What decisions can we make today that our future selves will thank us for? This week, John examines this question and discusses what can still be done to get the most out of your 2022 tax filing with Creative Planning Tax Director Candace Varner.
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 John Hagensen and a Head on today’s show. I’ll share what services Americans expect from their financial advisor, versus, what services are actually provided, tax tips for 2023 and whether or not you can rely on social security in the future. Now, join me as I help you rethink your money.
I’d like to start with a great Alan Laken quote that says, “planning is bringing the future into the present so that you can do something about it.” It reminds me of about seven years ago, my wife had a lump in the middle of her back. It was to the side below her shoulder blade, and it wasn’t very noticeable to the naked eye, but it was causing her a lot of pain. It was pinching nerves when she would move her arm, it was very uncomfortable. And so she went to the dermatologist who basically told her that it wasn’t much of an issue and it really didn’t need to be removed unless she wanted to, and she decided to get it removed. Thank goodness she did, because it turned out to be cancerous and they actually had to go back in and make sure that all the cancer was removed, which fortunately it was.
And of course, had she not taken that proactive step, we could have had some serious problems. And so the small initial lesson in this story is that we all need to be responsible for our own health, for the way that we feel. Lean into that if something doesn’t feel right. But the direction I’d like to take this regarding our finances was more from my perspective. While I was sitting at the surgery center in the waiting room surrounded by mostly people in their 60s, 70s, 80s, they all had bandages on their arms. Parts of their noses were cut off, their cheeks were sliced and diced from skin cancer. And I remember looking around and thinking, I might feel younger right now, but so did all of these people at one point in their life, and it probably didn’t seem like that long ago that they were younger lathering up the Hawaiian tropic tanning oil.
You know what I’m talking about? That brown bottle with yellow top smells really good like coconuts, probably chasing around their toddlers, trying to get a nice tan in the backyard, not thinking about the fact that 40 years later they’d have bandages all over their face from skin cancer. And it struck me just how bad we all are at taking into account our future self with our current decisions. But there are moments in life as I had in that waiting room where it hits you like, I’m getting older, my wife’s planning a big milestone birthday party for me, it’s next month. And no, I’m not going to tell you how old I am. I know you’re wondering right now. I’ll tell you this. No one would consider my age young anymore, especially after this upcoming birthday. And I’ve definitely had a few moments recently where as the great Toby Keith describes in his song, “I Ain’t As Good As I Once Was.”
I stayed up late with a buddy recently and I felt like a zombie from The Walking Dead. It took me three days to even feel somewhat normal just because I went to bed a little bit later. Man, remember when you could do that and no big deal? Those days are long gone, but if you don’t consider yourself young anymore either, you’re just chuckling right now saying, John, just join the club. It’s very true. The days are long, but the years are short and aging is inevitable. And so while we know this to be true, it’s worth reminding ourselves that the decisions you make today have a huge impact on your future self. And we know the data tells us this, that the further out that future payoff is or negative consequence, the more difficult it is for us to make decisions in the moment, with that in mind.
Let me share with you three practical aspects related to personal finance where the implications aren’t felt, just as I described, until way in the future. And because of that, it can be challenging in the moment to think of our future self. The first is compound interest, and anytime we talk about exponential growth, we need to understand that our brains think linear, exponential growth is hard to get our heads around. If I were to ask you to add three plus three plus three plus three, 20 times, you can answer that, it’s easy. But if I asked you to multiply three times three times three times three, 20 times, that’s more challenging, a lot more challenging. Thought of another way, if I told you that a pond had no algae and 30 days from now the entire pond would be covered in algae with the algae doubling every single day, how much of the pond is covered in algae on day 29?
Well, at first thought you’d say, well, probably almost all of it. Nope, that’s wrong. Half is covered the second to last day. You see that final day, the remaining half of the entire pond fills up with algae. That’s how significant the backend of compound interest is. Let’s put some numbers around the impact of compound interest. Let’s suppose at 30 years old, and by the way I’m giving this person all the way through their 20s for late night Taco Bell runs and spur of the moment trips to Cabo and saving for a home. Let’s also make this person responsible. They save up for a home but can’t save for retirement. Finally, at age 30, time to save for retirement. Hey John, I’m not rolling. I can’t max out my 401k, but maybe I can throw a 500 bucks a month into an IRA or a ROTH. So that’s this person’s scenario, 500 a month starting at age 30, and they save until age 65 at retirement at an 8% assumed rate of return.
They have just under $1.15 million saved for retirement, which is 500 a month for 35 years. But here’s what’s crazy. If instead of age 30, they decided to start saving at 25, so five years earlier, but all the other numbers are the same, 500 a month, 8% average rate of return, that person at age 65 doesn’t have 1.15 million. They have just under $1.75 million. So they saved 30 grand more because 6,000 a year, five years earlier, there’s the timetables, the ones that we can figure out quickly in our head, that extra 30 grand produced an additional $600,000 at retirement. This is the power of compound interest. This is why keeping in mind our future self with our present decisions can make such a significant impact on our long-term results. Second factor that must be considered by our current selves for our future benefit is inflation.
$1 in 1920 is worth $14 and 84 cents today, dollar average 2.65% inflation over the last 100 years. Of course, after hovering at 40 year highs, people are actually pretty happy about 6.5% here in 2023. But still, as you can see from a historical perspective, very high. Look at the cost difference of some of these common items over the last 100 years. Average house a 100 years ago costs $6,000. Today, 350,000. Eggs 47 cents today $4 and 25 cents. Steak was 40 cents a pound, now $13 and 69 cents per pound. A haircut costs $5, now it costs $65. You want to go to the movie theater that used to cost you 15 cents, now it’s $10. Oh, and how about a new car used to cost on average $525, now the average new car in America, $67,000. And of course the list goes on and on, but inflation is one of those aspects of our lives that’s difficult to factor in over the long haul because its impact is slow and subtle.
And the third and final element that your current self needs to factor in for your future benefit is taxes. During World War II, the top tax rate was 94%. Think about that for a moment. In 1978, the maximum capital gains tax rate was almost 40%. Currently, the highest income bracket as we sit today is at 37%, highest long-term capital gains rate 20%. If you want to add on the net investment income tax passed through Obamacare, that 3.8, you’re at 23.8%. It is not what you make that matters, but rather what you keep, taxes must be factored into a comprehensive financial plan because they have a significant impact on your future self. And in addition to compound interest and inflation and taxes, there are numerous other examples that we could go into, but I’m going to end with what is undoubtedly the most important factor for your future self, and that is your ability to not make irrational, emotional decisions.
A recent study showed that if all you did was invest in the S and P 500 and shred your statement for the last 30 years, you would’ve earned nearly 10% per year. But the average American unfortunately has earned less than half of that. Put another way in general, if we can just get out of our own way and not react emotionally as the markets go up and down, we would be removing the greatest risk to our future success. And here’s why this matters. Let’s go back to the 30-year-old who started saving $500 a month, but through good tax planning and estate planning, strategic rebalancing, and not making emotional decisions, let’s say that person instead of making 8%, was able to increase the efficiency and made an extra 2% a year. Well, instead of 1.15 million, they end up at 65 with 1.9 million. There’s a $760,000 difference, and it didn’t require them to save any more money.
It didn’t require that person to save for a longer period of time, but rather making great decisions within the context of their plan to just nudge up their returns by a couple percent per year. And I bring that up because I think so often we mistakenly think to ourselves, is there a whole lot that having a little bit better plan is really going to do for me? Does it really move the needle? I think my current investment strategy or tax strategy or estate planning, I think it’s okay. I think it’s decent. It’s not good enough not with your life savings because moves in the present toward efficiency can have significant benefits for your future self. And so I think it’s fair to assume we all want to make good decisions. We all want to have good behavior as it relates to our finances.
Let me share with you a couple practical tips for how I think you can give yourself the highest probability for making good decisions. Number one, have a financial plan, not an investment plan, not I did my estate planning six years ago, but it was in a different state. Not I file my taxes in the spring, but I don’t talk to my CPA or have any coordination the rest of the year. Oh, and my advisor never reviews my tax return. I’m talking about a written, documented, measurable financial plan. If you hear nothing else that I ever say for the next however many years I’m on the air, please get a financial plan that is the foundation for it all. If you have an advisor and you’re thinking to yourself, I don’t have a financial plan, that’s a problem. You need one because everything builds off of that plan.
And once you have that plan, number two, automate that plan. Remove as much friction as absolutely possible for you to execute on the plan that is in place. Number three, like a lot of things in life have good accountability. The Apostle Paul said it best when he said, I do what I don’t want to do and I don’t do what I want to do. And by the way, yes, that’s like the John Hagensen translation, but you get the point. It is only with great accountability that we are able to execute what we truly in our hearts desire to accomplish. And then lastly, be very responsible for what you are consuming. It’s easier than ever before to gain information yet harder than ever before to find truth. What you read, what you watch, what you listen to impacts the way you think. So again, the sacrifices today for the benefit of your future self, have a comprehensive financial plan.
Get that done, automate that plan, have accountability to that plan, and then be very conscientious of the information you are allowing into your mind and into your heart. If you have questions and aren’t sure where to turn, maybe you want that financial plan, maybe you just want a second opinion on the one you have. We’ve been helping families just like you since 1983 here at Creative Planning, managing, or advising on 225 billion for clients in all 50 states and 75 countries around the world. Why not give your wealth a second look by going to creativeplanning.com/radio to speak with a local fiduciary advisor who’s not looking to sell you something, but rather give you clarity on your current situation. That’s creative planning.com/radio. Up next on the show, my conversation with Creative Planning Director of Tax Services, Candace Varner, that and more ahead on the show.
Announcer: Have you been rattled by the markets this year? Maybe you lost sleep, obsessively checked your balances, or even pulled out of investing altogether. If this sounds familiar, you either don’t have a financial plan or you’re not confident in the one you do have, and it’s time to change that. At Creative Planning, our Wealth Managers, CPAs, and Attorneys work together to create plans and portfolios that balance your long-term growth needs with short-term stability so that you can prosper in any market condition. To get started on a plan or to get a second opinion on one you already have, go to creativeplanning.com/radio to schedule a meeting. This one small step could change your entire perspective on your financial future. Why not give your wealth a second look? With our team’s expertise across investing, taxes and estate planning, you can be confident every element of your plan is working harder together, no matter what the market is doing. Just go to creativeplanning.com/radio today to request your free meeting. That’s creativeplanning.com/radio. Now back to Rethink Your Money presented by Creative Planning, with your host, John Hagensen.
John: I’m joined today by Creative Planning Director of Tax Services, Candace Varner. She is a frequent guest here on the show, is a Certified Public Accountant, and she heads up a giant tax team here at Creative Planning, coming into a busy season, as you might imagine. So thank you, Candace, for carving out a little time for us here on Rethink Your Money.
Candace Varner: Thanks for having me back.
John: Well, 2022 has come and gone. So now we have almost an entire year to start planning for 2023 taxes. Is there anything we can do here in the first quarter of 2023 to still save on 2022 taxes?
Candace: So there’s a little bit we can still do, not as much as we could have done last month, but what the big thing we can still do is pay ourselves. So the things you can do after a year end, the biggest ones are going to be contributing to your IRA or an HSA fund, both of which can be done through the tax filing deadline, which this year is on April 18th. Now if you extend your return, you don’t get extra time for those two things. So it is April 15th no matter what, but if you start doing your tax return and you have not made contributions to either one or both and you are eligible, that’s the number one thing I would recommend that you still have control over. The other one would be if you are self-employed, you can still create and contribute to a SEP IRA, and that one actually can be done through the extended deadline. So you have until October 15th if it’s your personal return, September 15th if you’re doing it through an entity. And those can drastically reduce your taxable income as well.
And then the last one that I want to point out, which is a little bit different this year, although estimated payments aren’t a new thing, it’s becoming a bigger issue because the IRS interest rates are so much higher. So in past years, if you didn’t make estimates during the year, but you needed to get to the end of the year and maybe you owe 50 bucks an interest, no big deal. Well, the interest rates, the IRS charges on underpayment are now 7%.
John: Wow.
Candace: So if you owe an estimate and you aren’t going to pay it until April, you don’t have to pay it till April, but they’ll charge you interest if you were supposed to pay it during the year. So I have a lot of clients who used to just not care and they’d rather keep their money, which I totally understand, but it comes out to a much larger dollar amount. So if you are looking at 2022 and you might owe an estimate for a fourth quarter, which is January 15th deadline, I do recommend paying that and not waiting this year.
John: I’ve had many clients in the past that just assume they’d outperform the 2% or so interest rate and just keep it invested. Now as you mentioned, that’s important to note that at 7% a lot bigger hurdle for people to try to overcome if they’re subjected to that interest.
Candace: Yeah, it is.
John: Candace, walk us through the SEP IRA that confuses people sometimes. How much can they contribute to that? I know it’s a big one in some cases. What are some of the rules around that?
Candace: So the SEP IRA is going to be, you have to have self-employed income, and the easiest definition of that is going to be income that is subject to self-employment taxes. So nothing on a W2, no investment income, anything like that. We’re thinking we have our own business, usually a Partnership Income or Schedule C Income, I’m consulting, that kind of thing. Then I can take my net self-employed earnings and I can contribute 20% of that to a SEP IRA. Now this one, the maximum I think this year is 62,000. I could be off a $1,000 for inflation, but the regular traditional IRA is a like $6,500 $7,000, something like that. The SEP IRA, you can contribute 20% of your income and the cap is much higher. So if you are self-employed, it can be a much bigger deduction. Now you have to part ways with that cash and put it into an account that you can’t access, but if you are in the highest bracket, it can be a substantial tax savings.
John: Well, and a couple things that I’ve seen that should be considered, ideally you plan for it. Because you have to have the money to fund the account for the contribution as you mentioned, plus you’re still going to owe some tax. So I’ve had some people say, well, I’d love to fund it, but I don’t have enough to fund it and pay the taxes. So planning ahead, like most of these things, is really important when it comes to that for sure. Also, you have some considerations with employees.
Candace: Absolutely.
John: So I’ve seen SEP also be really helpful for those who either have no employees or very few employees to really be able to maximize the impact for them personally. That’s great advice. But we’re coming into your favorite time of the year where you get about two hours of sleep every night for a couple of months, but for us on our end of things, how can we prepare for the tax filing season?
Candace: Well, first I’d like to correct you. I get plenty of sleep. I just do nothing other than work and sleep, but if I don’t sleep, the taxes aren’t done well. My biggest recommendation for going into tax season is to get over you thinking that you don’t need to do it and procrastinate and get organized on the front end. You’ll feel better the entire time. Your mail is going to start being bombarded with tax forms mid to late January and early February. But even before that, you can start gathering the stuff that doesn’t come on a tax form. So all of your charitable deductions, your medical expenses, if you made contributions to 529 plans, if you bought or sold a home, you’re going to want those closing statements. Especially if you’re self-employed or have rental businesses gathering that income and expenses is all on you. They’re not going to send you a 1099 for the income.
They’re not going to send you a W2. So it’s all on you to gather that information. And those things are the ones that usually hold clients up the most is the stuff that they’re responsible for coming up with. So if you don’t know what you need and you’re working with an accountant, just ask them, say, send me a list of everything you’re going to need. Think of what you sent in last year. The estimated tax payments is another one. Look through the payments you’ve made to the IRS and to States during the year, and that’s a good time to double-check if you think you’re on track, it turns out didn’t make some of those. That might be a good time to look at making the fourth quarter estimate that we were talking about. And then I would say gather your mail for a couple months and put it all into a pile that says anything tax related.
And then ideally you’d prepare your tax return as soon as possible. But I would recommend waiting to file, it unless you’re getting a substantial refund and you really want to get it in there quickly. I totally understand that. If you have substantial investments and you get a 1099 consolidated, there’s a really high likelihood they’re going to issue a corrected version a few weeks down the road. I would rather just wait for that than have to deal with it then and see if it was major or minor. Do I need to amend? Go through all of that so I would say prepare everything and then just wait to file it until then. And if turns out that you owe money, you can wait to file and pay till April 18th. So you don’t have to do anything with that early, even though you’re prepared, but then you have that extra time to mentally prepare for it and gather the cash.
John: Well, there’s certainly no reason to pay it even a day early from a financial perspective, right?
Candace: But so much of what we do is more psychological than financial.
John: Well, no question about that. But as we redirect our attention ahead now to 2023, what, Candace, can we be doing this year or maybe more specifically, what do people tend to wait too long, in your opinion, into the year that you’d prefer to see them planning for earlier? Let’s get out in front of this for 2023.
Candace: Really anything that we’re talking about that applies to 2022, you can start. Look, it’s better to do it prospectively. So like you said, planning cash flow for a SEP IRA. If you’re going to make an IRA contribution for 2022, you can do one for 2023 right now and get it invested earlier. So all these same things will apply. The bigger one I would say is if you are someone who has withholding, so if all of your income comes on a W2 or most of it, this is the best time to check your withholding. Because if we wait until August, September and it turns out they aren’t withholding enough, you don’t have very many pay periods after that to adjust your withholding and it’ll be really uneven throughout the year. So especially when you’re finishing your tax return for one year, that is the perfect time to look ahead at the next year and say, what can I do better or differently?
The withholding is like we were just talking about, very psychological. It’s very different if they withhold it versus you writing a check. So we want to check that upfront. And then the other thing would be, is if you think your income is going to be substantially higher or lower in the next year, starting to think ahead of what we can do with that. Especially in the year that you’re going to retire or maybe you have some large capital gains in one year and you don’t expect them the next year. So if you have low income, especially when you retire, we’re going to start looking at ROTH conversions and does that make sense? If you have an unexpectedly high income year, maybe that’s the year you want bunch some donations into it, that kind of thing. So I really like to show everyone the 2022 actual and then what do we think 2023 is going to look like and seeing them side by side and whether one is higher or lower really helps put into perspective what are some things to prioritize this year.
John: Well, Candace, great tax tips. As always, I appreciate your time today and all that you and the entire tax team here at Creative Planning do for our clients. Thank you so much for joining me here again on Rethink Your Money.
Candace: Thanks for having me.
John: That was Candace Varner, Creative Planning Director of Tax Services, and if you desire a more proactive tax planning approach throughout the year, we have all the expertise, all the advice you need all in-house. Visit us at creativeplanning.com/radio to speak with a local advisor. Why not give your wealth a second look? I want to transition to a survey that recently came out where 2000 Americans were asked what they want and expect from their financial advisor. The survey included a 1,000 affluent families defined by those between $500,000 or $3 million, with the other half having assets below $500,000. For the affluent group, the number one priority was tax advice. For the overall list, which included the affluent group as well as those under 500,000, here were the top seven: number one on the list was financial planning. Number two, wealth transfer advice. Number three, investment management. Number four, trust services.
Number five, estate planning advice. Number six, tax planning advice, and number seven, non-liquid asset management. Now, as a reformed broker turned fiduciary, what I found to be interesting is that while financial planning is the number one service expected, it’s only being received by 70% of those respondents. So 30% of people that have a financial advisor are not getting true financial planning. Sadly, that’s the second to smallest gap of all seven. Wealth transfer advice, number two, only 24% of those surveyed are receiving wealth transfer advice. The smallest gap, which is not a surprise to me, is number three, investment management. Where that’s being received 88% of the time. Trust services, number four, only 10% of those surveyed are receiving trust services. Estate planning advice, only 22%. Tax planning advice, only 25%. And non-liquid asset management only 5% of those surveyed are receiving this. By the way, we execute financial planning, wealth transfer advice, investment management, trust services, estate planning, tax planning advice and non-liquid asset management on behalf of our clients.
We do all of those things, but I don’t bring that up to say, well, then clearly you should absolutely 100% be working with Creative Planning, but are you like those surveyed? Maybe you’re getting a little financial planning and investment management, but none of those other seven top priorities for investors. If that’s the case, you likely don’t have a complete wealth plan. You may have a solid one, you might have a good one, your investments might be okay, but it’s incomplete. There’s a reason Barons has called us a family office for all here at Creative planning, 85 CPAs, 50 attorneys, 300 plus certified financial planners, all working together on your behalf. To learn more about how some of these services that we offer may be of value to you and your family, visit us now at createaplanning.com/radio to speak with a local financial advisor. When we come back, I’ll answer the question, is it taboo to talk about money with your friends and family? That and more ahead on the show.
Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs as our team is structured to cover all areas of your financial life. Why not give your wealth a second look? Visit creativeplanning.com. Now back to Rethink Your Money, presented by Creative Planning with your host, John Hagensen.
John: With the NFL playoffs here, I’ve been thinking a lot about how much strategy for football has changed over the years. Seven of the eight remaining head coaches are offensive coaches because rules have changed to benefit the offense. You can’t hit the quarterback high, personal foul. You can’t hit the quarterback low. You can’t take out wide receivers over the middle of the field. And so because of that, it informs the way you have to build your team. The days of paying a middle linebacker like Mike Singletary to be the anchor of the defense, or even Ray Lewis, top dollar is crazy. It just doesn’t work anymore. You have to pay edge rushers, you have to pay corner backs because it’s a passing league. Offenses are more spread out, they’re more dynamic, they’re faster. And this isn’t unique to football.
Remember in the NBA when the best teams always had the most dominant big man, Hakeem, The Dream. You had Tim Duncan and the Admiral David Robinson, Shaq, you go back further, Kareem, Moses Malone, Bill Russell Wilt. Now back to the basket centers are liabilities. Teams in many cases can’t even play them down the stretch of a playoff game because the game’s all about spreading the floor with a bunch of three point shooters. And so if general managers were to build an NFL franchise or an NBA team using the same strategies and the same methodologies that were used to construct a team a couple of decades ago, they’d be bad. Their teams wouldn’t win. And because fans are all irrational, fan is short for fanatic, every fan would be wanting the coach and general manager fired. They don’t know what they’re doing. Well, the same is true with our money. I see often prospective clients come in with plans that have clearly been built using antiquated strategies.
The plans suboptimal, but it’s easy to get comfortable with familiar. And that’s why each and every week I’ll break down common wisdom or a hot take from the financial headlines and we’ll decide together if we should rethink it or reaffirm it because times change. And it’s important for all of us that we are reevaluating, that we’re adapting our current course of action to ensure that we’re providing ourselves with the best opportunity to achieve our goals. And by the way, virtually every one of these topics that I use each week come directly from real world client and perspective client situations. Let’s start with common wisdom number one, it’s taboo or maybe even inappropriate to talk about money. Now, my second grader, she might reaffirm this because Zaya came and asked me the other day, dad, how much money do you have? And I said, well, what do you mean Zaya, like in my wallet?
No, how much money do you have in the bank total? How much money do mom and you have? And of course I said, well, you don’t need to worry about that Zaya, we’re going to be able to take care of you. We have enough. No dad, I know we have enough. I want to know how much we have. Is it like one million? To which I deflected and explained to her that I don’t like to keep a lot of money in the bank because it doesn’t earn high enough rates of return and inflation’s high and her eyes glossed over and she went back to her iPad. But all joking aside, this is a serious discussion that we need to have here at America because according to Walden University Graduate Audra Sherwood’s research titled Differences in Financial Literacy Across Generations. She outlines that four in seven Americans are financially illiterate in report being unable to manage their finances.
53% of adults say thinking about their financial situations makes them anxious. And 44% say discussing their finances is stressful. That tells me that half of you listening feels some stress and anxiety around your money. And this cycle of financial illiteracy and negative emotions that many feel tied to their money, it’ll just continue unless we learn to break this cycle. And so then the question becomes how do we have these open conversations about money so that we can learn and grow and build healthy relationships, certainly with our children? If you’re a grandparent, with your grandchildren, even with your spouse, oftentimes the only thing that our children are taught in school is they play that ridiculous stock market game. I hate this thing. I can’t stand it. They teach kids to speculate by picking a handful of high flying individual stocks, track them daily for a month, which by the way is a ridiculously short time horizon when you’re talking about stocks.
Of course, they’re incredibly under diversified by only buying a few stocks, they’re chasing the winners, and then in the end, they declare the winner, the best investor, i.e, the best gambler in the class. It teaches them nothing except if anything bad habits. Instead, here are some practical tips that I propose you use when discussing money with your children and your grandchildren. Teach them the power of compound interest. Why giving then saving, then spending is the correct order with handling their resources. Be generous first, save next, then spend. When they’re old enough, maybe a bit older than my second grader in this conversation, help them set up an account that can be properly invested. Teach them that those investments are going to go up and down in value, but that over long periods of time, they’ll grow exponentially that they don’t need to look at those accounts on a daily basis.
In fact, they shouldn’t be. If they want to maintain good behavior. How about this one? Help them understand that every $1 spent at age 20 costs them the potential for $40 in retirement. Every $1 isn’t costing them one, it’s costing them $40 for their future self. Teach them that debt is dangerous and outside of a mortgage is something to be avoided. So tell them to cut up those pre-approved credit cards when they arrive first semester at college. If they’re like me, they’ll already be dealing with the freshman 15. Plenty of things they need to navigate. They don’t need a pile of 24% interest credit card debt to worry about on top of that. So when we look at the idea that it’s taboo to talk about money, the verdict is rethink. Our next piece of common wisdom that will rethink or reaffirm is that C Share mutual funds are less expensive than A Share mutual funds if you’re moving money around often.
Now, this statement is like saying a rowboat is better than an inner tube for a voyage to Hawaii. It is, probably a better solution, less likely to be eaten by sharks or die in a storm. But neither’s all that safe, both are suboptimal, and even in the rowboat, you’re almost certainly dead. So let’s just start by unpacking the differences between C Share and A Share mutual funds. And an A Share mutual fund is a loaded fund where the brokers selling it makes a commission upfront, generally around five or 6%, and it tiers down depending on the size of the investment. By contrast, a C Share mutual fund will have no more than a 1% cost for the commission when you purchase the fund. But then the ongoing fees are usually upwards of 2%. So in theory, the A Share Mutual fund makes more sense if you’re going to remain in that fund for a long period of time because you’re able to average out that really sizable upfront commission and then pay lower fees ongoing in over 10, 15 years of holding that investment.
The total cost is lower than paying 2% per year in a C Share mutual fund. Whereby contrast, if you want ongoing flexibility and you don’t want to pay five or 6% commissions every time you’re making a change, well then it might make sense to pay more ongoing for that flexibility. But here’s the most amazing and encouraging part of this discussion. Thankfully, you don’t have to only pick between A and C share mutual funds. In fact, I would contend that you should buy a Low-Cost Index Fund or an ETF, where there is no commission, where the ongoing fees are generally less than a quarter of a percent. And just take the prospectus of your A and C share mutual funds and just burn them. You need to get a fire started, it’s cold, we’re in the winter, there’s your use for those. I want you to never, ever, for the rest of your life, pay a commission to a broker, not an A Share Mutual fund, not a C Share mutual fund.
So I will reaffirm that C Share mutual funds are less expensive than A Share mutual funds if you’re moving money often. But a C share mutual fund is absolutely terrible in 2023, you should utilize neither of these types of mutual funds. Go to a fiduciary who could help you find a much more cost effective vehicle. If you look at your investment statements and you see an A or a C or even a B, not going to get into B shares right now, next to the name of your mutual funds, please come talk to us. Go to creativeplanning.com/radio, get a second opinion from a credentialed fiduciary who’s not a broker, who’s not looking to sell you something, and we will break down exactly what your costs are to ensure that you are not overpaying, using outdated strategies sold by brokers on behalf of their broker dealers. Again, that’s creativeplanning.com/radio to speak with a local advisor who can break down all of your costs and fees.
Our next piece of common wisdom, easy come, easy go. Let me explain. If you are on a first date with someone who’s been married five times before, I know, it’d be weird, right? But I don’t know these dating apps out there. I’m sure you can find somebody and you order your cocktails and before your apps even come, they bring out that table bread. And by the way, I have to sidebar here. My kryptonite is table bread. My wife and I were on our anniversary dinner recently. They came back to the table like, hey, are you guys doing good? And as my wife began to answer and say, yeah, we’re doing really well. I cut her off. I’m like, can we get more bread? I had already gone through the entire basket. They had that lavash flat bread, they had that warm sourdough bread, they had the sesame seed bread, the crispy one that nobody likes. But I still like it because I love table bread. You give me bread maybe with some olive oil and vinegar, maybe it’s just with some herb butter, I’m in.
And the bad thing is this is January and I’m trying to go low carb for the first month and get in better shape. That table bread, I can tell you is not helping. All right, now let’s go back to you on the date with the person that’s been married five times. But this person says, I love you. You’re the most incredible person I’ve ever met. We should get married. Well, first off, just run for the hills. The person in my example is crazy, but it would make sense knowing their history, wouldn’t it? Like oh, I get it. This is why this person’s been married five times and then isn’t happy and find somebody else. Easy come, easy go. The exact same thing is true when it comes to investing. Risk and return are different sides of the same coin. When you can watch a stock like Peloton go to $151 a share, you shouldn’t be surprised when it drops to 11 when the Carvana founder becomes the richest person in the state of Arizona, seemingly overnight. It shouldn’t be all that surprising when it drops 98%.
How about Shopify? All of these companies that made people so much money, you can’t have it both ways. If the market decline of 2022 taught us anything, it’s that what goes up also may come down. And when it goes up rapidly, it may come down just as rapidly. Some of the most hyped investments of the past two years did just that. Look at Crypto, look at NFTs. In fact, why don’t I just share with you the 10 biggest stock market losers of 2022. You’ll recognize all the names. Apple was down $846 billion of market cap, a 27% drop. Amazon down 49%. Microsoft down 29%, Tesla down 65%. Meta Facebook down 64%. Nvidia down 50%, PayPal down 62%. Netflix down 51%, Disney down 44%, and Salesforce down 48%.
Those have also been some of the best performing stocks pre-2022. So don’t be surprised when the person who fell in love with you before the main course arrived dumps you just as fast. And if you have any questions about what I’ve been discussing, by the way, don’t ask me for any dating advice. I’m definitely not qualified for that. But table bread, yes, and anything else related to your investments, your taxes, your estate planning. Why not give your wealth a second look by contacting us now at creativeplanning.com/radio. That’s creativeplanning.com/radio. We are here to help as we have been helping families since 1983. After the break, is social security going away or is it something you can count on for your retirement plan? That and more up next.
Announcer: Are you only thinking about your taxes around April 15th? If so, you might be leaving a lot of your hard-earned money on the table. From tax loss harvesting to making tax mark charitable contributions, there are many ways to save on taxes and boost your wealth. At Creative Planning, our wealth managers work with in-house CPAs and Attorneys to proactively look for tax efficiencies in every element of your financial plan, helping ensure your money is working as hard as it can for you day in and day out to see where you could be saving more on taxes, go to creativeplanning.com/radio to set up a visit with one of our wealth managers. We’ll review your plan and identify opportunities to save you a bundle on taxes. If you’ve never had a financial advisor review your tax return, now is the time to go to creativeplanning.com/radio to set up a free introductory visit. Find out now what you could be doing to minimize your tax burden and maximize your wealth because it’s what you keep that matters. That’s creativeplanning.com/radio. Now back to Rethink Your Money, presented by Creative Planning with your host, John Hagensen.
John: It’s time for listener questions and my answers. Remember, you can email your questions to [email protected]
Our first question comes from Jonathan in Tampa, Florida, who asks, with the stock market volatility, would I be better off buying more bonds? Well, Jonathan, this is a great question. It’s one that we hear often, but I’m going to parse my answer into two separate ideas. The first is that this is an unanswerable question because I don’t know your time horizons. I don’t know your goals because the fit and the application will dictate whether it actually does its job. It reminds me of the most horrifying experience I’ve had as a parent. It still gives me goosebumps to even think about this. And please don’t call CPS on me. I learned my lesson. This was not smart, but I was floating with Jude, our now kindergartner when he was about nine months old in our pool and he had a life jacket on.
So I was holding him and he was in his life jacket, and I had other kids hanging on me and I’m chucking the other kids, and I’m going back to Jude, and he was always right next to me. Well, one of our older kids wanted me to throw them up in the air. So I set Jude in his life jacket on the Baja step, which is that little shelf that you step into the pool. And it was a pretty big area with about three to four inches of water. While I went to go throw one of my kids, and thank the good Lord, I was looking right over at Jude when this happened. But he essentially tipped over on the Baja step. And because the life jacket was so bulky and it was so big, his arms were stuck. He couldn’t actually lift himself up.
And because I was close, I took one or two strokes and immediately grabbed him out of the water. And he was coughing and coughed up some water, but it terrified me. If I wasn’t paying attention, he easily could have drowned. And that’s how fast things like that happen. But the broader point for our discussion right now is a life jacket is perceived to be safe, and it usually is when applied correctly, when used appropriately. But when you have a baby in a life jacket and you set them in three inches of water and they tip over, that life jacket can be the very thing that kills them. And while bonds almost certainly won’t be life or death or have any level of significance to the story that I just told, they can either create a fantastic layer of volatility dampening and safety and predictability to the plan.
But you may be surprised that in some cases, bonds aren’t all that safe. And the reason this is paramount is because if Jonathan’s 33 years old and these are monies in his 401k that he plans to use for retirement, well then it would be ill advised for him to allocate any of his stocks to bonds for monies that have three more decades to grow before they’d ever be sold. Now conversely, if Jonathan is three years away from retirement and currently sits 100% stocks and he’s going to need to take withdrawals from some of his portfolio to drive income 36 months from now, well then he probably should be allocated to some safer vehicles that are less volatile, that provide more stability so that the stock market can work back to its averages, which have been frankly phenomenal over longer periods of time. So there’s the first answer that basically says I can’t answer that part of it.
But let’s talk about bonds more broadly because maybe this is a question that you are also pondering. Bonds are historically more stable than stocks. The last 45 years have had 40 positive years in bonds, so only five down years. Now the worst of those 45 years was 2022 by a long shot. But here’s an incredibly important thing to remember when it comes to bonds. Not all bonds are created equal. It’s an enormous category. The bond market is significantly larger than the stock market, and this is evidenced by last year’s performance in bonds. If you held the longest US government bond, which has a maturity of 30 years, that zero coupon bond lost 39.2%. Think about that, it’s a bond. It was down almost as much as the stock market was in 2008, but not all bonds were down 40%. In this historically bad bond year of 2022, intermediate term, US treasuries were down 10%.
Total bond market was down 13%. Long-term US treasuries were down 29%. Long-term investment grade bonds were down 27%. But short term high credit quality bonds were down two to 3%. It’s still not great, but remember the long bond that was down almost 40%. That’s a lot different than a bond down two. So to circle back to Jonathan’s question of would you be better off buying bonds in a volatile stock market? It all starts first with your financial plan and your time horizons and your objectives, and then it’s vital that you understand the types of bonds that are most suitable for your situation. If you have bonds of any kind in your portfolio and you’re wondering how do they perform last year? And more importantly, how should I consider utilizing bonds within the context of my financial plan moving forward? Feel free to contact us to speak with a local advisor by going to creative planning.com/radio
Next question comes from Alex in Wisconsin, is Social security going away? Now, I’d say of all the questions that I receive on an annual basis here at Creative Planning, this is one of the three or four most asked questions. In short, I’ll put your mind at ease. No, it’s not going away. But yes, it is underfunded directly from the Social Security Administration themselves. They have stated that the trust fund reserves are projected to become exhausted in the year 2034. So we’re talking 11 years from now. Now, if nothing were to change, it wouldn’t be that retirees would receive nothing in Social Security, but they would have an estimated reduction of about 23%. So if someone was receiving $1,000 a month in social security, the new payment would be $770 that would get this refunded until about the turn of the century. So by most estimations, that’s the worst case scenario.
And by the way, I’m not sugarcoating it. That would be really bad for millions of retirees, which is why I don’t think that will happen. A few basic things I want you to know about Social Security. It’s funded through payroll tax deductions. Payroll tax, by the way, is 6.2%. So if you are a current worker, what is going out of your paycheck is immediately being used to fund current retirees checks. And in recent years, this has been one of the problems we’re living longer than ever before, which is great, but not great for social security payments. We’ve had a decline in birth rate after the baby boom period that took place right after World War II from 46 to 1964. And while the millennial generation is huge, millennials aren’t in their peak earning years yet, and therefore not bringing in enough revenue to support the longevity of current retirees.
So the bottom line is that social security is absolutely not going away, but it is possible that future retirees could see a reduction. But even that, in my opinion, is highly unlikely because it’s the same idea of you seeing brake lights in front of you and me saying, if you never stopped and kept going 50 miles an hour, you’d crash really hard into that car. And you’d say, I get that, but I’m going to break like I have my entire life while driving. I’m not going to hit that car. And I believe the same is true when it comes to how we’ll handle Social security. There have already been many proposals on the table. It might surprise you. Believe it or not, Democrats and Republicans, they have different ideas of how to solve this problem. I know it’s shocking. A couple of the ideas from Democrats are to remove the social security wage cap, which for 2023 is $160,200.
And so what that means is that if someone’s making $200,000, they do have Medicare taxation taken out of all 200,000, but Social security is only deducted out of their paycheck to $160,200. By the way, the reason for that is because that retiree doesn’t receive a higher monthly check in retirement because they made $200,000 than someone else that made $160,000. And that check is the same as someone who made $2 million a year because again, they only paid in on their first $160,200. Democrats are proposing that you tax that 6.2% on all $2 million in my example. But that person still only receives a Social Security check based upon an income of $160,200. Well, what would happen at the extra payments on $1.84 million that person wouldn’t receive? It would be redistributed into that Social Security Trust to help boost back up the balance. Another proposal that’s been thrown out there is to just make that 6.2% rate higher.
One of the Republican proposals has been to push back full retirement age from 67 to closer to 68, 69 or 70, essentially forcing retirees to wait longer before receiving their standard social security benefit. And the reason nothing’s gotten done outside of all the normal reasons why things don’t get done up on Capitol Hill is that none of these proposals are popular with the largest voting group in our nation. No one wants to wait longer for their benefits. No one wants benefits reduced, and no one wants higher taxes. Social Security happens to be one of the most important and impactful decisions related to retirement planning. If you’re not sure where to turn, we have extensive experience helping families navigate the complexities of social security. Go to creativeplanning.com/radio to get your questions answered. I want to conclude today’s show with a reminder of how destructive it can be when we try to Keep Up With The Joneses.
Comparisons are simply the death of happiness. Your situation is unique to you. I love the quote that says, we buy things we don’t need with money we don’t have to impress people we don’t like. Well, I’m going to let you in on a little secret. Many of those around you that you’re seeing their highlight real on social media, their fancy vacations, their expensive SUVs, that’s not the whole picture. Consider consumer debt in our country, the average American holds a debt balance of nearly a $100,000, and the typical American credit card balance is over $5,000. I’ve had people with $50 million portfolios pull up to our office in a 10-year-old Honda Accord. And by contrast, I’ve had people pull up in cars that cost over a $100,000 and they don’t even have that much saved for their retirement. Don’t judge a book by its cover.
It reminds me of the Easterlin paradox, which in 1974, famed economist Richard Easterlin noted that while standards of living had climbed over time, happiness hadn’t. Because what people cared about wasn’t their absolute standard of living, but how they stood relative to others. And such envy is a worthy member of the seven deadly sins, isn’t it? Not least because it causes us to be dissatisfied with our own situation and thwarts our efforts to declare enough. Whether you have a $1,000, a $100,000, a million dollars, or a hundred million dollars, I want to encourage you to get the most out of your time and your money by devoting those two precious resources to the things that you consider meaningful, not that others consider meaningful, that you consider meaningful. Because it’s then and only then that you will unlock true peace and contentment. And remember, we are the wealthiest society in the history of Planet Earth. Let’s make our money matter.
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Announcer: The preceding program is furnished by creative planning an SEC registered investment advisory firm that manages or advises on 225 billion in assets. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of in investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives and suitability. If you would like our help request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently-
If you enjoy the podcast, please subscribe, share, and leave us a rating.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on $225 billion in assets. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning.
This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA, or financial planner directly for customized legal, tax, or financial advice that accounts for your personal risk tolerance, objectives, and suitability. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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