By now, most sports fans — and even casual observers — have heard about Shohei Ohtani’s historical $700 million contract with the Dodgers. While the numbers are staggering, what isn’t are the lessons we can learn about the time value of money and how to apply it to our personal finances for long-term success. (00:43) Join John as he explores not only this topic but also whether we should be rethinking or reaffirming taking Social Security benefits early. (24:08)
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 ahead on today’s show, how Major League Baseball provided a great lesson in the time value of money, the bold case for a good 2024 and the biggest wolf in sheep’s clothing when it comes to investment choices. Now, join me as I help you rethink your money.
I want to start with how Major League Baseball provided a wonderful lesson on the time value of money. Now, the sports headline of the month was Shohei Ohtani, the Japanese baseball star signing a 10-year check this out, $700 million contract, it’s almost three quarters of a billion dollars, with the Los Angeles Dodgers. It’s the biggest contract ever in baseball history. But in the days following the contract announcement, some of the details of how it was structured came into light and it turns out there are some financial lessons for all of us. Essentially, he and his agents negotiated the Jerry Maguire, show me the money but not yet. Show it to me but show it to me later. He’s only going to receive and I say only for all of us normal people, this is a ton of money, but $2 million per year for each of the next 10 years.
Then in 2034, the Dodgers will start to pay him 68 million of that 70 million per year for another 10 years, and the last payment will arrive when he is 50 years old. And it’s not the first time this has been done. There’s a famous Bobby Bonilla day with the Mets. He was a player who structured this so ridiculously into the future that the Mets are still paying him $1.19 million per year and they have to continue that until 2035. He retired in 2001. Bobby will be receiving that check with the walker with the tennis balls on it, going to cash the check. Here’s what you can learn for your own personal finances. One, planning for the future. It seems obvious that someone like this would have an agent and a wealth management team and a team of accountants and lawyers. There’s a lot of money at stake.
And even planning for the deferral, it wasn’t willy-nilly. They thought this through and ran analysis and coordination between taxes and the legal implications to ensure, big picture, that the contract aligned with his wishes, financially and his personal wishes. The lesson for you isn’t that you’ll probably sign a $700 million contract. It’s that when something is important, you spend time proactively strategizing it with a team who has a lot of experience with your situation. Shohei Ohtani has never negotiated a contract anywhere near the size, and so he wanted experts around him. What about for the millionaire next door? Us normal people can’t afford mistakes that frankly, Ohtani can make and still be fine. He has such an extreme level of wealth, he can make a lot of mistakes and it won’t impact his life, one bit. May impact how much goes to charities or future generations, but for him, he’s fine.
That’s not the case for most financial plans. Even those who have saved well, need a great plan and a great team in place. And if you’re not sure where to turn or you’d like a second opinion, maybe you don’t have a written documented detailed financial plan. Even if you have an advisor, you don’t have that and you’d like it. Well, we can show you how here at Creative Planning as we’ve been doing for 40 years, advising clients in all 50 states in over 75 countries around the world. Why not give your wealth a second look by visiting creativeplanning.com/radio or by calling 1-800-CREATIVE? So the first lesson from Shohei Ohtani is to plan for your future. Second pertains to the time value of money, compounding interest, which works for you when you’re investing and works against you when looking at inflation. So think of it this way, if he didn’t defer anything, if he just took the $70 million each year for the next 10 years and half of that was gone between federal and state tax, he’d be back to right around 700 million in 10 years.
So he’d receive it progressively for a decade, pay taxes on it, invest it, earn 10%, he’s back to his 700 million and all of that’s been taxed. Now, if he only earned 5% on his investments, he’d end up with a half a billion at the end of the contract, 500 million. So the rate of return he can earn certainly plays a factor in his situation as well as any time value of money calculation. But the most powerful tool in investing is a four letter word, time. The sooner you get it invested, the longer it has to compound, and we know that back end of compounding is where you really see the magic happen. If you had a pond in your backyard that just had a little bit of algae and I said every single day for the next 30 days, the algae is going to double and on the final day the entire pond will be covered in algae, how much of the pond is covered in algae on the second to last day? The answer is only half.
That’s how compounding works. The pond goes from half clear to entirely covered in algae on the final day. So getting money to work earlier and in your hand sooner is almost always going to be better. Why then would Ohtani structure the contract this way? The answer is found in our third and final lesson as regular people learning from a soon to be billionaire, and that is tax planning. Notice I said the Los Angeles Dodgers, in the State of California, not known for low state tax rates. It is presumed that Ohtani will move to a state with no state tax rate or maybe move internationally outside of the United States in an attempt to potentially reduce taxes even further.
When’s the last time your financial advisor reviewed your tax return? When’s the last time your CPA provided tax planning? Not being an accurate historian and putting the right numbers in the right boxes and accurately reporting what you already did at filing time in the spring. I’m talking about in the middle of the summer, reviewing your tax situation and providing proactive guidance, like what Shohei Ohtani received. Because while you and I are not the modern day Babe Ruth, one of the best pitchers in the world and one of the best hitters in the world at the exact same time, Dodgers essentially got two top five players in one body, you have worked your tail off to save what you’ve accumulated. And you don’t want to unnecessarily pay more in taxes than legally required. But that begins with a great tax plan.
And that’s why here at Creative Planning we have over 70 CPAs working in coordination on our client’s financial plans. We don’t think taxes are separate, but rather a central part of your success. If you’d like to learn more, visit us at creativeplanning.com/radio.
What did we learn from the recent Fed announcement? The market’s been advancing after the Fed signaled three rate cuts in 2024. Creative Planning president Peter Mallouk was a guest on CNBC and he dubbed this rally a celebration for the long-term investor. The economic takeaways for rates being lowered three times next year will have a myriad of effects. But in particular, bonds, their yields and their prices depending upon how far out you’ve lent money, as well as the housing market and mortgages. Big impact on those things. Also, it’s an initial indicator As much as we like to rag on the Fed, they’ve sort of threaded the needle between inflation and productivity and the soft landing that everyone was hoping for but felt very unlikely or an impossibility, they may have pulled it off. While certainly unpredictable future events could change that, they’ve done a pretty good job cooling off inflation and not completely breaking the economy.
But more importantly, what are the implications for you as an investor? What are the reminders? Well, how about that unexpected news is what moves markets? The markets are priced today with a great deal of efficiency based upon the knowable information that exists, and there’s a lot of it with millions of participants, and the access we have today to information. The Fed’s been on the forefront for 18 months, yet Powell’s announcement was still a surprise and that’s why markets went crazy. It was new and unknowable information that then needed to be priced in. Predicting these things is impossible.
Secondly, disciplined long-term strategies, staying invested, rebalancing to weakness has once again paid off in spades. Speculation has been disastrous. And remember, the market’s always moved up into the right over long periods of time. It’s easy to be a victim of the moment, completely focused on the here and now. But that’s not what good investors do. So I want you to remind yourself during the next bear market, this too shall pass. Stocks are not short-term investments. Everything you have in stock should be planned to be held for five to 10 years or even longer.
Next, remain diversified to smooth out the ride and create more predictable returns. Diversifying minimizes risk, and that’s been a great reminder over the last couple of years. The biggest losers of 2022 have also been the biggest winners in 2023. Last lesson, the market recovers just as fast or sometimes even quicker than the drops. Timing the market is futile because you’re often out at the worst possible time. When that pop occurs, you cannot be sitting on the sideline. November is a perfect example with the market increasing nearly 10% in one month alone and it’s another great reminder to keep a long-term focus when it comes to investment strategies over a lifetime.
I love those car commercials that they show during Christmas time, where it has perfect snowflakes coming down in the driveway and the person walks out of their front door and there’s a beautiful car sitting in the driveway, one of those giant bows on it. It’s like give the gift this holiday season. Man, nobody’s ever given me a car for Christmas. That would be amazing. And a lot of these car commercials, I mean they’re nice cars, these are like $80,000 cars, like SUVs sitting in the snowy driveway. But I’ve also never given anyone a car. I’m not a great gift giver. My wife, amazing, intentional. I’ll say something in February and all of a sudden at Christmas I’m opening up something that I forgot I even wanted.
We all have that person in our life, you might be that person, that’s my wife. I’m not quite at her level, as in really bad at giving gifts. And so fortunately for our kids, she runs point. I go pick certain things up she needs me to get, but she’s got it dialed in. With seven kids, it’s a process. And speaking of family, probably the best gift you can give your family this holiday season, it’s not a car. I mean it might be, but that’s not going to happen. Let’s just forget about that. How about an estate plan? If this would’ve been a movie, there was broken glass. I know you had this vision, this beautiful gift and all of a sudden, I just broke the glass, just destroyed your dreams. But I have seen so many families either blessed or put in really troubling situations based upon the estate plan that was left by their loved ones.
If you have not had your estate plan completed or you had one done and it’s probably not relevant, you move states, you don’t have minor children anymore, you have a new rental property, your net worth has changed, you have more grandchildren, your wishes have changed, make it a priority to knock this out. And outside of completing your estate plan and keeping it updated, I want to share with you three blunders I regularly see. Number one is picking the wrong people. Estate planning is a two-part process. Around half the documents that you draft provide instruction for divvying up your estate after you die. But the other half, and in my opinion often the more important half, outlines directives for handling your finances and your medical needs if you become disabled. So think very long and think very hard about who you select as your durable power of attorney for both medical and financial needs.
Regarding medical in particular, your life is literally in their hands. And so picking someone who’s not trustworthy or not qualified, that’s going to step in and act on your behalf can create a lot of problems. I suggest you consider proximity as well as qualifications and just overall disposition and be prepared to amend your powers of attorney as life continues on. Second blunder I see is leaving your IRA to your estate. Do not, and I repeat, do not name your estate as your IRA or your 401k beneficiary. Because while it might sound like the logical choice, it’ll be subject to claims and creditors during probate, which is the legal process for settling your estate. You see, when you die in this example, your IRA assets would be used to pay off any of the debts that are in your name. Whatever money remains then after the fact would get distributed to your heirs and not quickly and not inexpensively.
Probate can take literally years and attorneys make a whole bunch of money. Instead name a living person or living people, if you’re splitting it amongst multiple children for example. And that will allow those IRA assets to pass outside of probate free and clear and away from any hungry creditors. But by failing to name a person and instead having your estate listed, they will lose that flexibility.
And so in addition to selecting the wrong people to care for you or leaving your IRA to an estate, my third and final estate planning blunder is for those who have actually created a trust and gone through the estate planning process but then never fund the trust. A living trust allows you to pass assets to your heirs outside of probate, and it can be an extremely valuable estate planning tool. But it doesn’t do you a bit of good if that trust doesn’t own anything.
And if you’d like help with your estate plan, we have over 70 attorneys here at Creative Planning and have helped thousands of families align their wishes with a great estate plan to speak with our team. Visit creativeplanning.com/radio now, or call 1-800-CREATIVE.
I’m joined today by a special guest, Creative Planning Chief Valuations Officer Gary Pittsford. Gary, good to talk to you again here on Rethink Your Money.
Gary Pittsford: John, it’s always good to be with you, sir. Thank you.
John: You wrote an article a while back for us here at Creative Planning that I will post to the radio page of our website discussing the four buckets of financial planning in particular for business owners.
Gary: Yes.
John: Share with me, first, how you arrived at the four buckets and what the genesis was from that.
Gary: It’s turned out to be kind of comical in a way. But after working with business owners for the last 50 years, I learned the ordinary business owner had been in business for 30 or 40 years and then they want me to help them retire. But every year that they’re in business, they make a profit and they take all of it and put it back in the business. They buy more inventory, they buy more delivery trucks, they open up another store and the company keeps growing and growing and they paid off all their debt. But the bulk of their assets, their entire net worth is 75 to 80% in the value of the business. And what I talk to business owners about is that please, for the next 20 years or so, diversify into other buckets. Put some money into four different categories rather than just one. I’ve done a lot with the hardware industry and with the ag industry and they understand buckets. The people in my office always wanted me to call it a basket, but I like the word bucket better.
John: What you mentioned is important because diversification is one of the most important aspects of safety when it comes to all of our money. But with a business owner, oftentimes, maybe not even by intentionality or design, they look up, and to your point, have 80% of their net worth in the business because that’s what they’ve been working in and that’s where they see opportunities and that’s where their expertise is. And maybe they’re not as comfortable with public markets or other types of investments and they feel like most business owners that are talking with you have had a level of success. And so maybe rightly they feel a lot of confidence in their own industry.
But as we saw from Covid or the great financial crisis, sometimes there’s inherent risks that are completely outside of the business owner’s control within their industry and certainly, as they get closer to retirement, that can be important. So let’s go through these four buckets. I think that this would be helpful for any business owners listening. Speak to the first bucket for us.
Gary: Bucket number one is the value of the business. And we need to figure out what is the value. We need to value that business and we know how much it’s worth three years, four years, five years before they want to retire. Don’t wait until the last minute to figure out what it’s worth. You’re going to automatically have a lot of your net worth in bucket number one, which is the value of the business.
John: Let me ask you this, Gary. Do you think that it’s important for that business owner to understand the sellability, so to speak, of their business within their industry? Because there are certain businesses that are going to be very easy to sell and there are other businesses that a lot of factors need to be perfect for them to get top dollar. Don’t you think that maybe should play into as their valuing their business as well? Because on paper it might be one thing, but what in reality in four and a half years when you actually want to sell the business. Is it an internal real simple transition? Is it an internal transaction? Is it an internal transaction? Is it an A buyer teed up that’s a family member or someone working in the business or are you going to outside parties hoping that the economy and interest rates and some of those other factors you can’t control are in place? How do you factor that into valuing the business, thinking about the business maybe within those last 5, 10 years before they want to sell?
Gary: Everything you said is right on target. If you’re going to sell it to their son or daughter or their children, then we have a built-in buyer, but we can take our time. But we want to design how we’re going to sell it and how we’re going to minimize capital gains and how we’re going to save taxes. I’ve learned about 25% of the business owners will sell to their family. About 10% will sell to a key employee because the kids don’t want it.
John: Okay, that’s interesting.
Gary: And then about 50% or more will sell to somebody else in their industry. But depends on where you’re located. You may be able to find a buyer, maybe not. The other important thing that you touched upon is the last, since Covid, everybody all of a sudden realize, “Holy cow, maybe I need to get my act together.” Covid scared a lot of people.
John: The reason I bring this up, Gary, is because if 75, 80% of the business owner’s net worth is in this business and that’s bucket number one, and they’re trying to figure out what to know for planning for their future, the liquidity and predictability of that sale, which it represents the vast majority of their net worth, is very important for the planning process.
Gary: It’s very important. And a lot of business owners don’t have an automatic buyer, so it’s very iffy. So you’ve got a huge amount of illiquid asset. It’s not even liquid. It’s an illiquid asset and it’s an iffy buyer. So bucket number one is something that we have to talk about. We got to think about who’s going to buy it. Do we have a buyer? How do we develop a plan to sell it?
John: And I’m going to talk up your team here for a moment, Gary, because that’s difficult to figure out bucket number one, if you don’t know what it’s worth. And so whether it’s here at Creative Planning, working with your team in the business valuations group or finding another team like ours, it’s really important that owner has clarity on what it’s worth. It may surprise them one way or the other, hopefully high. But regardless, they need to have an accurate plan for what realistically they can achieve in that liquidity event.
Gary: Yeah. They need to know ahead of time. I just had a conversation yesterday with a gentleman who he thought his business was worth about a million dollars and we’ve gone through the numbers, but it’s only worth about 600,000. There’s no way that I could find somebody to buy it for a million.
John: And that’s a big difference because that might inform that business owner to work five years longer or change the direction and strategy of the business to make it a little bit more sellable, with maybe more recurring revenue or whatever it might be depending upon the industry. I’m speaking with Gary Pittsford, Chief Valuations Officer here at Creative Planning. If you’d like to learn about what your business might be worth, you can contact Gary and his team at creativeplanning.com/radio.
All right, Gary, let’s go into bucket number two.
Gary: Bucket number two is what I tell people at all the conventions I go to is that every year, if you’re going to work for 10 or 15 or 20 more years, every year max out your retirement accounts. You should have a 401k plan or a set plan or an IRA, a profit sharing or some kind of a tax-deductible plan. You need to max it out because that automatically pushes some liquid assets into a tax-deductible account. It’s just a good way to diversify. Put the maximum into whatever type of plan you have.
John: That’s an automated diversification plan, right?
Gary: Yeah. It’s automated, just every month.
John: And I’ll add to that. If you’re later in life, you can consider a defined benefit plan depending upon the structure of your employees and their ages and all of that. But if you feel like you’re late to this listening, that would be one opportunity to shove a lot of money in the final five or 10 years toward retirement and get it diversified. I love that. So how about bucket number three?
Gary: Number three is where I want the owners to buy other assets, buy a strip shopping center, buy some farmland, buy an apartment building, open up an investment account and buy dividend paying stocks or buy treasury bonds or buy municipal bonds, or buy something away from the business. I want you to diversify your net worth into more than just one or two buckets. I’m a farmer, okay, so I buy some farmland. I also buy municipals. If you’re in a high tax bracket, municipals might be a good idea. What I want the owners to do is to work with their financial advisors and diversify into other assets so that over the last 10 or 20 years, they’ve got a net worth that’s diversified into other places.
John: Muni bonds are a little bit more attractive now, paying four to 5% federally tax-exempt, maybe state tax-exempt as well, depending upon if you’re buying it in the state you live. A little more attractive than when they were paying a quarter of a percent, right, Gary?
Gary: Yes. Yeah.
John: So there are some options with interest rates a little bit higher. I think that’s a great suggestion.
Gary: And then bucket number four is what I’ve said over the years. About 50 to 55% of all the people that we work with, they own the building and the land where their company is located. It may be a warehouse, it may be a retail store, whatever it is. But owning that real estate, putting it into an LLC, leasing it back to your S-Corp or your C-Corp or whatever your business entity is, that’s a good way to diversify. You own the real estate and you’re renting it to yourself. It’s a good way to move money out of your business into the real estate entity and you can shelter some of it with depreciation. But you’re diversifying away from just the business. These four different buckets are normal for most business owners.
John: That’s fantastic. So to recap, those four buckets that every business owner should know about when they’re planning for their future. Business, obviously the value of that, which is often the largest chunk, retirement accounts, other personal assets in any business, real estate. I think those are great things to reflect on. Again, if you have questions about this and you’re a business owner, you can contact us here at creativeplanning.com/radio. We help thousands of business owners every year create transitions with their business, understand the value of their business. That’s a testament to Gary and his awesome team. So again, that’s Gary Pittsford, Chief Valuations Officer here at Creative Planning. Thank you so much for joining me here again on Rethink Your Money.
Gary: Thanks, John. Good to talk to you.
John: I received an email this past week with the title, Claiming Social Security Early: Eight Reasons Why You Should Do This. And I thought, huh, this is interesting. I’d like to see what this website, that will remain nameless, posted in this article and what those who are approaching retirement about to make, for most, the biggest financial decision of that season of life where their wages stop and retirement income begins. What are they being told? What is this all about? And I’ll run through them quickly. The article said that you’re planning for end-of-life care. If you die before your 70th birthday, you may never have turned on social security and the benefits of course for you now that you’re deceased, are gone. Maybe you have a shorter life expectancy or you need to pay off debt. You were forced to retire early. You’re only working part-time now. You’re single, you already have your 35 years of service credit, or you’ve decided to start a business. These were their reasons for claiming early.
Now, let me be clear. The number one variable that determines when you should in fact turn on social security income is how long are you going to live? What is going to be your date of death? If you knew that number and you knew your spouse’s number, if you’re married, when to take social security would be a math equation. So I am not disagreeing with this article that if you’re in poor health currently, or no one in your family lives beyond 75 years old, or you have absolutely no money saved or very little money saved and would otherwise be going into debt without your social security income, or possibly you’re single and you have no survivor benefit component, yes, then you should take early. That would be prudent.
But as a certified financial planner, when I’m strategizing social security income with clients, I look at this a little bit different, and I’m assuming these are clients who have a financial plan that works. They’re not massively underfunded for retirement, they’ve saved more than enough to produce the income that they need even if they live until 99 years old. See, I see social security income as longevity insurance. One way of looking at it is like this article, well, if you die at 73 years old, think about how much you didn’t receive from 67 until 70 because you were waiting. You never hit that break even around 83 years old where it would’ve paid off to weight. My response, you’re dead. I know it sounds harsh.
But most financial plans are not stressed. There’s no risk of running out of money if you die early. I don’t think people are on their deathbed at the hospital going, “You know what? I could have squeezed another year out of social security and I waited until… Ugh, that is my dying regret.” No, you don’t care. You never depended upon anyone else. You didn’t end up living in your kid’s basement because you didn’t live long enough to stress the portfolio.
Even good financial plans, if there is a scenario where they potentially run into trouble, it’s generally when you live into your nineties or triple digits, and that’s where it’s incredibly valuable to have a higher benefit because you delayed social security. That’s when plans, even good ones, as I mentioned, can be put under stress.
Another reason I like waiting on social security benefits, and I’m not suggesting every single person should wait until 70, it should be customized to your situation. But there are a lot of tax planning opportunities by waiting. And I’ll post an article to the radio page of our website, written by Joe Cortese, that outlines the four important social security tax planning strategies.
So think of it as voluntarily suppressing income by not taking Social Security, which allows you an expanded margin to potentially do Roth conversions or take taxable distributions to live on to lower the value of those deferred accounts while you’re in low brackets. And because of the Trump tax reform historically low brackets for another couple of years. Once social security has been turned on, your income’s higher. And that may not only lead to higher taxation of other assets down the road, but a taxation on the social security benefit itself. Remember, if you are married filing jointly and you make more than $44,000, up to 85% of your Social Security income is taxed. If you’re single, once you’re over $34,000, up to 85% is taxed. And remember that income number includes half of your social security benefit.
And then lastly, the counter argument to taking Social Security early is for survivorship planning. You want to strategize social security jointly if you’re married. Typically, and this is a broad rule, it may make sense for the larger benefit to delay until 70 while taking the smaller of the two benefits earlier, maybe at 67. Or if that person’s retired at 64, maybe at 64 or 65. Again, needs to be customized within the context of a detailed written, documented financial plan. But the reason you do that is because the moment the first spouse passes away, the smaller of the two Social Security benefits is gone. The surviving spouse keeps the larger benefit, which is why delaying the larger benefit to age 70 protects the surviving spouse. Even if in a terrible scenario, the first spouse passes away at 73 and it was their benefit that had been delayed until 70, if the widow lives to 100, they still benefited from the increased payment as a result of delaying. And conversely, it made sense to take the smaller benefit earlier because that one now ceases to exist.
If you have questions about social security, speak with an independent credentialed fiduciary. Contact us here at Creative Planning to speak with a wealth manager just like myself. You can do so by visiting creativeplanning.com/radio now, or by calling 1-800-CREATIVE.
I’ve heard a lot recently that the only reason stocks keep recovering from corrections and this recent bear market, it’s because of the Fed. Or put another way, the Fed’s the most important factor when it comes to the economy and the stock market. You can only point to great market performance because, I mean, it receives the tailwind of the Fed manipulating the money supply.
Ben Carlson wrote a great article on his blog about this where he outlined some of the prevailing narratives after the great financial crisis in 2008, that we only had a bull market in the 2010s because the Fed was juicing the economy. The only reason tech stocks did so well, these growth companies, is because of low interest rates. The only reason stocks kept recovering was just because of the Fed put. Carlson said, these narratives all have a kernel of truth to them. The Fed was trying to juice the economy in the 2010s to get us out of the GFC. Technology companies did benefit from low borrowing costs and the Fed did step in during a handful of the downturns we’ve experienced. But I think a lot of us just took this as gospel, like this is just the reality, and it’s something we need to rethink together. Because in 2023, that gospel was put to the test and it turns out it wasn’t the 10 Commandments. It wasn’t written in stone. Moses wasn’t coming down from Mount Sinai. Turns out this was much more nuanced and fluid than at first glance.
Look at the 10-year Treasury yield this year alone. When it went from 3.3 to 5% in the blink of an eye, it did so without really any reason. Then they fell back down to 4.2, as Carlson points out, in a hurry. That wasn’t the Fed, that was just the market. And while it’s easy to blame the Fed for inflation, and they probably did keep rates too low for too long in hindsight, but I’m not sure how much it would’ve mattered. If you look at the US compared to Germany, the UK, France, Italy and Canada, all of which took different monetary policy stances, they all tracked almost identically with one another when it came to inflation. So while fed policy is something, it is certainly not everything.
I want to transition over to one of my least favorite investments of all time, I feel bad even calling it an investment, and that is gold. The notion that gold is a safe investment could not be further from reality. It’s not kind of right, it’s entirely wrong. While I was jogging the other day, listening to a podcast minding my own business, it cut to an ad break and I’m paraphrasing. But essentially the ad said, “In these uncertain times, the stock market continues its risky behavior.” By the way, they say this when the market’s up, “Oh, it’s getting ready to crash.” When the market’s down, “Things are never going to get better.” It works in all seasons, these ridiculous ads. But it continued on, “Protect yourself by buying gold.”
Huh? Protect yourself by buying gold. Creative Planning President, Peter Mallouk, in his recent book wrote, “For those of us who don’t plan to be around 10,000 years from now, gold is a lousy investment.” And Peter’s right. Unlike stocks, bonds, or real estate, gold itself is nearly intrinsically worthless. Stocks, bonds and real estate have the ability to create income. They generate profits, they pay dividends, they pay interest. Gold produces no income and isn’t a crucial resource. I think it’s so interesting, people say, “Well, what if the world ends?” What if the world ends? You’re going to go to your gold storage facility or into your safe in your home, load gold bars into a backpack, drive down to the gas station and say, “Can I shave off a piece of my gold to buy some gas today?”
And by the way, I understand that some of you listening that are gold bugs, you hate me right now. You will never work with Creative Planning purely because I’m ripping on gold. But it is so bad and so misunderstood. An ounce of gold bought you a nice suit 100 years ago, and that’s what it buys today. It’s performed worse than stocks, worse than real estate, worse than energy, worse than bonds. It’s barely kept up with inflation.
Unlike many investments, gold doesn’t compound. You put eight gold bars in a safe, you open it up 100 years later, there are eight gold bars in the safe. You’re purely banking on that someone else in the world is willing to pay you more for that gold than what your great grandpa bought it for 100 years earlier. Think of it this way. It’ll deliver you returns historically, lower than treasuries, with more volatility and risk than the stock market. Does that sound like something you’d like to put into your portfolio to protect yourself? No. Awful advice. It’s not safe. You should wear it, not invest in it.
It is time for listener questions. And to read those, as always, one of my producers, Lauren, is here. Hey Lauren, who do we have up first?
Lauren Newman: Hi, John. Joel in Bismarck, North Dakota says, “Every year I get a bonus from my employer in December. But I also struggle to figure out the best way to budget for this. Any tips?”
John: Really good question, Joel. Because you said every year, I’m assuming this is predictable, but that’s really from a financial planning perspective, one of the biggest questions to answer. Because in a perfect world, you would build your financial plan and specifically your budget for expenses, assuming that you’re not going to receive any bonus. And you plan for taxes as if you will receive the bonus. So essentially, you’re planning a worst case scenario. And preferably, you have enough inside of a brokerage account or a savings account that any year where your bonus is much lower or you don’t receive a bonus, you’ll have enough to cover it. Now, I’ve seen people relying upon a bonus running up a credit card during the year with the intention of paying off the $30,000 in December and all of a sudden, “Oops. Uh oh, we didn’t get the bonus.” Now what?
So you do not want to put yourself in that position, but there are others whose base salary is $80,000 and they make $300,000 in a bonus because that’s how their comp is structured and they’ve received right around that bonus amount for the last 15 straight years. So you do need to use some common sense. In that scenario that I just described, you’re better off working a year in advance. And so what I mean is whatever you make in 2023, maybe it’s a 50 or $100,000 bonus, use that along with your base salary as your budget for 2024.
Now, to do this, at some point you have to get ahead. You have to have enough banked to run your budget based upon the previous year. You cannot be living paycheck to paycheck. But that’s a great way to create predictability because you’re taking it an unknown, a future bonus, and making it a known quantity based upon exactly what you in fact received in the previous year.
We have an office there at South Washington and the Expressway in Bismarck. If you’d like to meet with us, you can visit creativeplanning.com/radio, and we’ll run a customized personalized financial plan specific to your situation and objectives.
All right, Lauren, let’s go to the next question.
Lauren: Next, let’s hear from Greg in San Diego, California. He wrote us and says, “If I bought an electric vehicle this year and solar panels, can I combine both tax credits? My solar panel system costs me just over 60,000. My car was 42,000.”
John: Rather than me answering this, I pulled in our director of tax services, regular guest of the program, Ben Hake. Hey Ben, why don’t you answer this one for us since this is your wheelhouse.
Ben Hake: Hey John, that’s actually a great question and probably not surprisingly, the overlap of clients who are getting both an electric vehicle and interested in solar power for their houses, pretty high. And so it’s something we’re getting asked a lot about and the answer is basically the EV credit is use it or lose it in the year you get the vehicle. So that first year you get a $7,500 credit and let’s say for whatever reason you were to have no tax liability, then that credit, at least at the federal level, would be lost. We didn’t get any benefit out of that. Whereas the solar credit is basically, it’s not refundable, so you’re never going to get cash back in your pocket, but it’s, let’s say that first year you have a $10,000 credit, use up $5,000 of it on your return. That excess $5,000 will credit forward into 2024, 2025, whenever you end up getting that solar panel installed on your house. So you’ve got multiple years to use it.
The other thing is that a lot of people will say, “Well, if I have both, which one does the IRS make me use first?” And the answer is going to be they want it to be taxpayer favorable. So they end up letting you take that EV credit first. And let’s say you utilize all of that and you just have a small segment of that solar credit, you’d use that up to get to basically no tax due.
One other thing I’d point out is that starting this year, a lot of people don’t like that they have to wait until they file their tax return to basically get the benefit of the EV credit. So in ’24, assuming the dealership you’re purchasing from participates in the underlying process, they can actually give you a dollar for dollar reduction because they’re going to claim the credit. So if that vehicle was going to be $50,000, they will have you sign a form saying the dealership gets the credit and your purchase price would in turn then be 42,500. So it allows you to advance it, not have to wait until you do your return and say you the exact same amount of money, just much more early in the process.
John: Well, thanks again, Ben, for your expertise and for joining me. Lauren, let’s go to the next question.
Lauren: Bryce in Franklin, Wisconsin says, “I’m a couple of years away from 65, but it has me thinking if I choose to continue working after turning 65, do I have to enroll in Medicare? Can I still contribute to an HSA while being on Medicare?”
John: This is a good question. For retirees, self-employed workers and others who rely on Medicare as their sole option for health insurance after reaching age 65, there’s no way to contribute to an HSA. So if you stop there, nope, there is no possibility. However, people who continue working beyond age 65, or if your spouse does and you have access to a high deductible health insurance plan through your employer, you can continue making HSA contributions. And here’s the key, as long as you don’t enroll in Medicare or apply for social security benefits. And because there’s no age cap on HSA contributions, it’s possible to keep contributing for as long as you’re working and remain on one of those health plans.
But again, if you retire and you subsequently enroll in Medicare, that will ultimately end your HSA eligibility. Additionally, if you’re married and even one spouse has that high deductible health insurance coverage, the other spouse can enroll in Medicare without affecting the other spouse’s HSA eligibility and they can contribute to that higher family contribution limit. Even though one spouse is on Medicare and technically they’re ineligible to contribute to their own HSA. I know. Right now you’re thinking to yourself like, “Okay, cool, I’m glad I asked this question. Now I’m more confused.”
But in short, if you work beyond age 65 and you’re still on your employer health plan, you can contribute. But once you go on Social Security, once you retire and you’re on Medicare, you will not be able to. One side note, you will have to navigate what’s called the six-month rule where Medicare coverage is considered to begin six months before applying for the benefits. Again, very confusing. I’ll just stop there. Speak with an advisor. There are ways to do it as long as you are continuing to work.
All right, Lauren, let’s keep rolling through these. Who’s next?
Lauren: Next one is from Melissa and she says, “Is a 529 plan clearly the best college savings choice? I know there are some other options out there, but I’m not sure if these are good ones.”
John: I don’t know about clearly the best college savings, but they are the best college savings option in my opinion, when considering all of the advantages. They’re low maintenance, they offer high contribution limits, they’re very flexible, they’re treated favorably for financial aid. They offer some state tax benefits on the way in. They’re highly tax advantaged on the way out if used for qualified education expenses. They’re also portable so they can be moved between different beneficiaries. If all of a sudden one child doesn’t need it, but another one does, you can make that change pretty easily.
But there are certainly some disadvantages. You’ll lose some of those tax benefits if you do not need them for education. You can’t self-direct the investments, they’re state plans, and there are limitations on some of the state tax benefits. And they’re not always the lowest cost. But when considering your alternatives like taxable brokerage accounts, which offer more flexibility, but you lose a lot of the tax benefits, you can do a Roth IRA, which is great. If your child has earned income, you can contribute to those for them. But that starts depleting their absolute best retirement vehicle from a tax standpoint that they could have potentially compounded for 40 more years.
Plus, the contribution limits on Roth IRAs are really low at the stated maximums. And if your child works a part-time job, they’re limited even underneath that total limit to their maximum earned income. You can contribute to an UGMA account, a uniform gift to minors, which offers substantial flexibility in how the funds are invested. But the moment your kid reaches the age of 18, it’s their account. They own it. They don’t even need to use it for college. They can liquidate every position in there, run off to Vegas and squander it in a weekend playing blackjack. So to me, 529s are the cleanest shirt in the dirty laundry. While they’re not the pot of gold at the end of the rainbow, they do offer the best option if you prioritize saving for a child or a grandchild’s college expenses.
If you have a question that you’d like me to answer on the air, submit those to radio@creativeplanning.com.
I asked some of my colleagues here at Creative Planning, that I work with in Arizona, what was the most meaningful dollar you spent this year and what made it meaningful? I received amazing answers. It’s such a worthwhile question to ponder. Lauren, who you just heard from, she bought tickets to the Taylor Swift concert for her 10-year-old daughter. And her daughter just radiated pure joy for the three-plus hours that they were at the concert. And Lauren said, “That’s a memory I’m never going to forget.” Just an amazing night with her daughter. Another said, Skyline chili dog after a long flight to Cincinnati. Now this is an Ohio native. Obviously he’s joking, but if you’re from Cincinnati, they love their chili dogs. I don’t know. I think I want to be known for something different than chili dogs, but all right, we’ll go with it. I think most people like a good chili dog here and there.
But a serious answer was signing his daughter up for rock climbing. They’ve been enjoying learning together, setting goals, and it provides built-in time for them to practice together. Another person answered starting an allowance for his five-year-old son. Seeing him connect the dots between chores and money, creating an internal locus of control where his son believes that he can do things proactively to help improve his situation, that’s something that’ll carry forward into other aspects of life.
Another said they invested in creating memories together as a family by going on trips and enjoying experiences they haven’t done in the past. It’s meaningful because they’ll be able to look back on these times, years down the road and have conversations about the memories that they shared with one another. Another said, having the means to pay a hospital bill. This person got hit by a 100 mile per hour foul ball during spring training, almost lost his eye, hit right in the face. And it reminded him how quickly life can change and to be present in the moment. Fortunately, he fully recovered, but those were meaningful dollars to be able to ensure that his health was taken care of.
Another said taking a vacation to Disneyland with all of his children. He said, “Disney’s not my first choice, but the kids loved it and we made so many great memories. We also saved for a while to afford it, and in the end, it was definitely worth it.” Another person, and you can guess they’re in their twenties, said, “The money I spent to travel to 11 weddings in 2023.” Well I guess as Owen Wilson and Vince Vaughn say in Wedding Crashers, “It’s wedding season.” He went on to say that it was so worth saving money and then spending it on celebrating close friends who are making a huge life commitment and enjoying those special moments with them and other friends. Another who’s a veteran gave $1,000 to the Iraq and Afghanistan Veterans of America Charity. Another spontaneously gifted $1,000 to a young couple in their marriage small group who had just had their first baby with a lot of complications and were in a tough spot. It alleviated a financial burden and they all hugged and cried together. It was that meaningful.
Another funded two different overseas mission trips for two close friends who couldn’t afford to pay for it themselves. And lastly, one bought a snowboard for their young son. She said, “My husband and I love snowboarding. And now we get to share that with our son.”
I thought about this for myself, and it may sound strange, but the most meaningful dollars I spent in 2023 was buying a set of rubber baseballs, two bats and a bucket. My first-grader, Jude, just rakes. He’s a natural hitter. And we’ve spent time across the street from our house in the neighborhood park hitting balls, pretending we’re playing an actual game. Now batting, right fielder, Corbin Carroll. I even go throwbacks. Up now, dad’s favorite player from his childhood, Ken Griffey Jr. And it’s a blast. And through that, my sixth grader started coming out and hitting with us and shagging balls. He even joined the middle school baseball team two weeks into the season. He had never played baseball a day in his life. And I know what you’re thinking. Yes, in Arizona middle school baseball is a winter sport. And we spent time out there doing something together and having fun.
And the great irony is that those two bats and 36 rubber baseballs cost a couple hundred dollars. It wasn’t one of our major expenses as a family for 2023. And isn’t that a great reminder that often the most valuable uses of your money aren’t even close to the most expensive? So let me ask you, what’s the most meaningful dollar you spent in 2023? And in light of that, how can you use your money in the same way, maybe even more so in the year ahead? Remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1st, 2023. 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.
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