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The Benefits of Simplifying Your Financial Plan

Published on July 10, 2023

John Hagensen

Find out why simplicity is the master key to financial success and what strategies you should be following to capitalize on it. (1:25) Plus, discover crucial scenarios where you’ll need an estate planning attorney (13:42) and why following the herd may lead you off course — and onto a dangerously misguided financial path. (24:48)

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 I head on today’s show, the power of simplicity when it comes to your investments, as well as the negative consequences from following the herd. And lastly, how much should you expect to pay your financial advisor? Now, join me as I help you rethink your money. 

Have you ever met someone who has a knack for explaining difficult to understand concepts in a simple to understand way? They say this is a sign of intelligence. It’s certainly the sign of a great communicator, and this is true of a lot of things in life. Isn’t it? I mean, consider this. If I were to ask you, what’s the key to losing weight and being physically fit? Your answer would probably be if you were choosing the simplest, most honest response, eat less, move more. These four words hold the essence of a healthy lifestyle. You don’t need more complexity, but we live in a world filled with fad diets, complicated workout routines and related to finance intricate investment strategies. 

So together let’s uncover the truth that lies within the simplest of explanations. If I could argue that the most important ingredient to your financial wellbeing is your physical wellbeing and health. Without your health, your money’s rendered useless. It’s pointless if you are dead or you have no quality of life and without time to enjoy your money, what good is it? Creative Planning president, Peter Mallouk recently spoke about this on his podcast. 

Peter Mallouk:  The primary thing that allows people to enjoy retirement is health. It’s the ability to have your mental and physical wellbeing and be able to enjoy all of the wealth that you’ve created. And you’ve got this health generally all the way up until retirement and it gets more tenuous for all of us every year that goes by. And so the biggest investment anybody can make is in their health. A lot of people think that they value money over time, but if you told somebody, “Hey look, you could have Warren Buffett’s wealth but you’re going to be Warren Buffett’s age, would you take it?” Nobody listening to this would take it. Nobody in their right mind would take it. You’d be much better off to have 10 more years than Warren Buffett has than to have his wealth. So time is the greatest asset and health, is what really drives our time availability. 

John:  So according to Peter and I wholeheartedly agree, focus on your health, focus on banking as much time for the most important aspects of your life. Which leads me to the most practical way that you can execute giving yourself more time. That is through simplifying your investment approach as much as possible. And here’s the beauty and it’s counterintuitive. You’re likely to get better returns, all the research shows that. Meaning you get your cake and you get to eat it too, which is the dumbest saying ever. It makes no sense who wants cake and not be able to eat it. But its true complexity has no correlation with more success when it comes to your money, and it’s important to note that this is different than almost every other aspect of our life. For the first time in my life this summer, I’ve gotten a few golf lessons. 

Well, what do you know? I’m hitting the ball better because I’ve been practicing more than ever before. If you go out and shoot a hundred free throws every day for a year, you’re probably not going to be Steph Curry shooting 90 plus percent from the line, but you’ll probably be a better free throw shooter than you were one year earlier. If you have a job, the more effort you put in, the more time you spend, the better your career outcomes. But when it comes to money, the exact opposite is true. William Smeed said, “An investment is like a bar of soap. The more you handle it, the smaller it gets.” Let me put some color around this by comparing a more passive investment approach against a more actively managed fund. The passive index fund has a low expense ratio, let’s say five one hundredths of 1%. 

That’s what it’s costing each year. And if we’re using an S&P 500 index fund, it aims to replicate the performance of that index. On the other hand, an actively managed approach may have an expense ratio of around 1% and aims to outperform the index through active stock picking. But let’s take a hundred thousand dollars investment as an example in each fund. You invested for three decades over 30 years, let’s assume an average annual rate of return of 7%, which is actually under what the S&P 500 has actually produced. So this is a conservative estimate. You end up with about 760 grand in the index fund and only 575,000 in the active fund. So by keeping it simple, we’re talking about simplicity here and opting for a passive index fund that tracks the 500 largest US stocks, you would’ve earned an additional nearly $200,000 over the 30 years. 

And at a broad level, if you’ve wondered why it’s so hard for professionals to outperform indexes, this is the reason. Compound the difference in their higher fees. That is the manager’s hurdle off the top that they must overcome to outperform and that’s significant. And why 85% of active funds have lost to their benchmarks over rolling 10-year periods. Trying to find the right fund managers, even for professional financial advisors, it really is like playing a game of whack-a-mole over at Main Event by my house, a big arcade and bowling alley. You know the game where they pop up their heads and you smash them with the club and then they go back down and two others pop up in different areas. That’s Ken to finding the right manager, very hard. So if you’re an advocate for active management, generally there won’t be an argument against the data I just shared because it’s pretty indefensible. 

The average managers get crushed by the broad markets, but what about in down markets? What about in highly volatile markets? Well, that’s generally when a more active approach will protect you on the downside and provide for overperformance. No, that’s really not true either. According to Baron’s, slightly more than half of us large cap stock fund managers underperformed the S&P in 2022, which was a terrible year for both stocks and bonds. By the way, this was the 13th consecutive year that passive outperformed active and it upends the narrative that active funds can better navigate market downturns than just a buy and hold passive strategy. While there are a multitude of reasons why people still own active funds, I believe the most influential to be that it’s really difficult for us to accept such a simple strategy would be so superior to more complex strategies that take more effort, more research, and more time. If you have questions about how to simplify your financial life. 

That’s one of our greatest values here at Creative Planning. There’s a reason Barron has called us a family office for all. We’re a law firm, we’re a tax practice, wealth managers, managing or advising on a combined 210 billion for families in all 50 states and over 75 countries around the world. And through our team of in-house specialists, we organize and coordinate your financial plan all under one roof. In an effort to not only help you achieve a more comprehensive financial plan, but to make your life simpler, to give you some of your time back. If you’d like a second opinion with one of our local fiduciaries just like myself here at Creative Planning. Do what thousands of other radio fans have already done, visit CreativePlanning.com/radionow to schedule your visit. Why not give your wealth a second look? 

Well, Ben Carlson wrote a fantastic piece on why simplicity trumps complexity in any investment plan. He had that on his blog and I want to highlight a few of the points that he brought up. First off, it’s easier to be fooled by randomness with complexity. That whole saying, “If you torture the data long enough, it’s bound to tell you exactly what you want to hear.” Complexity invites us to data mine.vWhen we simplify, it makes it harder for us to game our own system. Simplicity trumps complexity also because intelligent people are drawn to complex solutions. Some of my most intelligent clients have the most difficult time getting their head around the fact that simpler wins when it comes to investing. Lower cost, less trading, more discipline, simply better. But intelligent people can more easily fool themselves into believing we’ve got all the answers. Average kind of normal people maybe should invest in index funds, but I’m really smart. 

But here’s the problem. When something is unknowable, like how 7 billion people will respond to upcoming unknown events that are unpredictable. Well then it doesn’t matter how smart you are because you don’t know the future and there are billions of simultaneous inputs that impact the market. Intelligent people also tend to overthink things. You ever known that person who’s really smart, but they’re just in their own head going round and round in circles. And so while simple is not stimulating enough for a lot of intelligent people, it’s effective. And the worst investors I’ve ever interacted with as a wealth manager were those who knew just enough to be dangerous. By contrast, when we accept the fact that we cannot forecast the future our likelihood of increased outcomes immediately improve. Complexity also is more about tactics. Simplicity is about systems. Tactics come and go, but if you have an overarching philosophy when it comes to your money, it’ll help you make better decisions in multiple scenarios. 

You see, a core philosophy applies in various economic and market cycles. Another reason simplicity trumps complexity is that trying hard doesn’t guarantee you better results. I have coached some of our kids’ sports teams over the years and one of the pillars that we talk about in the first practice is giving 100% effort, trying your best. Because in flag football, when you’re in second grade, trying hard gives you a better shot at winning. Unfortunately, outsmarting the competition is easier said than done when it comes to your money because putting in more time and effort, it doesn’t make you a better investor. Waking up and watching CNBC or Bloomberg for the first two hours of every day and then trading on behalf of that information, all the data shows you will underperform your neighbor who is playing pickleball and hanging out with their spouse. But the last and final benefit of simplicity is that it’s easier to understand. 

Simplicity allows for far more transparency and in turn, it’s much easier for you to have realistic expectations, a reasonable framework on your financial future. You don’t hear about a lot of people getting scammed buying a really simple investment like a total stock market index fund. Then we get scammed buying some crazy thing that no one understood. Charlie Munger once said, “Simplicity as a way of improving performance through enabling us to better understand what we’re doing.” Great advice. Not only does it need to be complicated to be good, it shouldn’t be complicated. And with that, here’s my investment advice and it all really boils down to three simple rules. Rule number one, buy stocks. Ownership is how you create wealth. When you hold stocks, you are an owner of the largest companies around the world that are producing goods and services and competing with one another in an attempt to achieve profits that you then share in. 

That’s how you make money. Now because the value of those stocks bounce around like a pinball and are volatile and go up and down based upon expected earnings. Rule number two is you diversify. No big bets in any one spot. Own companies of different sizes in different asset classes and sectors that have different strategies in different geographies. And if some of your money will be needed over the next five or 10 years, that diversification process will also include owning more stable investments like bonds. So you buy stocks, you diversify. And then rule number three, rebalance. 

Rebalance per your time horizons, your risk tolerance and your goals as all of those diversified investments move dissimilarly to one another and drift from the stated percentages that you want for an efficient portfolio that aligns with your financial objectives. There you have it. Three simple rules. Buy stocks, diversify and rebalance. Not much more challenging than the simple four words of how to lose weight, eat less, move more. But the challenge with these simple rules is not in knowing them, it’s in doing them. Simple rules are often not easy to follow. If you have questions and aren’t sure where to turn, we’ve been helping families since 1983 here at Creative Planning. Visit CreativePlanning.com/radionow to speak with one of our local financial advisors because we believe your money works harder when it works together. 

My special guest today is Chrissy Knopke. Chrissy is an estate planning attorney here at Creative Planning and I’ve asked her to come on and discuss times where calling an attorney makes sense outside of the context of needing a full-fledged estate plan. Which I think so often is when we think to call an attorney. So with that said, Chrissy Knopke, welcome back to Rethink Your Money. 

Chrissy Knopke:  Thank you for having me. 

John: Often people equate estate planning with a full estate plan, but there are plenty of other specific situations where talking with an attorney makes sense as I just alluded to, even if your basic documents are already in place. Can you speak to that Chrissy? 

Chrissy:  People don’t need to call us for a full-blown brand new estate plan. A lot of times we tell people it’s life changes where you need to call us, so death obviously is one of those. If a spouse passes away, if a child passes away, if one of the agents that you have selected passes away. So a financial power of attorney, a healthcare power of attorney, the trustee of your trust or the executor of your poor over will, we need to talk about that. Look at who’s in line below them if there is anyone, and then maybe nominate somebody else. If someone in your plan or your family passes away, it’s definitely a good idea to pick up the phone, talk to your estate planning attorney and saying, “Hey, do I need changes in my plan?” 

John:  It’s such a good point. I often as a wealth manager will review a new client’s situation here at Creative Planning and we provide that estate planning diagram that maps out their current estate plan. And it’s very typical that the client will say, well, wait a second, why is that person on there? In some cases that person in questions no longer even alive 

Chrissy:  Or the person may not even be deceased, but they put their parents in as a financial agent and they’re like, I now manage my parents’ stuff. There’s no way they could manage our stuff and they just forget who they have in those places and they really just need to get it updated. 

John:  It’s that idea that people think of estate planning as sort of this one time project and then they can check the box and set it to collect dust in their home office on a shelf. And it really should be dynamic just like a financial plan, just like your investments because life’s changing and obviously laws are changing. What’s another scenario where someone should reach out? 

Chrissy:  Let’s talk about some happy things. 

John:  Oh, good. 

Chrissy:  Don’t just call us if there’s a death, call us if there’s joyous times as well. So a birth of a child, birth of a grandchild. Say, hey, we had our first grandbaby and now we want to make sure that if something happens to us that we are giving them money to have an education. And so those are things that we want to talk about and review the plan and make sure it’s still what we want happening when someone passes away. Not only a birth but a change in wealth. So a lot of people created their plans when they were young, had minor children and now their wealth has grown and so we need to reevaluate does the plan still work? So if you have 10 million and it’s split between two kids, do you really want your two kids getting $5 million if you passed away tomorrow outright or do we want it held in trust? Do we want to give them some tax planning or divorce protection? So those are all things that we need to reevaluate as the situation changes. 

John:  I just had a scenario this last week, someone that originally had a will and they were newlyweds and they had one kid and now they have three kids. It’s about 10 years later and this person’s having a large liquidity event and that’s kind of an obvious one where it prompted them to say, pretty sure we need to change a lot of these things. They weren’t really worried about a minor child going through bankruptcy or a divorce when they inherited $12 at the very beginning of the plan, but now those things are a big concern. They don’t want an ex-spouse to get $7 million of their money because they didn’t have certain protections in place. So I think that’s a fantastic one, just using common sense. If our situation’s changed, what might need to change with our estate plan? 

Chrissy:  Well, and that goes to a point too, most of these people created these things when their kids were young and now their child could be married and there may be issues with the spouse. And so you know you still love your child, but hey, we want to provide some protections, let’s talk through this. 

John:  That’s one of the biggest ones that I see is people not wanting a potential ex-spouse of one of their children to receive money. And it’s obviously something that you can easily protect against with proper estate planning. How about relocation? Because that’s one where state law, obviously federal law is dictating things, but state law is very impactful and that could be a trigger. 

Chrissy:  We tell all of our clients if they relocate to a different state, they need to give us a phone call. The big reason is states have different laws. So what we can put in a trust in one state, we might not be able to put in a trust in another state. Property differs in each and every state. In Kansas and Missouri where Creative Planning is based in Kansas, you can put a beneficiary on your real estate. So you can say if I die tomorrow, my real estate goes to this person, it’s filed with the county and it won’t go through probate. That’s only allowed in about a third of the state. So if someone lived in a state where they had a beneficiary deed, they go move to a new state like Georgia, California, one of the states that doesn’t allow us to put beneficiaries on real estate and they say, now what do I do? If I pass away, where does my house go? I don’t want it going through probate. 

So we just need to reevaluate what the laws are in each of those states. Additionally, not even just property, but some states still have a state death tax. Oregon has a very low state death tax, million dollars. Massachusetts has a million dollar estate tax. So those are things that we want to look at if you’ve moved to one of those new states and say how does it impact your plan? 

John:  I’ve seen people move out of Minnesota across the border for example, they live in Moorhead and they moved to Fargo five miles west because they want to be residents there to avoid that death tax. It can be pretty significant from a planning standpoint. 

Chrissy:  Yep. 

John:  Would you generally tell people, obviously real estate would be one trigger, would how many days per year you’re spending if you have two different properties really be dictating in terms of what state you need to be having your estate planning docs with? 

Chrissy:  People always want to move to Florida when they’re selling something and not pay state tax, and so it’s not just going and buying a vacation home and spending a month or two there. You really have to be proactive about what you’re doing and make a real plan, talk to your tax advisor and your estate planning person and make sure it all makes sense. And you’re dotting the I’s crossing the T’s when you’re doing something like that. 

John:  Well, yeah, and the larger the estate, the more the state that you’re trying to avoid paying tax in is going to scrutinize it, right? I’ve even seen to the extent in an audit where they’ll be looking at where your credit card purchases were from, where your cell phones being… I mean all of that because they want to get their tax dollars. There’s certain states like California that are very aggressive. If you have minor children and you say, “Well, I’m a resident in Florida.” And they say, “Your kids go to school in California. No, you’re not.” Right. 

Chrissy:  I’ve seen it go all the way to what dentist you use and what vet your dog goes to. So in New York, they will trace about everything to tie you back to New York if you’ve tried to leave and get rid of that estate tax. 

John:  Yeah. So if you’re going to move to Jackson Hole, you actually need to live in Jackson Hole. 

Chrissy:  Exactly. 

John:  Not just go there for a ski vacation every once in a while. How about businesses? 

Chrissy:  A lot of our clients, a lot of people in the country own businesses. Usually in family businesses, the idea is that a family member will take over, so we’ve got to look at what does that plan look like? Do we already have a plan in place? Is there a buy sell agreement? Are we gifting before death? Those are all things that we need to look at. Not only that, but I have a lot of clients who, let’s say the son is going to inherit the business and that’s the bulk of the estate. And then we’re splitting everything else 50/50, is that really fair to the daughter? We need to kind of talk through that. What does that look like? Does the sun fire out of anything? Those are all things that, again, when you own a closely held business, we really need to discuss. 

John:  Yeah, how about when one person’s inheriting money that’s going to come through with a step-up in basis, whether it be a business or real estate. And they say, “Well, the other kid’s getting this large $3 million retirement account over here.” You’re like, well, they’re in a pretty high bracket and they live in California and after all said and done, they’re going to lose 50% of that to state and federal. So they’re really only getting one five and the other kid is getting a full 3 million. Those are some of the things that people can overlook from a tax standpoint in terms of what they’ll actually end up receiving in what state they’re in. I think that’s really good advice. 

Let’s end with changes in law. We know that the current laws are sunsetting at the end of 2025. So ’26 is going to be a new environment if nothing changes prior to that. That’s an example of things change that aren’t even in your life or your situation, but external factors. Those might be reasons, wouldn’t you say to give an attorney a call and say, is my plan still working? 

Chrissy:  Yep, exactly. 2026 is going to be big for a lot of people. Right now the federal tax exemption sits really high at $12.9 million, set to sunset back down to 6 million in 2026. So that’s going to affect a bigger majority of the population than it does right now. Needless to say, we never know where it’s going to be, so it’s worth a phone call to look at where your assets are, does my plan still have some tax planning in it? Do I need to put tax planning in it? Do I need to do advanced planning? People who are already over that exemption or haven’t thought about how their death benefit of their life insurance policy is going to be calculated in their overall assets. So if they’re looking at their net worth statement, they say, oh, I’m under that amount, and then as soon as they tell me, oh, I have a $5 million life insurance policy, we got to talk. 

We got to do some things. There’s very easy things to do too that can take place to make sure that that policy isn’t included in your estate when you pass away. Just again talking to your advisor, talking to your estate planning attorney. Every time something changes in your life, reevaluate it. I tell all of my clients, they say, should I review this every three to five years? I think if you are meeting with a financial advisor, you should look at it annually. Big picture, maybe a diagram, make sure all those people look proper and then every three to five years take a deep dive and say, okay, does this plan still fit us? 

John:  These are all great reasons to reach out. A perfect example, I’ve met with countless people who still have an AB trust within their estate plan that they set up in the year 2000 when the estate exemption was a million dollars and they needed to avoid 40% estate tax on a $3 million net worth. Now it’s a married couple that’s well under the 24 plus million dollars that the estate exemption is today. Maybe they’re net worth at $4 million, but they still have unnecessary complexity with this AB trust to avoid an estate tax that they’re $19 million under the limit for being subjected to. So there are many examples of this. Well, Chrissy, thank you so much for joining me here on Rethink Your Money. 

Chrissy:  Thank you for having me. 

John:  We have 75 attorneys here at Creative Planning just like Chrissy. If you have questions about your estate plan, visit CreativePlanning.com/radio now to schedule a meeting with a local financial advisor. Why not give your wealth a second look? 

Now a while back, my family and I were heading off for a road trip and I went to fill up gas and received that annoying message at the pump. Card reader down go inside to pay. So I go inside, I prepay and I go back out and start fueling up and decide we got a long trip. I have a bunch of kids back there in the 12 passenger van. I’m going to use the restroom and I wait in a line of about a six or seven people deep. When my time finally came and I was at the front of the line, I entered the bathroom only to find that it wasn’t a single stall. It wasn’t even a door that locked on the exterior. There was a urinal and a stall, and we had all been standing in line like a bunch of idiots, assuming that everyone in front of us was waiting for good reason because only one person could enter at a time. You ever had something like that happen to you? 

Now I’m sure a thousand years ago when you went to catch your dinner and you looked out and saw all of your friends fishing in one area, they probably were there because that’s where the fish were biting. So I understand the evolutionary aspects of following the herd. But when it comes to our money, the herd is eerily similar to my gas station bathroom line. The herd’s really bad at personal finance, and because of that, you not only want to avoid following the herd when it comes to your money moves, you probably in most cases actually want to take the opposite approach. You want to look completely different when it comes to saving and investing your money than the typical American. According to the Fed, the average American can’t come up with a $400 unexpected expense. As a society we struggle with saving. 250,000 is the median net worth for a retiree in America and 65,000 is the median retirement savings for all families in this country. 

Think about that. At a 5% safe withdrawal rate, that would mean you could spend about $250 per month out of your portfolio to sustain you in retirement if you’ve saved what the typical American has. Don’t be fooled by your friends and old classmates from 30 years ago at high school, from their highlight reels on social media. Don’t begin to believe that many of them can afford what they’re spending on. Don’t chase or feel envy for what they have because you don’t know their situation and whether or not they can even afford what they’re flaunting. Avoid that comparison trap. 

But most importantly, you want to rethink this notion of following the herd. When it comes to saving money and unfortunately from an investment standpoint, the masses are just as bad. I’ve shared [inaudible 00:27:41] annual study, their quantitative analysis of investor behavior. Which is a broad industry benchmarking study used throughout the world of personal finance and it basically evaluates whether investors are capturing investment returns. And we’ve earned about half the 10% returns that the S&P 500 has delivered the past three decades,. And you don’t have to look any further than the inflows and outflows of investments during bull and bear markets. 

They mirror one another. Meaning when the market drops like in 2008, you see a ton of people running for the sidelines. Screaming and gnashing their teeth as they sell at the bottom. Market begins to recover, which happens in most cases very rapidly, too quick for you to actually identify the bottom and then Americans begin investing money once much of the rebound has already occurred, the market’s already off, often rallying. Take 2020 as a perfect example. Everyone ran for the sidelines. Bear market only ended up lasting for two months. Then we experienced one of the fastest recoveries in market history. By April of 2021, more money had flowed into the stock market over the previous five months than in the past 12 years according to Bank of America. And sure the market continued to increase in 2021 but then came back to Earth in 2022, where predictably we saw massive outflows and now guess what’s happening? 

Of course it is. Americans, the herd are pouring money back into the stock market because the NASDAQ just had its best first six months in 40 years. There is a logical explanation for this. It’s not that we’re trying to self-sabotage, it’s that we’re human beings. Our sentiment and our perspective is based upon what we’ve experienced in the past. Well, markets are always forward-looking. So as they say, it’s always the darkest before the dawn. Negative sentiment usually is at peak levels just before the market is ready to bottom and rally. And there are so many examples of this. $5 trillion lost during the dot com bubble bursting. Where everyone poured in and sentiment was at its highest right before the market crashed. GameStop and the meme stocks, remember that whole saga during 2020? You knew somebody would be without a chair when the music stopped and that absolutely was the case. 

All total of $177 billion were lost, due to money pouring in at the worst possible time. Rethink the notion that there is safety in following the herd when it comes to your money because nothing could be further from the truth. And here at Creative Planning when it comes to wealth management, we’re not interested in following the herd either. We believe you deserve to have your financial advisor be a fiduciary acting in your best interests at all times. We don’t think proprietary funds or advantage products or third party kickbacks are in your best interest. We offer an objective independent perspective on your money. We also think that having a CPA and your estate attorney all working together in coordination in-house on your behalf, a team committed to strategizing for your success is the way that wealth management should be done. If you’d like to experience a richer way to wealth, speak with one of our 700 financial advisors at creativeplanning.com/radio. 

Another piece of common wisdom that I’d like to rethink together is that HSAs are only a health savings account. I’m going to push back a little bit on this and I’ll post an article to the radio page of our website that addresses why health savings accounts might just be “the best Roth”, and I’m putting that in quotes ever. A little background. HSAs were created in 2003 as a tax friendly way for you to save money for healthcare expenses. The benefits were designed to encourage the use of a high deductible health plan, which usually would then involve a lower monthly premium but higher out-of-pocket cost for you until the deductible was met and out-of-pocket limits were reached. Let me be clear, HSAs are not technically a retirement account, but in many ways they’re better than even the venerable Roth IRA itself. When used strategically and HSA can incorporate some of the best features of both traditional and Roth accounts all rolled into one. They are triple tax-free. 

The money you put into your HSA account is excludable from taxable income. So it’s similar to contributions to a traditional IRA or your 401k, but unlike those accounts, you can make deductible contributions also to HSAs regardless of how high your income might be. You do not get income phased out as you would with a traditional IRA. A simple example, if you directly contribute via your payroll, a payroll tax of 6.2% for social security and 1.45% for Medicare are avoided. This is a 7.65 return on money that you directed at HSA. Another benefit is that an HSA can be invested in the markets just like any other investment portfolio and it grows in a tax deferred, I’m not going to say tax-free, but it’s tax deferred similar to most of your retirement accounts. And there is no use it or lose it stipulation, the funds are yours forever. 

So that’s the first two aspects of the triple tax-free. Contributions are deductible and there’s no income restrictions and the growth is tax deferred. And then finally, when your HSA funds are withdrawn and you spend them on approved healthcare expenses, those withdrawals are not taxed. And let me share an example with you for more of an advanced strategy. Let’s suppose that you’re out of pocket $5,000 for surgical expenses. Your first option is that you could charge your HSA card directly, to debit card right where you just swipe it or you could immediately reimburse yourself with that account, but you may actually be leaving something on the table by doing that. There’s no deadline to reimburse yourself for medical expenses. A lot of people don’t know this. You could wait, let’s say five years to take your $5,000 tax-exempt medical expense reimbursement from the HSA. By waiting there are some benefits. 

Your 5,000 still comes back to you, but it would’ve had five years to grow in your HSA tax-free and any earnings on that money left behind continue to compound and grow within the health savings account. Here’s the big downside to an HSA. If you take the money out for non-medical expenses before age 65, you’ll pay ordinary income tax on the distribution plus a 20% penalty. And so that’s where you’ll lose a lot of the benefits. But even if eventually you get later in life and have been miraculously and thankfully in extremely good health and you have a massive HSA balance, you can take withdrawals and use them for whatever. I don’t know, go buy a car, take a vacation, and they’ll be taxed at ordinary income just as if it were an IRA or a 401K distribution. And remember, you received a deduction just like you do on those accounts when you made the contribution. 

So you’re not taking advantage of that triple tax opportunity, but it was essentially an extra retirement account. For most people though, you have plenty of medical expenses as you age. And that HSA does in fact serve as basically the best Roth ever when used in that capacity. My last piece of common wisdom is that Roth IRAs are better than traditional IRAs. I’ve heard this a lot the last two or three years. John, I heard you on Rethink Your Money talk about Roth conversions and why they’re great. Let me just pause for a moment. The only consideration when it comes to whether you should utilize a Roth IRA or a traditional IRA is one thing. Do you anticipate your tax rate today being lower or higher than in the future when that money will be withdrawn? If you think your tax rate will be higher in the future, then you’d want to utilize a Roth assuming you qualify. And you may want to do Roth conversions, which everyone qualifies for regardless of income level. 

But if conversely, you believe your taxes are higher today, then they’ll likely be in the future, then you’d want to defer that income and claim it at a later date at an assumed lower bracket. The reason that Roth IRAs have gained so much notoriety and attention the past four or five years is that with the introduction of the Trump tax reform, we’re in the lowest tax environment we’ve seen in decades. We have $32 trillion of national debt. We have an expansion of wealth inequality and some aggressive political proposals that are looking to close that. So most people do believe taxes are likely to increase, and that feels even more likely due to the fact that these historically low rates sunset at the end of 2025 and are set to increase. But that doesn’t mean that Roth IRAs are better than traditional IRAs. If you’re in a 37% tax bracket right now and making $800,000 a year, but you plan to retire and once you retire, your taxable income’s going to be $150,000 a year. Well then you should be deferring into a traditional. 

You probably don’t want to do any Roth conversions even though you qualify because they’d be taxed at 37%. You’re not even eligible for Roth IRA contributions. You make too much money and even if you’re 401K offered the Roth option again, you’d be better off pushing that contribution amount to a later date and claiming it at a likely lower tax bracket. So no Roths are not better than traditional IRAs, but if your advisor hasn’t run a Roth conversion calculation for you, hasn’t forecasted your future required minimum distributions hasn’t run projections based upon best case, worst case of what your taxes are today and what they might be down the road, then you probably don’t have an advisor that’s looking at much beyond the investments. We here at Creative Planning and I personally believe that one of the greatest ways you can move the needle when it comes to increasing what you keep is by utilizing proactive tax planning. 

And Roth strategies are just one of the many opportunities that exist. If your tax return hasn’t been reviewed by your financial advisor in the last year, what might you be missing? And is it time maybe to give your wealth a second look? To speak with one of our local advisors here at Creative Planning just like myself, visit the radio page of our website at creativeplanning.com/radio. Don’t wait any longer. This second opinion might be the most valuable thing that you do for yourself and for your family all year. One more time, that’s Creative Planning.com/radio. 

Well, it’s time for listener questions and one of my producers, Lauren is here to read those questions. Lauren, what do we have for today? 

Lauren Newman:  Hi, John. Our first question is from Meredith in Phoenix, Arizona. She asks, “Hi there. So I’m getting married next month and my fiancé and I are having an ongoing discussion about whether we should consider getting a prenuptial agreement. We are both in our early thirties and we’ve been together for five years. We both have successful careers, and while we are deeply in love, we want to be cautious about our individual assets and financial stabilities. What are your thoughts?” 

John:  So first off, congratulations, Meredith on your upcoming wedding. That’s fantastic, and I will post an article to the radio page of our website that speaks directly to the importance of prenuptial agreements. And I don’t want to reign on your parade, Meredith. I’m not saying this is the case for you at all. I don’t know your relationship, but 50% of marriages end in divorce and no one’s getting married with the idea that they’re going to get divorced. Divorce rates even higher for second and third marriages, 60%, 70% plus. And they can be an important tool depending upon the situation financially as they enter the marriage. The main purpose of a prenup is to make sure your assets are distributed fairly in a divorce. Some of the other benefits, a prenup encourages premarital financial conversations. It’s a great opportunity for you and your future spouse to have discussions about bank accounts, financial goals, financial responsibilities. 

I think it’s fantastic when you go see a financial advisor and if you’re not sure where to turn, I work out of the Valley of the Sun and would be happy to meet with you and your fiance. Because building out a joint financial plan can be a pretty neat process that starts the relationship from a great foundation financially and a plan of attack for how you’re going to merge your finances together. I highly recommend that. If it’s not us here at Creative Planning, find a firm similar to us that are fiduciaries, that are independent that you feel comfortable with. Secondly, it simplifies the divorce process. Divorces are stressful enough already and deciding how assets should be divided just magnifies that stress. A prenup eliminates that. A prenup also protects you from debt. Most people think of a prenup and they’re like, oh yeah, that professional athlete and that movie star are getting married and they have a prenup because they’re both really rich. 

Well, sometimes without a prenup in place, the opposite is true. Any portion of debt that your spouse brings into the marriage could potentially, depending upon state laws be your responsibility following a divorce. And lastly, a prenup will protect your family and your business. Now, you’re in your early thirties, so you may not have kids from a previous marriage. But for people that do have children from a previous marriage, a prenup can allow you to designate certain assets to them. And I can attest firsthand, these can be contentious scenarios. So I don’t know whether you need a prenup or not, but I would sit down with a financial advisor jointly together to go through your current assets, debt objectives. Because regardless of whether you end up executing a prenup, I believe that open dialogue will be incredibly fruitful as you merge your lives financially together over the next month. 

And by the way, I know what you’re thinking. John, I’m wedding planning right now. I don’t have time to go to a financial advisor’s office. I know, but I’m still making the recommendation. All right, Lauren, how about the last question? 

Lauren:  Our last listener question comes from Manny in Aurora, Illinois. And he writes, “I’m paying 1.75% in annual advisory fees. It seems high, and one of my friends told me was way too high. What do you think is a reasonable price to pay for in fees? I’ve got 620,000 between a brokerage account and an IRA managed by this advisor and another 300,000 in my 401k.” 

John:  1.75 does seem pretty high. That’s definitely much higher than the going rate. I don’t know what this firm is doing for you, but if they’re more of a traditional money management firm, that’s pretty high. But I would remind you that what you’re looking for is best value, right? Not least expensive. And I don’t necessarily think that Manny’s asking that. You’re just saying it seems kind of pricey, which it is. But if you pick the cheapest option possible, you usually are going to get cheap. No one goes to a Mercedes dealership and then says, well, why isn’t this the same price as a 25-year old astro van? Well, because it’s a brand new Mercedes. Now, according to many different sources and studies, the percentage of Americans who pay a financial advisor varies quite a bit. But according to a survey conducted by the CFP Board and Consumer Federation of America in 2019, approximately 42% of American adults reported working with a financial planner. 

Here’s what I found interesting though. When you look at the distribution of financial advisors across different wealth scales, individuals with higher levels of wealth are more likely to engage in the services of a financial advisor, and maybe that’s intuitive. Wealthier individuals often have more complexity and they may require more specialized advice and services. According to a study by the Spectrum Group, 83% of individuals with a net worth over a million dollars, and that excludes their primary residence. So in addition to their home, work with a financial advisor. And as wealth levels continue to rise, the likelihood of having a financial advisor continues to increase. Ultra-high net worth individuals, those with 30 million or more are even more likely to have a financial advisor or a team of advisors to address their complex needs. I’ve mentioned before on the show, I pay a different financial advisor at Creative Planning who is a certified financial planner just like I am. 

We use the same software, we have the same philosophy. Well, why in the world would I spend money every year to pay an advisor? Because I value another perspective and I like the accountability and I appreciate simplicity. I have blind spots when it’s my own money. My wife also, we don’t think the same when it comes to money. And so it’s helpful to have a third party that we can discuss our opinions with and get his feedback. Accountability is great because a lot of financial success isn’t in the knowing, it’s in the doing. Apostle Paul, when he wrote to the Romans for what I want to do, I do not do, but what I hate I do. It’s hard to do the right thing and accountability’s helpful and then simplicity. I don’t want to have to quarterback my own plan. I have seven kids, a wife, I host this show and I have over 1100 families that I’m the managing director for. 

So it’s great to have someone else simplifying my personal financial life. Basically, I don’t want to be the cobbler with holes in my shoes, but so back to whether this fee is high or not, it really does come back to the value. If their fee was 25% a year, but they had some magical strategy that was making you 50% a year, which of course they don’t, no one does, don’t want a compliance issue. I’m not saying that we can do that for you at Creative Planning, we’re certainly not guaranteeing that. But they’d still basically be the least expensive advisor you could find because the net difference was 25%. By contrast, I just met with someone recently who was paying about 1.5% and they were with a firm that did no financial planning, they didn’t have any taxes. I mean, they basically stuffed them in some model portfolios and charged one and half percent. 

I mean, that was unbelievably expensive for what they were getting. At the end of the day, Manny, with the amount of money that they’re managing for you, you should be expecting to pay probably around 1%, maybe one and a quarter. 1.75 does seem high. And Manny, we do have an office right there near you if you would like a second opinion on your portfolio. You can request that by going to CreativePlanning.com/radio. Thank you for those questions, Steven, Meredith and Manny. Again, if you have questions, as they did, submit those to radio@creativeplanning.com and I’ll either answer them on the air or personally reply directly to you. 

As I conclude today’s show, want to ask you a question, and it’s not rhetorical. It’s one that I want you to actually answer. How do you define the word wealth? Is it Scrooge McDuck? Is it someone getting out of a black Lincoln town car on a tarmac with those really cool, expensive designer sunglasses, kind of hair blowing in the wind and walking onto a private jet? Is it someone who can pay for their children’s college education? Maybe it’s someone who gives a lot to charity because their financial situation is taken care of. Maybe depending upon your childhood and the way you grew up, it’s someone who owns a home. Well, I would say that wealth is much more about the satisfaction with what you have. By that definition, there are a lot of rich people who are broke. I am convinced that to be wealthy, all you need is to be content with what you currently have. 

Having a very small gap between your present situation and what you desire and being poor is the exact opposite. You can have a seven or eight or nine figure net worth, and by this definition, you’re not wealthy. You’re flat broke because what you desire is still far in excess of what your present circumstance is providing. The Atlantic wrote about a recent study provided by Ameriprise where only 13% of American millionaires felt like they were wealthy. Even some of those surveyed who had net worth in excess of $5 million didn’t feel rich. It was because of a constant desire for more. I want to encourage you find peace with where you are at. Be aspirational, have goals, have dreams, work hard to accomplish them, but do your best to not continually move the goalpost. And I’ll leave you with a great quote from Morgan Housel who said, “If your expectations grow faster than your income, you’ll never be happy with your money no matter how much you accumulate.” And of course, this is important because 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. 


The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined 210 billion in assets as of December 31st, 2022. 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 or this station. This commentary is provided for general information purposes only. 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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