a captain at Horizon, nowhere near Alaska. And I remember him telling me, this is not what I was expecting, but 9-11 happened, and then just as I started making some progress, 08 happened. Those were two massive events and then they expanded retirement age from 60 to 65 and it was just one thing after another hitting his progress. So that’s pretty remarkable now that you’re telling me how quick it is today.
Jesse: So after COVID, most of the airlines laid off 20% of the workforce or gave them early retirements. I won’t say they laid him off, but gave them early retirements and of course once we figured out, COVID, everyone’s going to be fine for the most part, and we can get back to traveling now that that accordion effect of, oh man, we got to get our schedules back up, but we don’t have the personnel to support it. So here we are now years later, and we have lucky for folks that want to get into aviation. You can be in your mid-twenties and be a captain at a major airline. I don’t know if I’d want that schedule personally, but hey, it’s a young man’s game. Suddenly you’re a captain a year into your first major airline, you’re making 300, 400, $500,000 a year. Holy moly, what do I do with this?
So it’s kind of overwhelming and one of the things we get a lot is people come in and go, oh, how can I save money on taxes? And this is a longer discussion because as you and I both know, there’s only so much you can do in the real time to avoid paying Uncle Sam more than you have to. A lot of what we talk about is how the tax problem from airline pilots is not just short-term, it’s long-term. It’s the rest of your life, because now instead of pensions, you and I both know the airlines throw money at your 401k and it’s all tax deferred money. It’s the form of what’s called non-elective contributions.
Nobody pays tax on that today, but you will pay the bill on that later on in life. And when we do our start meetings here at Creative Planning and we show projections, part of that projection process is here’s your future tax liability for the rest of your life until you hit age 100. And that’s usually a mind-blowing moment for these pilots. They go, wait, what? I’m going to do what at 75? I’m going to have to take out how much. Yeah, yeah. That’s because the blessing of having that big shovel that the airlines give you and throwing money at your 401k, the consequence of that is a pretty sizable tax bill in the future.
John: It feels good to get that reprieve in the moment in that short-term, but now that person has maybe $4 million saved for retirement. They’ve done a great job. You go to do their plan at 65 and you let them know that with 3.96 of their 4 million having never been taxed, we’ve got to strategize that now and that can really surprise people. You did a great job asking the IRS to pay later, but now it’s time to do the hard work and figure out how to minimize taxes over the rest of your life. So obviously if they come sooner to you, that’s better because you can start helping them make proactive moves rather than trying to react. What would you say Jesse, outside of specializing in airline pilots and you being very familiar with the industry inside and out, what else would you say makes us different at Creative Planning that another advisory firm that they work with might not be doing?
Jesse: There are very well-intentioned advisory firms out there that know airline pilots pretty well. They’re philosophically aligned with the things that you and I know, that we feel are proper, whether it’s our outlooks on the markets and how we treat investments. But the thing that really stands out that I’ll tell anybody I talk to is number one, and we say this a lot on the show, we don’t sell you anything. So when we go through the process, there’s not that conflict of interest that’s the elephant in the room of where other financial professionals that are familiar with aviators may be trying to sell you something. Okay, so that’s number one.
And number two, it’s the breadth and the depth of our offering. So a lot of these well-intentioned independent advisors out there, they could probably do some financial planning for you. They can probably help you out with some portfolio management, and that’s kind of where it ends because then anything else that you run into, they go, well, you should go talk to a CPA about this. You should go talk to an estate planning attorney about this. You should probably talk to your insurance person about this. We have the benefit of going, oh yeah, you need some extra disability insurance that’s own occupation for pilot stuff.
We have connections to help you do that right here in house. Let me connect you with one of our insurance people. Oh, you need some estate planning work done, let me connect you to the estate planning attorney on our team. At Creative Planning here we have that comprehensive offering where you do not have to waste your time and go anywhere else and try to talk to other people. I also have the benefit of working in the military. I’ve talked to a lot of ex-military aviators and the joke was, we’re all on the same team, the Air Force, the Navy, the Army, but we don’t always play nice together.
We kind of hold our cards close to our chest. I found that happens a lot in the financial industry too, where you have an estate planner across town, you have a tax planner across town, you’ve got a wealth manager, financial planner, and they’re all on your team. They’re supposed to be working on the same team, but they maybe don’t share information like they should. Here at Creative Planning, we’re all working on the same sheet of music, we’re sitting in the same meetings, we’re all combined in our efforts. That is just such a standout in this industry for this company compared to anywhere else. Obviously that’s not just the aviation team, that’s across the board here at Creative Planning. That’s one of the things that makes us unique.
John: Well, sure, doing it 40 years, 265 CPAs, 50 or 60 attorneys, whatever we’re at now at this point, almost 500 certified financial planners like you and I are, we’d certainly have a lot of experience doing these various services. We didn’t just six months ago say, well, let’s start doing tax returns, and that comprehensiveness hopefully simplifies our clients’ lives, just makes things easier, but then also optimizes outcomes by creating efficiency with these professionals, coordinating and strategizing with one another.
Okay, Jesse, I have one final question for you before we wrap up. As a previous Top Gun aviator, now I’m expecting you’ve seen overconfidence bias play out here and there, just as we see with our money, pilots, we’re notoriously pretty assured of ourselves. I imagine that’s to the extreme after beach volleyball shirtless on the beach at Top Gun, by the way, I have no idea if you actually do that or not. We’re going to pretend that you do and that you’re on your motorcycle cruising around. Take my breath away is just somehow playing out over the ocean air. Do you find that a lot of pilots you work with have a susceptibility to saying, I am really good at this one thing, I am elite, so do I really need help when it comes to my money?
Jesse: Yes, I do see that a lot. I get a lot of folks that, because pilots are highly trained, it took you years to get to that point where you are, takes some intelligence and some IQ to get to that point. But I do run into people that cross their arms and go, well, I could probably do all this stuff myself when I’m first talking to them. And my answer to them is, well, if after you go through our process and you see everything that we do, everything that we identified that we think you need to change, everything that we can implement for you. If you sit there after those meetings with us and you think you can do all that yourself, you should absolutely do it yourself and not pay someone to do it.
John: Yeah, if you want to, right? Yeah, if you want to and you have the time.
Jesse: Now, another analogy I use is my dad taught me how to change the oil when I was 13. That’s how I made money in the sports season when I couldn’t hold a job. So my dad said, go change the oil in the car. He taught me how to do it when I was 13. I can do it to this day, John, the last time I changed the oil in my car was like 20 years ago because-
John: You don’t want to, right?
Jesse: I don’t want to do it. It’s a hassle. I got to lay the newspaper out. I got to take the milk jugs of oil to the recycling. I don’t want to do that. I’d rather go sit at the Goodyear down the street, sip coffee, watch college football on a Saturday morning, and then they rotate my tires and change the wiper fluids.
John: That’s the beauty of our process. Jesse, thank you so much for joining me back on Rethink Your Money and sharing your story and wisdom.
Jesse: It was my pleasure. Thanks for having me on again, John.
John: It’s time for this week’s one simple task where I help you improve your financial situation one tip at a time. Today’s one simple task is to schedule your routine health checkup. What does this have to do with your wealth though? Specifically and directly, medical events are expensive. Long-term care is expensive, unhealthy Americans and just healthcare in general is a massive cost in our society. But those are just pointing out the directly correlated aspects. The indirect ones are far more serious. As I spoke of at the show’s opening, your money is a tool to improve your priorities and you’re unable to do them if you forget to be alive. But let’s suppose you live longer. That may provide an opportunity for more memories with your grandkids, with adult children, with siblings, with your spouse. But let’s look at this from a different angle. What if you being healthy doesn’t lead to you living even one day longer, but each day that you live is to a much higher quality because you feel good.
Physical health is linked also, of course, to emotional and mental health as well. Yes, this is a show about money and it’s about personal finances, but while many seem to care or at least display that they care far more about their bank accounts than their blood pressure, the truth is it isn’t as important. Your health does matter more than your money. And if you don’t believe me, answer this question, would you rather be 18 years old and in great health but broke with your whole life ahead of you? Or would you rather be Warren Buffett? Whose place would you choose? One of the wealthiest people on the planet, but you’re in your nineties with only a few years left, or an eighteen-year-old? Well, exactly. Like unless you are 90 years old listening to me right now, you likely wouldn’t change places with Warren Buffett if someone could wave a magic wand and transport you. That right there is your answer. It shows that health is more important than wealth. To review all of 2024’s one simple tasks, you can visit creativeplanning.com/radio.
Along those lines of health and wealth, a common wisdom that I find totally backward is that you should make money while you’re young and you have energy. Seize the day. No. How about instead of making money, while you have energy, you make memories while you have energy. Think about the arc of American culture and the way we work. That whole idea of rise and grind. You work your tail off, hustle culture and you’re doing this while you are potentially building a family. You have young children that aren’t even in school yet, but that’s when you’re also building your career and then you finally achieve the wealth because you’ve been grinding and your kids are out of the house.
Now you’ve got way more time, far less going on at home and far fewer people depending on you. This is really now when you could kick it into another gear and work longer hours. Now you have the money and you don’t have the energy. And depending upon your health, you may not have a lot of time. I’ve heard people say, well, you can’t have work-life balance, not if you want to be successful, not if you want to get ahead in the work world, work-life balance doesn’t exist. I disagree. Your time and your energy are finite. They’re like an apple pie sitting on your kitchen counter. The bigger one slice is the smaller the other is. Now, does that mean I’m suggesting that you sit around to be present with your spouse and your kids? You don’t really work or you don’t put your heart into your work? At some point when everybody’s gone, I’ll start working hard. Of course not. But also, don’t fool yourself into believing that you’re making money for those whom you love.
Now, let me be clear. Providing for your children is obviously worthwhile and meaningful. I’m a proponent of hard work and having career aspirations. Don’t misunderstand what I’m saying. And that can be very fulfilling using your gifting in an occupation that you love. But there are a lot of people that are already upper middle-class and beyond that are in American homes and mom or dad maybe both aren’t really around. They’re working long hours to get the next promotion and they do it saying, I’m doing this for you. You know what their kids want? Their parents. They don’t need a more expensive wake-board boat. They want their parents engaged and present. And by the way, I’m talking to myself here because there have been periods of my working career where I’ve lost sight of what’s important.
Now here’s the encouragement. There are ways to enjoy life and make money, crush it in your career. They’re not mutually exclusive, but you do have to remember to keep each in mind. And here are my three rules to enjoying your life, being present while you’re building wealth. Number one, know your priorities. What is most important? It answers a lot of questions.
Second, stay out of debt and have an emergency fund. You know why a lot of times we feel like we need to keep working harder? I was guilty of this early on in my career because I had a lifestyle that I needed to keep up with. Live below your means. So don’t overspend and have a cushion. Have a buffer for the unexpected. Don’t be living paycheck to paycheck where if anything goes wrong, which inevitably it will at some point, you may feel out of options relative to your priorities.
And the third and final rule, invest your money wisely and with as simple of strategies available to accomplish your goals. That’s it. Know your priorities and what’s most important. Stay out of debt and have a little cushion and build simple strategies to help accomplish your goals.
Have you ever been intimidated by personal finances, by investing, taxes, estate planning, where you want to do a good job, but you just feel like it’s too complicated? I just don’t know if I can get my arms all the way around this. And on one hand that conventional wisdom is correct. Like you’re right, if you want to understand every single detail of the tax code, which makes the Bible look like a children’s picture book, then yeah, it’s probably going to be too complicated. But like a lot of things in life, if you know the right things, you don’t need to know everything.
I’m just hitting you with bullet points this segment, and I have more for you. I’ve told you, you need to know the right things so you don’t need to know everything. Here are the right things when it comes to personal finances, three rules. Spend less than you make, build an emergency fund and have a financial plan that takes into account your goals, a written plan. Then adjust the plan as needed. That’s it. I’m not exactly sure all the details of personal finances. You don’t need to, don’t overspend. Have a cushion and have a written financial plan that’s specifically tailored to your situation and make sure it’s up-to-date. From an investment standpoint there are three rules, buy stocks, diversify, rebalance. Just repeat that. Stocks have made about 10% a year for the past hundred years on average. Past performance, no guarantee, of course of future results.
Once you’ve done that, diversify. Own big stocks, small stocks, U.S. stocks, international stocks, value, growth, different asset categories, different sectors. Well, I need money sooner. Okay, maybe diversify into more stable investments like bonds. Those will then deviate over time. Some will zig when others will zag. The very nature of true diversification, dissimilar price movement. So you’ll need to rebalance to ensure that that constitution stays consistent with your objectives. That’s it. Three rules on investing, and I have two for taxes and estate planning. These are even easier. For taxes have a forward-looking tax plan. Actually have a plan, don’t just file your taxes, have a plan. And then step two, file your taxes or have a CPA file your taxes each year. That’s all you need to do.
And finally, with estate planning, find a great attorney, chat with them about your desires and your family situation, and then sign the documents that they draft that fit your needs. And there is a second rule with estate planning, which is review and update those as needed. As laws change, as the world changes and as your life changes, ensure that they’re current. So no, personal finance at a core level is actually very simple. Look, everyone wants to believe that money has to be complicated. Or if you can’t figure out all of those complicated things, you won’t have success. You won’t have wealth, you won’t have freedom. Not true. It’s not too complicated. Understand the basic building blocks and delegate what you don’t desire to do on your own.
The co-founder of Twitter and Medium once said, “Timing, perseverance and 10 years of trying will eventually make you look like an overnight success.” So true. Netflix launched a two-part documentary on the life of Steve Martin, then and now. I learned a lot of things about his life that I had no idea. I only knew him as the movie star. He had this stand-up act with an arrow through his head and balloon animals that he was making and card tricks, and he was pulling items out of his fly for part of his bit. Honestly, I didn’t get it. It wasn’t funny to me at all from the documentary. I was like, what the heck, this guy ended up being a famous movie star and really wealthy? How did that happen? And I wasn’t the only one that didn’t get it. Very few people did for around a decade.
And he’s traveling around making no money, getting a few laughs here and there. And then he gained a little steam. He started getting a little traction, and then the creator of Saturday Night Live decided to interview him and he became a star on SNL, which then cross-pollinated with his stand-up tours that began selling out stadiums. Wham, overnight he became a megastar. Of course I’m saying that facetiously. From there, he had the Jerk and Roxanne and Three Amigos and Father of the Bride, and he was huge. One of the most recognizable figures in Hollywood. But just like with Steve Martin, when you read about or see other success, don’t be mistaken. Don’t think that it just happened for them overnight but for you, it’s different. For every lottery winner or viral TikTok star, there are thousands of Steve Martins or to a lesser degree multimillionaires next door.
Most of us go through our own set of predicaments and have to trust that what we’re doing is working towards something and that it matters and it will eventually make a difference. It might eventually pay off. Oh, and ironically, it’s a blessing that it doesn’t happen overnight because when it does, you miss out on the opportunities and the teachings and the lessons that are learned from those memories that have ultimately made you who you are today. So enjoy the process. Compound your wisdom, your experiences, and yes, your money for long-term success and fulfillment. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax or legal 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 the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help request to speak to an advisor by going to creativeplanning.com, Creative Planning Tax and Legal are separate entities that must be engaged independently.
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