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Practical Tips to Reduce Portfolio Taxes

Published on May 20, 2024

John Hagensen
MSFS, CFP®, CFS, CTS, CIS, CES

When it comes to planning for your retirement, you’ve probably devoted ample time to considering your investment strategies. But have you given much thought to your tax strategies? If you haven’t been doing strategic tax planning, your portfolio may not be as tax-efficient as it could be. This week, discover five tips you can implement to help ensure taxes don’t erode your investment returns.

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!

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 future performance of any specific investment or investment strategy, including those discussed on this 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.

John Hagensen:  Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Higginson and ahead on today’s show: Biden’s Tax Proposal, how to think about being fair when it comes to your estate plan, as well as listener questions, including a smorgasbord related to Medicare. If you have questions of your own, email those to radio@creativeplanning.com. Now, join me as I help you rethink your money. Around a year ago we went to purchase a home and this house looked great. Setting was beautiful. Natural light was amazing. The outdoor space was fantastic. I mean, my wife and I were just, “We love it. This place is great.” But then we got the inspection report and it had a multitude of problems. It’s like there’s some plumbing issues. Oh, okay, not ideal, but not too hard to fix. The roofs at end of life, no leaks yet, but that thing needs to be replaced.

I’m like, “Ah, I’m still looking through rose colored glasses. That’s all right. Look at this place. It’s beautiful. Ah, we’ll fix the roof. No big deal.” But then we got to the foundation portion of the inspection report. Yeah, that had issues too. You see, this home was a hundred years old. It had literally single bricks underneath the home supporting certain areas. “Not exactly to code,” I was told. Now my wife Brittany is a phenomenal designer. She can renovate a house that is awful and within a few months it looks like it’s out of a Restoration Hardware catalog. But the kitchen counters and new lighting and wall colors and even her essential oils diffusing really making that house just smell beautiful, pretty unimportant, all of those things, if the foundation is in bad shape. In the same vein, when you look at squeezing out better returns on your investments, that’s great.

It’s not that you shouldn’t look to optimize your performance, but that’s new kitchen appliances. They make a difference. Get those red knobs on the Wolf Range or the Sub-Zero under counter ice maker. Yeah. Come on, those are sweet, but exponentially less important than the structural integrity of the house. This analogy could be expanded to so many areas of your personal finances; aspects of your plan that are important but not foundational to your success, yet often they monopolize disproportionate amounts of our time and our energy. You see, getting your house structurally sound means just a couple of things. Spending less than you make, pretty critical. If you don’t do that, you’re in debt and you have nothing to save, and secondly, it’s foundational that you have a tax plan. Taxes are one of the few areas in finance where risk and return are not correlated.

I want to pause momentarily to differentiate tax planning and tax preparation. Tax planning is strategizing and making proactive moves that will lower either your immediate or future taxes. Tax preparation by contrast is accurately reporting what you already did. This is what most people do. They have their accountant account for what took place in the past. Let’s be really accurate historians when it comes to our taxes, which of course doesn’t reduce your taxes in any way. Minimizing taxes and having a long-term game plan for reducing those taxes are again, they’re foundational to your plan. They’re not the outdoor kitchen, they’re not the porch swing, they’re not the fireplace, they’re structural. I want to ask you a simple question–when is the last time your financial advisor reviewed your tax return? When is the last time that this time of year, May, June, July, unrelated to filing your taxes, reviewed your situation, ran a mock tax return, looked at projections, not just for this year but over the next five or 10 years, and offered strategies proactive to minimize your taxes? Has that ever happened?

When is the last time that your financial advisor and your CPA sat down together assuming that your financial advisor is not also a certified public accountant? If you don’t like the answers to those questions, then do better. You have options because this is structural to your financial success. Get a tax plan for not just this year but for future years and do it right now. At Creative Planning we have over 260 CPAs who work in coordination with our nearly 500 certified financial planners just like myself to provide tax minimization strategies in advance proactively within the context of your goals and your concerns and your broad financial situation. If you’ve never experienced that, we offer a second opinion complimentary and with no obligation to become a client. We have provided this for tens of thousands of families just like you over the last 40 years.

Visit creativeplanning.com/radio now to schedule to meet with a local wealth manager just like myself. Again, that’s creativeplanning.com/radio or you can text the word plan, P-L-A-N, to 1-888-914-PLAN because we believe your money works harder when it works together. And by the way, if you’re wondering, do I really need a plan? Maybe I can sort of figure this out on my own. I want to read to you possibly the greatest letter ever sent to the IRS. It came from Donald Rumsfeld, who to refresh your memory, was an American politician. He was both the youngest and oldest Secretary of Defense because he served under Ford and George W.. He was a four term US congressman from Illinois. He was the Director of the Office of Economic Opportunity, Counselor to the President, US representative to NATO and the White House chief of staff.

Before you think, “Oh, well, man, that guy was a slouch. He didn’t do a whole lot.” Oh, he also graduated from Princeton and served in the Navy, so there you go. We all have something to aspire toward. Donald Rumsfeld wrote on April 15th, 2014 to the IRS and he said, “Dear sir or Madam, I’ve sent in our federal income tax and our gift tax returns for 2013. As in prior years, it’s important for you to know that I have absolutely no idea whether our tax returns or our tax payments are accurate. I say that despite the fact that I am a college graduate and I try hard to make sure that our tax returns are accurate. The tax code is so complex and the forms are so complicated that I know that I cannot have any confidence that I know what is being requested and therefore I cannot and do not know, and I suspect a great many Americans cannot know whether or not their tax returns are accurate.

As in past years, I’ve spent more money than I wanted to spend in hiring an accounting firm to prepare our tax returns and I believe that they are well qualified. This notice to alert you folks that I know that I do not know whether or not my tax returns are accurate, which is sad, commentary on governance in our nation’s capital. If you have questions, let me know and I’ll ask our accountants to be in touch with you to try to provide any additional information you may think you need. I do hope that at some point in my lifetime, and I am now in my eighties, so there are not many years left, the US government will simplify the US tax code so that those citizens who sincerely want to pay what they should are able to do it right and know that they’ve done it right.

I should add that my wife is 59 years, also a college graduate, has signed our joint tax return, but she also knows that she does not have any idea whether or not our tax payments are accurate. Signed. Donald Rumsfeld.” That is classic letter, amazing letter, and unfortunately so true. When looking just at common types of portfolio taxes, you have capital gains, you have dividend tax, you have interest income, tax on investment income, tax on retirement accounts, tax on rebalancing or trading. You have tax on passive income and no wonder if this isn’t what you do for a living, why it’s so incredibly complicated. But let me share with you an example of the impact of good tax planning to quantify the tale of two different tax strategies. I’m going to use hypothetical people named Monica and Chandler. That’s right. For you Friends fans, you know what I’m talking about.

They have a brokerage account, they have an IRA and they have a Roth IRA. They need to take distributions to meet their income needs because they’re in retirement. And the question which is a common one related to withdrawal strategies, which account or accounts should I make the withdrawals from? So if we assume that they have a $500,000 portfolio with 200,000 taxable, 250,000 in their IRA that’s deferred and 50,000 in a Roth account that’s tax-exempt. Conventional wisdom would suggest a traditional withdrawal approach, which means they spend their taxable assets first, then tax deferred savings from that traditional IRA, and then finally tap the Roth account those tax-exempt assets. The estimated taxes with that withdrawal strategy would be just under $70,000. But by contrast, let’s put some strategy around this. Let’s not just pull from non-qualified, then deferred, then Roth. What if Chandler and Monica stopped hanging out with Joey and Ross all the time? And Phoebe and Rachel and took a proportional approach essentially to fill up lower tax brackets with deferred money and then utilize more tax advantage accounts to make up the difference so that they don’t blast into higher tax brackets?

This is a much more tax efficient strategy than burning down one account fully at a time. The estimated taxes in this scenario went from $70,000 to $43,000. We’re looking at a 38% reduction in taxes simply by having a tax strategy around the distributions, by being mindful of the withdrawal. So the question for you is how tax efficient is your current portfolio? Are you locating the right investments in the right types of accounts? Are you harvesting losses and down years and booking those onto your tax return? Are you incorporating tax efficient asset classes, utilizing municipal bonds if you are in the top tax bracket rather than taxable bonds? The taxable equivalent yield is generally going to be better.

If they’re municipal bonds from your home state, they’re also state tax-free. I just mentioned it, do you have an optimized withdrawal strategy? And have you considered Roth IRA conversions while we sit in the lowest tax environment that we’ve seen in decades? You’ve put a lot of time and a lot of effort into working your tail off, saving money, trying to invest it correctly, but how solid is the foundation of your house? How solid is that tax plan? Don’t let high taxes limit your financial success. Contact us today at Creative Planning or you can download our guidebook, The Five Tips to Reduce Portfolio Taxes, at creativeplanning.com/radio.

Well, President Joe Biden floated a bevy of tax increase proposals as part of the President’s 2025 fiscal year budget. That budget comes in at a cool $7.3 trillion and someone has to pay for it. And this reinforces my previous point–taxes are highly unlikely to go down. What are you doing today in light of that? And the president’s not shy about proposing these increases. Much of his focus is on getting higher income taxpayers to pay more, and the one that seems to be capturing the biggest headlines is his planned reboot on capital gains taxes. Robert Wood over at Forbes had a great breakdown of the proposal that I’ll be referencing. Before I add my commentary, let’s set the stage by hearing from Creative Planning president, Peter Mallouk, who discussed taxes in America on his podcast Signal or Noise with chief market strategist Charlie Bilello.

Peter Mallouk: The reality is taxes are higher than people think. I can tell you, as someone that works with an enormous amount of high income people, high net worth people, they pay much more taxes than people think. If you look at where a lot of high net worth people are, for example, New York, California, their overall income tax rate is over 50%. So they go to work and every dollar they make, more than half of it goes to the city they live in, the state they live in and the country they live in more than half of it. And then they take what’s left and they pay property taxes on their house and their cars, and then if they sell something, they pay a capital gains tax and then when they die, they pay an estate tax. So they are definitely paying taxes. There is a mythology that they’re not paying taxes.

They most certainly are. And so I think it makes for divisive politics to say, “Hey, we’re just going to take this group of people. We’re going to tax them another 10%.” You got to remember, they’re paying state taxes, sometimes city taxes, and they are paying other taxes, so you’re really taking them to 60 plus percent, and at some point it becomes a little bit ridiculous. I mean, if somebody is super successful like Taylor Swift, right? Okay, fine, she can pay half her money in taxes, but should she really be paying 75% of what she does? At what point does she go, “You know what? Maybe I just am not going to tour.” Do you know what I mean?

So I think that there comes some point where you will stifle productivity. I don’t know where that point is, but you will reach a point where someone will go, “You know what? I’m not going to put my money at risk to start a business or I’m not going to work those extra five years if instead of giving half to the government, I’m going to give 65% to the government.” There is that tipping point. I’m convinced the government is on a mission to find out what that tipping point is.

John:    Based upon the recent proposal, President Biden seems to be trying pretty hard to find that point, and here’s a breakdown of some of the other key points to the proposal. If your taxable income is 47,000 or less, you currently pay zero tax on long-term capital gains. So those are assets that have appreciated and you’ve held for longer than a year. If your taxable income is from 47,000 to 518, so very broad range, you pay what would be considered the standard long-term capital gains rate of 15%. If your income’s more than $518,900, you pay 20% and there’s another 3.8% for the net investment income tax sometimes called the Obamacare tax. How would this change Under Biden’s budget proposal? It would change a lot. For high-income taxpayers, that long-term capital gains rate would nearly double to 39.6%. For investors who make at least $1 million per year, in fact, it’s possible that it even goes higher all the way up to 44.6.

Now, you might be wondering about state taxes. If you live in one of these 11 states–California, New York, New Jersey, Minnesota, Oregon, Maine, Nebraska, Idaho, Iowa, Kansas, or Georgia–your total combined capital gains rate will be over 50% with California’s nearly at 60%. President Biden is also proposing a tax increase for people making more than $400,000 a year to help finance Medicare, and that increase would hike the Medicare tax rate from 3.8 to 5% on higher income earners. He also wants to do away with 1031 exchanges where you sell one property and identify a like kind, which currently allows you to defer the capital gains taxes as a result of the exchange. He also wants to impose a minimum tax on billionaires, including involving a tax that would be a minimum of 25% for households with a net worth exceeding $100 million.

It’s important that you understand this proposal is just that, a proposal. Don’t run out and start selling assets immediately or exchanging real estate properties because the 1031 exchange is going away. No. This is not as good as done. It’s not even close. In fact, it would shock me if this proposal in its current form or even close to its current form ever sees the light of day. But with $33 trillion of national debt and a widening gap of wealth inequality in our country, this political yo-yo of tax increases will not go away. So make sure the foundation of your financial plan is rock solid. Have confidence in your tax plan and get the advice you need proactively when it comes to minimizing your taxes.

Over the last few decades, women have moved into a position of power when it comes to managing the country’s wealth. Consider the following: Women currently control $14 trillion, which is more than half of the nation’s personal wealth. That amount by the way, is expected to climb to 22 trillion in 10 years. Women influence more than 80% of consumer spending decisions and make 91% of new home purchases. And as caregivers to both children and parents, their spending decisions impact multiple generations. I can attest to this in my own home, certainly a small sample size, but my wife’s making a whole lot more than 80% of the consumer spending decisions in the Higginson home.

Women represent 59% of the workforce as of September 22, giving them more buying power than ever before. What’s interesting though is even with this rise in women’s financial empowerment, women are still at a disadvantage when it comes to long-term financial stability and retirement planning. Here at Creative Planning, we are committed to addressing this need, to speak more on this topic and contextualize it for us. I’m joined by private wealth manager, certified financial planner, Anpu Stephens, who recently wrote an article titled Women’s Retirement Crisis that will be posted to the radio page of our website if you’d like to read the article in its entirety. Anpu, what was your motivation for writing the article?

Anpu Stephens:    The article really spoke to me. There isn’t a lot of literature that’s specific to women’s needs, so I make it a point to write articles that cover women’s unique point of view and women’s psychology.

John:    Why do you think focusing on women is so important?

Anpu:   Women are a very underserved population. I think back to some of the first wealth management clients that I ever worked with, and it was a husband and wife, and I remember the wife saying to me that she chose to work with me because she felt shut out of those conversations and that she felt ignored and invisible. She didn’t feel like she had a good forum to ask questions, big or small, and she couldn’t articulate her fears and get answers to those either. So I think about that conversation and I’ve heard that echoed from countless other women to various degrees, and I thought it was really important to talk about women as a unique demographic.

John:    What makes women unique as a demographic and why should women’s needs not be generalized?

Anpu:   Women are unique because there’s no one-size-fits-all approach to us.

John:    Wait, you’re multidimensional? All right.

Anpu:   So there are women who are married who blend their finances with their spouses or partners. There are women who are married and choose to do their financial planning separately. There are women that are single by choice. There are women that are single as a result of a divorce or because of a loss of a loved one. There are younger women who are in growth mode, some who have young children, some who are not quite there yet, and then there are women that are more tenured and there’s increasingly more women in the workforce and there’s increasingly more executives in the C-suites. There’s no one way to treat women, and I think part of this is planning for their unique needs. The other aspect of it is psychological in that if you look at the research, women tend to be more conservative when it comes to their risk-taking. They tend to be more goals oriented in their planning. That’s very unique to them, and so when we speak with women, I think it’s really important to speak to them in their language, in areas that are meaningful to them.

John:    You hit the nail on the head. Women by all measurements are better investors, partly because they’re more patient and they trade less. It’s great that wealth managers and firms like us here at Creative Planning are really opening the door hopefully to have these quality conversations. I’m speaking with private wealth manager Anpu Stephens. How do you see women being able to protect themselves against some of the risks and pitfalls?

Anpu:   I think it’s really important to put a holistic plan together. It’s important to arm yourself with the right legal structure and risk management strategy. So on the legal side, just making sure that you have appropriate estate planning documents. Have you empowered someone to help make financial decisions? What’s going to happen to you when you’re no longer here? Who do you want to bequeath your assets to? What’s that strategy look like? For women business owners, and Creative Planning works with quite a few, do you have proper liability protection around those interests to protect and safeguard your own personal resources?

And for women that are entering in a marriage, if you’ve accumulated assets prior to that marriage, is considering a prenuptial agreement a sensible possibility for you? So I think of all of those pieces as the foundation to a strong plan. I think of risk management also as an important one. Do you have the right level of life insurance, disability insurance? Do you need long-term care insurance? Do you have the right levels of homeowners or car or umbrella insurance? These are all the pieces that can impact or derail your financial success, so why don’t you try to safeguard things by having the proper pieces in place?

John:    Well, and how about life expectancy?

Anpu:   When we think about women, they tend to live longer than men, therefore have higher healthcare expenses over their lifetimes than men. It’s compounded by the fact that women tend to have lower lifetime earnings than men and lower social security benefits. So putting a plan in place to address those specific aspects is really important. You’re talking about potentially 5 to 20 years where you’re out of the workforce and caring for children when you’re on the younger side and on the older side may be caring for aging parents as well.

John:    How do you think women can be more empowered

Anpu:   Listening to you, John, I mean, is one. Exposing themselves to new ideas through podcasts or radio programs, reading articles and becoming more knowledgeable about the markets and about investing as a whole with that empowerment really helps people make better, more informed decisions. Hiring the right team around them, so finding someone who can be that advocate and accountability partner who you can bounce ideas off of and constantly check in to make sure that your plan is working for you. As we know, life is really dynamic and we want something that can be flexible and factor in these different life circumstances.

John:    Well, all really good tips, Anpu. If this is resonating with you and you’d like to speak with one of our private wealth managers just like Anpu, you can visit the radio page of our website at creativeplanning.com/radio to schedule your free consultation. You can share your concerns, your objectives, and we’ll walk you through building a written documented dynamic financial plan so that you are organized and can have confidence that your ducks are in a row. Well, thank you Anpu for joining me on Rethink Your Money.

Anpu:   Thanks so much, John.

John:    Well, should you treat your children equally when it comes to your estate planning and distributing your assets? Common wisdom would say, “Well, yes, and the most fair way to divvy up assets is to give each child the same amount.” Well, I want to rethink this together in terms of what is fair. After all, what does that word even mean other than when we use it as parents for our kids to say life isn’t fair when they’re complaining that one of their siblings got something that they didn’t? Now I think about my family, seven children ranging from age 22 and 21, our sons that we adopted when they were 11 and 10 from Ethiopia along with five other children spanning from 13 down to two years old. Two of our children are legal adults, but they’re very young adults who are certainly not ready to steward wealth without safeguards, not because they’re not awesome young men.

They are, they’re doing great, but they don’t have enough life experience or financial experience to receive a lump sum should something happen to my wife and I. Additionally, minors can’t inherit wealth and Luna our two-year-old is still 16 years away from even graduating high school. How do my wife Brittany and I create a plan that’s fair for all the kids? Ron Blue has a quote that I love and have shared countless times with clients over the years regarding the estate planning process. He says, “Love your children equally by treating them uniquely.” He’s in his eighties now. He has five adult children and explained that four were doing very well in their careers. Financially they were stable, and then one of his children was a single mom who had gone through a tough divorce.

She needed more help and his wife and him chose to offer some financial support and assistance even though they didn’t true up every dollar with the other four kids because they said, “You don’t need that same level of support. Your circumstances are different from your sisters and we love you all and we love you all the same, but we’re going to treat you uniquely per your circumstances. We’re going to treat each of you in a unique way.”

Let me put a pin in that idea and back up for a moment, and just highlight why is it even worth having a discussion around wealth transfer, estate planning, and how to maintain family harmony even after you are gone? Well, because we are all going to die. I know. Newsflash. I’m not trying to depress you, but we are and we’ll take nothing with us and we’re probably going to die at a time other than when we would like to die, and someone else is going to get our stuff, and we can decide only before we die who gets our stuff after we die. That’s why spending the time to think this through now is important.

What if a year ago your doctor came to you and said, “You have one month to live?” Would you have been spending the next month of your life these last days with lawyers and accountants and your financial planner scrambling to make final plans, or would you be able to enjoy the sweet final moments with your family? I like the approach to wealth transfer where you’re considering the impact on recipients as the highest priority, not on your estate, not on you as the donor, but on your recipients. I suggest you implement a plan now, not that starts once you pass away. That doesn’t mean by the way that you have to start divesting of assets and giving away your money while you’re alive. You may in fact want to do that if you have a surplus, and you find it appropriate to give with a warm hand rather than a cold one. But I think the broad plan itself, however you customize that, is implemented now.

I suggest you involve family input and professional advisors later. I know that sounds counter-intuitive coming from a certified financial planner, doesn’t it? I think a lot of people involve professional advisors now and then at the very end, they involve their family members. Do it the other way around, assuming that you have a good healthy relationship and open communication with those whom you love. And don’t let the tax tail wag the dog. Make stewardship decisions, not simply tax efficient decisions. We have over 50 attorneys here at Creative Planning who work in coordination with your certified financial planner to build a wealth transfer strategy that is unique to you and to your family, and that accounts for not just your valuables but also your values. Remember, always pass wisdom before wealth. If you’d like to review the wealth transfer strategy that you have in place and whether it’s ultimately fair as per your definition, visit creativeplanning.com/radio now to get your questions answered. Why not give your wealth a second look?

Money talks. Have you heard that expression? What do you think it means? Often it’s used in reference to financial power or wealth and its significance on influence and speaks louder than words in certain situations. It implies that money can facilitate action and it can persuade others or provide leverage in various contexts such as business dealings or social interactions, maybe decision-making. By the way, that’s all true. I play a game with our kids most winters and I say, “Hey, you want to jump in that freezing cold water for a dollar?” And my kids look at me like I’m crazy, and they’re like, “Are you nuts? Do you think we’re that desperate, dad?” Especially my thirteen-year-old who’s a typical cool teenager, he goes like, “Yeah, right dad, I’m not doing that.” To which I followed it up with, “How about if I give you $10?” Man, those kids are down to their underwear faster than I can even finish the sentence.

They’re jumping in, they’re cannonballing, they’re swimming back, and they’re popping out with their hand open going, “Show me the money.” Money talks. If you asked me to go sleep outside in a park with no pillow or blankets for a week straight and you’ll give me a hundred dollars, I’m not doing it. If you offer me a million dollars to do it, I’ll be out there curled up in the fetal position in a hoodie with a big old smile on my face because money does talk, but it also talks in different ways. Money decisions speak volumes about priorities and about values. Show me your bank statement and your calendar and I’ll know what you care about, not what you say you care about, but what you actually care about.

Carl Richards wrote in the Times on this topic, he said, “I have a crazy idea that I want to run by you. Imagine that a cultural anthropologist finds one of your credit card statements in a hundred years. What would your spending suggest you value the most? Based on your spending, what assumptions might this person make about how you lived your life?” One of the few things that we can’t fake in life is the way our money talks. If you’re like me, sometimes you don’t like the tone it’s taken because it’s saying, “Hey John, you value material things more than relationships. You value yourself more than others.”

Here’s the silver lining. Here’s the encouragement for you. You do have another option. You can flip the equation. You can put your values first and make spending decisions that better align with your true self. It takes effort, it takes intentionality, but spending doesn’t happen in a vacuum. And with some planning, with some knowledge, with some accountability, you and I both hopefully can end up with statements that better reflect a personal manifesto that we’re proud to call our own. So the next time you hear someone say money talks, let it be a reminder it absolutely does.

Another piece of common wisdom that I’d like to rethink together is this notion that once you buy insurance, you’re all set. Set it and forget it, you’re covered for life. Now I want you to rethink your insurance plan. I meet often with new clients that while reviewing and inputting their current situation, I ask about these various life insurance policies. Why do you have these three policies that you’re paying $900 a month in premiums on? The answer more frequently than not is, “I bought those a long time ago.” Sadly, it’s often, “I had a friend that I went to church with who told me whole life insurance was the holy grail of investing while they made a fat commission explaining to me that this is the most critical piece of a great retirement strategy.”

I got these a decade or two ago when my kids younger. We had a big mortgage, we didn’t have enough college savings for them. We needed my check to support my family.” It’s like some of these people now are 70 years old, they’re in retirement. No one is depending upon their life whatsoever, and they still have these policies that barely grow. They’re older now, so the cost of insurance is through the roof, meaning the internal expenses are extraordinarily high and for what? So that they have the privilege of paying premiums to pass a life insurance benefit on to someone else who has no financial hardship in the event that they in fact pass away? Beyond this, things like homeowners insurance, auto insurance, long-term care insurance have seen massive rate increases. We provide something here at Creative Planning while building out your financial plan and reviewing that plan. Obviously as an ongoing client, that’s called an insurance needs analysis.

Did you know that you can quantify exactly how much insurance is needed to cover a shortfall for your spouse? Like if something were to happen to you yesterday, a certified financial planner can calculate and express to you the exact dollar amount needed to cover that gap, or which in many cases for those financially stable, near retirement, in retirement, we’re able to show that there are no insurance needs required to cover either loss of life or a long-term care event or for whatever else you may need an insurance policy to help cover.

And if you’d like a review of your insurance, do not go back to the person who makes thousands of dollars in commissions to sell insurance. What do you think their analysis is going to produce? Go to a fee-based, credentialed fiduciary who’s not looking to sell you something. Ask them to review your entire situation, including your insurance and make recommendations from a planning standpoint around your coverages. If you are not sure where to turn, we are happy to help here at Creative Planning as we’ve been doing so since 1983. We work with 75,000 families in all 50 states and over 85 countries around the world. Why not give your wealth a second look at creativeplanning.com/radio.

Well, it’s time for this week’s one simple task where I help you improve your financial situation incrementally through 52 easy-to-execute improvements throughout 2024. And if you would like to review previous tips, they are all available and listed at the radio page of our website. Today’s simple task, download our tax guide, The Five Tips to Reduce Portfolio Taxes. It doesn’t get easier than that. I’m not even saying you have to read it. Of course, that’s implied. But the simple task is to go to our website and download the tax guide. My objective for you is that you’re not paying one penny more than legally required to the IRS. Well, it’s time for listener questions. To read those today, one of my producers, Lauren, is here. Hey Lauren, who do we have up first?

Lauren Newman: Hi John. First off, I’ve got a handful of Medicare questions. Every week we get a lot of questions about Medicare and I’ve compiled some of our most frequently asked questions here for you. First, how do I know if I have the right coverage? Next, what constitutes a qualifying event for making changes to my Medicare coverage? Last, what healthcare options do I have if I retire early and I’m not eligible for Medicare yet?

John:    I can broadly help clients with Medicare planning, but when it comes to the details, the types of plans, the companies that offer those, which states they’re available in, the various drug coverages and which include specific drugs and which do not, that is far outside the scope of a generalist financial advisor. And because of that, we have seven people here at Creative Planning on the Medicare team. All they do each day, every day is help clients make sense of this Medicare world. Find someone that all they do is Medicare, which is my answer to the first question: How do you know if you have the right coverage? It sounds a little bit like I’m talking in my book and it’s because to some extent I am. You need to have a professional that understands this stuff inside and out. Now, what constitutes a qualifying event for making changes to medical coverage?

This is a great question because these qualifying events make you eligible for a 60-day special enrollment period even if you’re outside of Medicare’s annual election period. So a qualifying event that is often overlooked is a change of address because sometimes when you relocate to an area where your current coverage isn’t available or with new health plans to consider, you may want to change coverages. It may be moving back to the US after living outside of the country. It might be moving out of an institution like skilled nursing or a long-term care hospital or moving to a new address that’s in your planned service area, but you have plan options now that were not available prior in the new location that are better. You can also qualify for a special enrollment period if you experience a loss of your current coverage, and there are a plethora of other qualifying life events.

Again, this is why you need to speak with someone who does this every day to ensure that you don’t miss an opportunity to improve your plan that you may be eligible for rather than waiting all the way until the annual election period. And the final question surrounding healthcare options, if you retire early and are not yet eligible for Medicare, that’s a very common question. So if you retire before age 65 and you don’t have access to retiree healthcare coverage from your employer, there are four main ways to obtain healthcare coverage to bridge that period between retirement and Medicare. The first is COBRA. So the target here would be former employees. It can be fairly expensive. An easy one is your spouse’s plan. So if you have an eligible spouse or partner who is a covered employee, that’s generally less expensive.

The third option is the public marketplace. Anyone can do this. Depending upon your county and in your state, it can be quite expensive, but a consideration is that qualification for any federal assistance will be based on your income level. And lastly, you can obtain private insurance. Those are really your four primary options. Don’t go about this alone. If you have questions, visit creativeplanning.com/radio, speak with one of our nearly 500 certified financial planners. And in that consultation process say, “I’d like to get help with Medicare,” and we will connect you with our team who, as I mentioned, does this all day every day. All right, Lauren, who’s next?

Lauren: So I’ve got Vince in Madison, Wisconsin here, and he asked, “I’ve been contemplating buying a rental property. With the recent drop in rates, do you think now is the right time? What question should I be asking when it comes to working this into my retirement plan?”

John:    Well, Vince, thanks for the question. Interestingly, the highest mortgage rate the last 50 years was 18.63% in October of 1981. So obviously nowhere near that today. It did finish that decade going into the nineties at around 10%. The 30 year fixed rate is hovering around 7%. As of now the 15 year at 6.4, and we do have a decade of recency bias with rates being down in the threes before they spiked. But if you look at even the last 25 years going into the 2000s, we were at 8%. Then going into 2010s, it was around five. Then as I mentioned, by 2020 we were sub four. So 7% today is just slightly higher than the historical norm. But Vince, it’s important to remember you marry your home price, you date the interest rate. What you pay is what you pay. The rate is temporary.

Now, mortgages offer the advantage of locking in a rate and if they go up, you keep your rate and if they go down, you refinance to a lower rate. I think your broader consideration is what happens to pricing if interest rates fall. But what’s going on with prices? This is really a supply and demand story. Buyers don’t care about interest rates as much as sellers do, and home sellers are either sitting with a low mortgage or no mortgage at all, and it’s tough to give that up. As of today, there are approximately 1.1 million existing homes for sale. Think about that for a moment. Out of 336 million people, we have 158 million Americans employed right now, and there are only slightly more than 1 million existing homes for sale today. If you contrast that with 1999, the inventory was doubled. There were 2.2 million existing home sales and we only had 278 million people in the entire population.

Oh, and side note, this is kind of an ironic stat. There are 1.5 million realtors in America transacting on 1.1 million existing homes for sale. Lastly, I’m not intimately knowledgeable of the real estate market in Madison, Wisconsin and real estate can be very much a regional story. Rapid City, South Dakota real estate looks a lot different than Dallas, Texas. Phoenix looks different than Charlotte and San Diego looks different than Denver. So in summary, for an investment property, I would look at the immediate cashflow opportunity. Can you afford to make the payment? Will it be rented? What’s the condition of the home? As well as what it might look like. If rates go back to maybe 5%, they fall a couple of percent? Will that happen? How much lower will they go? Will you see three or 4% interest rate opportunities down the road? Maybe at some point. I mean no one knows. I surely don’t. But I think you should pencil it out at today’s rates and then look at how those might change if rates fell a little over the next few years. All right, Lauren, last question

Lauren: Last I’ve got Jonathan in New York and he asks, “When it comes to our portfolios, how worried should we be about national and world events affecting them? What can we do to protect our portfolio?”

John:    Yes, you should be worried for those directly involved in these conflicts, maybe for the geopolitical ramifications, for the foreign policy implications. But if you are invested properly and you have a good plan from an investment portfolio or a strategy standpoint, no, you shouldn’t be worried. You have to decouple those two realities. It’s important in my life, it matters, but I’m not going to change my investment strategy as a result. So I say, again, if you are properly invested, you don’t need to worry but that is a big if. Because if you’re not, let’s say you’re under diversified, you have a big bet in one place that happens to be a loser as the result of this conflict, you can get clobbered. You can lose half of your portfolio value before you blink an eye. These types of events can really hurt you, but that’s not unique to if you’re in long bonds when interest rates go up in 2022 or you’re in all large US stocks for a decade to start the two thousands and they go nowhere during the last decade.

Or you’re all in tech in 2001 or 2022, or you are in banks and financials in 2008. And I’m really satisfied with how we help clients navigate these inevitable highs and lows of the economy and more broadly of the world. Build your financial plan with the assumption that all sorts of crazy events are going to occur along the way. Remember, frustration is the gap between expectations and reality. We’re often focused on changing our reality. Well, our expectations are more within our control and actually are easier to adjust. If you walk outside in Bismarck, North Dakota in January and you’re in a tank top, board shorts, and flip-flops, your nose is all white from the sunscreen like you’re about to head out to the beach in Maui and then you complain that you’re cold, that’s a you problem. And I’m not talking to you, Jonathan, I’m sharing this with all of us.

In short, you protect yourself by having a documented plan that accounts for these events. You invest your money tax-efficiently, broadly diversified, and in alignment with your time horizons. Then, and here’s the key, that’s just the first step, you remain disciplined. Zoom out, you’re not a creature of the moment and you keep a long-term focus in the midst of all the uncertainty that will inevitably surround you. There’s a reason the average American has made half of the S&P 500 returns the last 30 years. It’s because we struggle to get out of our own way and out of our own heads when we perceive danger and risk, especially with our life savings and what that money represents from a security standpoint. But as an investor, that’s when you lean in and you’re greedy when others are fearful.

Jonathan, let me share with you the timeline of the MSCI World Index since 1970. So this is an international stock index. We had the Arab oil embargo. Oil prices then quadruple. The S&P drops 43%. BusinessWeek deems the death of equities. Gold hits a record high. Inflation’s at 13.5%. The Dow drops 23% on Black Monday. We had the savings and loan crisis. Iraq invades Kuwait. Income tax rates rise. Asian currency crisis. Russian financial crisis. Y-two case care. Dot com stock crash. 9/11 terrorist attacks. Iraq War begins. Hurricane Katrina and Rita. The subprime mortgage crisis. The S&P drops 46%, the Eurozone debt crisis. US home prices hit a bottom, fiscal cliff worries, Brexit, and then COVID.

A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets. Despite all of that. $10,000 invested in 1970, grew to 1 million over that timeframe. 10 grand to 1 million in the midst of all that dysfunction and chaos. If you have questions just as these email us to radio at creativeplanning.com. But when you lose someone close to you in the midst of your loss and your grief and the pain, one positive is that it reorients what actually matters in life. It has a way of crystallizing what you’ve always known to be true, but so easily lose sight of. You keep a few of their items that are sentimental and literally everything else they owned gets sold or donated. Everything.

Now think about how silly that is when we acknowledge that truth, yet spend considerable time and energy and resources on things that are fleeting and temporal, the sometimes central treasures of our lives that one day are boxed and discarded. So what truly matters? Your relationships; that those who you loved, loved you as well. The memories you shared together and the way you made them feel, that’s where the ripple effect is found for decades after you’re gone.

I was reminded of this during Berkshire’s Annual Conference where the best advice Warren Buffett gave had nothing to do with investing. The most interesting question of the day came from a child and Warren Buffett’s answer eulogized Charlie Munger and shared thoughtful life advice. The boy said, “Hi, my name is Andrew and I’m wondering if you had one more day with Charlie, what would you do with him?” Buffett replied, “Ask yourself who you’d want to spend the last day of your life with and then figure out how you could meet them tomorrow and then meet them as often as you can.” 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 affiliates currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. United Capital Financial Advisors is an affiliate of Creative Planning. John Higginson works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or the station. This commentary is provided for general information purposes only. It should not be construed as investment, tax or legal advice and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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