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The Invisible Threat to Your Retirement

Published on May 6, 2024

John Hagensen

In a world filled with financial advice and market predictions, it’s easy to overlook the powerful impact our own behavior can have on our retirement outcomes. Tune in as John explores how our emotions play into our behavior and decision-making and how this invisible threat could impact your plans for retirement. (:30) Plus, the probate puzzle: what is it, and how can you avoid it? (13:25)

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, the biggest threat to your financial success, how much you’ll need to retire, and whether giving up your daily latte is really necessary to achieving your financial goals. Now, join me as I help you rethink your money. We are often our own worst enemy when it comes to our financial success. The story of investing is actually quite simple, stocks win and they win big, and they’ve always won. Stocks are the Michael Jordan of the NBA Finals. They’re the Casino in Vegas. They’re Floyd Mayweather, Jr. They’re the snow in Alaska in January, they’re undefeated. Whatever example you want to use, they’re me playing Pop-A-Shot in the kid’s arcade. Yes, I just used myself with a basketball analogy in the same 32nd spot as Michael Jordan. I get that, but it might be my greatest skill in life playing Pop-A-Shot.

I get the high score on every machine in the arcade, and I’m pretty sure when I look back on it, this is why my wife married me, this is what pushed me over the top for her. She’s like, “Man, this guy is a winner, look at his skills. And if we have a family someday, our kids are going to have so many tickets, and they’re going to walk out with not just one or two Dum-Dums from the prize store, note, they’re going to have six, maybe even a Jolly Rancher and a Paddle Ball too. Unfortunately, I haven’t figured out how to translate this completely useless skill to any relevant area of life. So I guess I won’t be quitting my day job as a wealth manager anytime soon. But history has shown us that in the long run, stocks win, plain and simple.

Use any data set you want over an extended period of time… In fact, if you go back to 1800, we’re going way back in the time machine, stocks have earned an annualized return above inflation of 6.9%. Bonds, about half, 3.6. Gold, just over inflation, 0.6. And not surprisingly, the US dollar, relative to inflation, is down 1.4% per year over the last couple of 100 years. If you’ve studied finance at all or looked at the markets, you know the data. If you shredded your statement the last 30 years, you made about 10% per year in stocks by doing absolutely nothing. Why then, if stocks always win, is this so difficult? John Bogle answered this question in part when he said, “Don’t do something, just stand there.” It’s difficult for us to do nothing. Sounds easy, but it’s not. If you look at the history of bull and bear markets, so a bear market being defined a drop of 20% from a previous high close, and a bull market being defined as the lowest closed reached after the market has fallen 20% or more to the next market high.

Over the last nearly 100 years, you have 11 bear markets, as compared to 12 bull markets. So not a lot of difference in the quantity. But here’s the more instructive part of the data. The average bear market period lasted 1.3 years with an average cumulative loss of 38%. The average bull market, that period lasted 6.6 years, on average, with a cumulative total return, and I don’t want you to miss this, of 339%. I’m looking at a chart on my computer monitor right now, with bear markets listed in orange and bull markets listed in blue, and the obvious thing that jumps out is how huge, and sprawling, and wide the bull markets are as compared to these very thin bear markets that come and go, again, with just over one year, as compared to over six and a half years for bull markets. Paul Samuelson said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

But despite this, as human beings, we still have trouble not disrupting this growth along the way, and this is in part because there are always reasons to sell, and negative news is much more prolific, and dramatic, and in our face, and readily available, and driving emotion than long-term positive news. I took a ten-year period from 2009 through the end of 2019, which saw dramatic growth in the market coming out of the great financial crisis. But despite that, here were just some of the news headlines that could potentially be construed as reasons to sell, “663,000 jobs lost in March of 2009.” “Chrysler, General Motors, files for bankruptcy.” “The BP oil spill,” “The flash crash,” “Most powerful earthquake to ever hit,” “The S&P downgrades US debt,” “European sovereign debt crisis,” “US stocks fall 20%,” “Gold peaks at 19.23,” “The Dow only had five positive days in a month for the first time since 1968.”

“Fiscal Cliff talks send stocks lower,” “The taper tantrum,” “US government shutdown,” “Ebola virus,” “Dow falls a thousand points for the first time ever.” “Global stock market sell-off,” “Chinese stocks fall 45%,” “Crude oil bottoms out after falling 77%,” “Brexit,” “There’s a US election,” “Futures fall 5%.” “US stocks go nowhere for 20 months.” “The Nasdaq-100 falls 4% from its session high in a day.” “Charlottesville,” “Dow then falls almost 1200 points for the largest decline ever.” “US government shutdown,” “Again, trade war,” “Yield curve inverts,” “Emergency Fed injection into the repo market,” and, “An Iranian bombing.” Those are just some of the headlines. That’s not a comprehensive list, that’s a lot of scary bad things over a ten-year stretch. During that decade, with all of those reasons to sell, the S&P 500 increased 495% in the midst of all that chaos. You see, the market cycles wreak havoc on our emotions as investors.

The key is not acting upon those emotions, sticking to your plan, because when the market’s up, the common wisdom is, “Buy everything. I want all in.” When the coast is clear, that’s when I like being in the market. But successful investors recognize that’s actually the point of maximum risk. The market’s already high and that doesn’t mean you shouldn’t stay invested, it just means it’s not reason for additional optimism, that because presently, things are great, they will be in the future. And conversely, when the market’s down, common wisdom is, “Sell everything. I want to get out.” But successful investors obviously realize that this is the point of maximum financial opportunity. If the markets are going to average 8 to 12% a year for 100 years, and they are temporarily in a drawdown or a bear market, I have higher expected returns from this point moving forward than I did prior to the correction.

Keep in mind, there will always be a reason to sell. If you are looking for it, you will undoubtedly be able to find a narrative that supports, “Not a good time to be in the market.” And I’ll conclude this point with a 20 year annualized return by asset classes from 2002 through the end of 2021, publicly traded REIT’s made 11.2%, emerging market equity, 10% per year, S&P 500, 9.5, small cap, 9.4, a 60/40 made 7.4. So even if you had 40% of your money in bonds, which earned 4.3%, home prices appreciated by 4.2% nationally, the average investor is all the way down this chart having earned 3.6%, only outpacing inflation by a little, commodities and cash. Remind yourself of the war within yourself when it comes to your money. Your behavior, your emotions is often the largest factor by far of your investment success.

Stocks are an airplane from LAX to DFW. You may get some bumps along the way when you’re up at cruise, you might have to hold onto your ginger ale during some rough patches at 35,000 feet, but at no point are you more likely to reach Dallas by jumping out of the airplane to avoid the turbulence. Buckle up, listen to a podcast, put on your noise-canceling headphones, and you’ll be walking into a terminal filled with a bunch of Dallas Cowboys gear in no time. If this message is resonating with you, and you’d like help, and guidance, and perspective, and you’re not sure where to turn, visit creativeplanning.com/radio now. We’re helping 75,000 families in all 50 states and across the globe. To speak with one of my colleagues, a credentialed fiduciary, not looking to sell you something, visit creativeplanning.com/radio now. Or if you’d prefer, you can text the word plan PLAN, P-L-A-N, to 1-888-914-PLAN.

Let’s suppose you’re all in on what I just shared, you believe the stock market will grow and compound over time, as long as you can control your behavior and make smart decisions, and so you’re saving for the future, but how much will you need for retirement? It’s one of the most common questions in financial planning, “What’s the number that I need to accomplish all my goals? What is that end point? Where is the finish line?” Well, Northwestern Mutual conducts an annual study, and this year, a few things really jumped out at me. And it’s relevant, because here in 2024, more than 4 million Americans will turn 65. That’s an average of 11,000 people per day, and that’s projected to continue through 2027. It’s the largest surge of Americans hitting the traditional retirement age in all of history. And in this study, they found that just half of boomers and Gen Xers believe they’ll be financially prepared when that time comes.

US adults believe, in aggregate, that they’ll need 1.46 million to retire comfortably, which is a 15% increase from the 1.27 million reported last year, far outpacing today’s inflation rate, and over a five-year span, people’s magic number has now jumped a whopping 53%, from 950 grand, that was the target that Americans reported in 2020, all the way up now, as I mentioned, just under $1.5 million. Meanwhile, and here’s the real sobering part of the study, the average amount that US adults have saved for retirement actually dropped, from 89,300 to 88,400. So let’s get this straight. We think we need about 1.5 million, and the average American has saved less than 100,000 for retirement. No wonder half of the people surveyed don’t have confidence their plan will work. I’m not trying to sound insensitive, but duh, you’re going to be just a little bit short.

And I’m not going to sugarcoat this, we need to take personal responsibility for saving money toward our future, as a society. If from age 25 to 65, you just save $500 a month, you get an 8% rate of return, which is lower than the historical averages, you end up with over $1.7 million at retirement. That’s assuming you don’t receive a match of any kind from your company. This is assuming you’re not married with a spouse who’s also saving $500 a month, this might be $250 per month each if you’re married. We’re talking putting away $500 a month, while you’re working, to nearly have $2 million at retirement. I’m not going to let us off the hook, we’ve got to do better, $80,000 is pathetic. Three other quick takeaways from the study, in addition to how far behind we are as Americans, where the people don’t have tax plans, only 30% of respondents stated that they have a plan to minimize the taxes they pay on their retirement savings.

Secondly, Gen Z is going to need far more than Gen X due to inflation. Gen Z in the study said they need 1.63 million, while Gen X needs 1.56. Well, considering that the average age gap is 30 years between these generations, and your money has to double every about 23 years just to keep up with inflation historically, that’s not a circle I can square. One of the groups is way off there. And lastly, you attempting to figure out how much you need to retire, should be done by a certified financial planner who looks at your entire situation, because there are so many variables that make your plan unique. Here are just a few. How much do you spend? Do you want to leave an inheritance, or do you want the check to the morgue to bounce? Do you have longevity, or conversely, health complications? How much are your social security benefits?

Do you have a pension? Will you be caring for an aging parent, or by contrast, inheriting money? Do you own a long-term care policy, or not? And on, and on, and on. There’s hundreds of questions just like that, and a great wealth manager can not only ask the relevant questions and bring those to the service, but then apply that knowledge and information for you to get that number. I want to provide you an easy outlet to get that number for you to have confidence. Do you want to know what your specific shortage or surplus is? Is it 1.2, is it 3.7, is it 600 grand? Where are you at, projection-wise, to achieving that? What rate of return would you need to accomplish those goals? Is it 3%, or is it 9? And if you’re already in retirement, how much can you spend? That number is a really important one once you’re coming down the mountain. My special guest today is Creative Planning attorney, Annie Rogers. Annie, thank you for joining me on Rethink Your Money.

Annie Rogers: Hi, thanks for having me.

John:  Probate’s a difficult process, it’s expensive, it’s time-consuming, and if you can avoid it, you’ll be very thankful. For those unfamiliar or haven’t experienced it, what is probate, Annie?

Annie:  The probate court is a court that solely looks at the management of a person’s estate or their person. So this can be if you’re incapacitated, for a guardianship or conservatorship purposes, or when someone passes away, who do their assets go to? How do debts get paid? And those are governed under a will, if you have one, if not, there’s an intestacy statute that says, basically, it goes to your next closest family members, and it depends on the state and what that looks like, but a lot of people think that if they die, and they’re married and have kids, everything goes to their spouse, when in every state statute I’m aware of, it is usually divided between the spouse and kids.

John:  Yeah, that surprises people, for sure.

Annie:  That is a shocker sometimes when you have minor kids, and then you have to do something in probate.

John:  Let’s say someone dies with a $200,000 mortgage, isn’t that where it’s settled up is within probate, correct?

Annie:  Right. Probate really is retitling assets and making sure creditors get paid. So if your state is going through probate, there’s a statutory period in every state, where you have to leave it open for creditors to make claims. So nothing can be done until that period has passed, and the credit card companies, and different mortgage companies, and things like that, can say, “We want to get paid if this house is sold.” If there’s a mortgage on a property and the house is sold, then part of that agreement is that the lien be paid off before it can be sold.

John:  How does a will, Annie, factor in with probate?

Annie:  A will is really like a letter to the judge about what you want to happen in the probate process. One of the common misconceptions is that if you have a will, it doesn’t require probate, when, in fact, it ensures it. It’s just saying something potentially different than what the default statute says, like in the event that you want everything to go to your spouse first and then your kids, or if something had to go through probate, and I have a trust, I want to kick it back into my revocable trust, instead of going to individuals or to whomever it would go to through that intestacy statute.

John:  That’s a really important distinction. People will say, “Why do I need to trust?” Well, a will actually, to your point, ensures that you’ll go through probate. Everything’s public. I think most people that have gone through any court process of any kind, or had to work with the government, if you can avoid it easily, you probably want to, especially when it comes down to your life savings and your surviving children, and spouse, and a lot of people that you care about trying to make it as easy as you can. What are some other misconceptions that you find about probate?

Annie:  People sometimes think their debts die with them, and that’s not true. Just like you asked about the mortgage, if you had debt, that’s still there, and it’s going to get paid first out of your estate before anything else goes to your family. Things like federal student loan debt, sometimes that is forgiven when you pass away. But most debt is still there.

John:  So don’t just go get an Amex and start flying private when you find out that you have three months to live. You’re like, “Ah, who cares? I’m just going to live it high and I won’t have to pay any of this.” Nope, you will.

Annie:  Yeah. And sometimes, the executor of the estate can negotiate those amounts down a little bit, especially if there’s not much in the estate. And if you have more debt and assets, then they’re going to have to take what they can get, but that leaves nothing for your family.

John:  Which, a side note though, this is why I don’t advise that people jointly own things with their children, because a lot of times, you just mentioned a really great reason why, they’re not going to come after your children who have nothing to do with your situation if they’re not titled with it. But I’ve seen people say, “Oh, for the ease and maybe avoiding probate in some cases, we’re going to jointly own things.” Then the person dies with a negative net worth, creditors are coming after the kid who lives halfway across the country, “Oh, you’re a co-owner on half of these different assets. You’re now tied into this.” I’m speaking with Creative Planning’s estate planning attorney, Annie Rogers. If you’d like to speak with Annie and her team, you can visit creativeplanning.com/radio for any of your estate planning questions. What are some other disadvantages, Annie?

Annie:  The timeliness of being able to get the probate accomplished. Like I mentioned before, there’s a statutory period where you have to keep it open for creditors. You file the petition with the court, you have to figure out what assets are there, which sometimes is an Easter egg hunt, if someone has done no planning whatsoever. It used to be we’d wait for the statements to come in the mail, but now, most people get things electronically, so it can be very difficult to figure out what they have, and then things keep trickling in, which extends the time it takes to get it resolved. Also, if there are multiple beneficiaries, there are sometimes documents they have to sign to go onto the next step of the process, and if you one beneficiary that’s not responding or signing documents to waive hearing or things like that, it can really extend the period, because it’s kind of hurry up and wait until the next step can happen.

John:  I’m glad you mentioned that because in my experience as a wealth manager, that’s probably been the biggest surprise, disadvantage to someone who’s never gone through it. They’re like, “Oh, they’ve got these plans to maybe renovate their house, or do different things with the money, or donate some of it.” Like, “Oh, you’re not getting any of this-

Annie:  Yeah, you can’t get any of it.

John:  … for quite a while.” And in a state like Arizona, where there’s a million snowbirds all over the state, the probate system is so backlogged. To me, that’s one of the biggest surprises, people go, “Wait, how long is this process going to take?”

Annie:  Even if it went really smoothly, I would say it probably takes at least six months, often, a year or more, depending on if there’s anything contested, or you find new assets later that have to continue to go through the process.

John:  Well, and we’ve talked about it being public and the fact that it can take a really long time. How about the cost, Annie?

Annie:  Yeah, it’s very expensive. The executor gets paid, the attorneys get paid to go through that probate process, and generally, the payments in each state happen one of two ways. One, it’s statutory, which usually is some percentage of the estate. The other is based on the hours you’ve spent on administering the estate, and then the court approves it. It can be thousands and thousands of dollars. A while back, I calculated what it would be for a $2 million estate in California based on their statutory fees, and it was $30,000.

John:  Isn’t that wild? The other part of that is we’re talking about a fairly smooth probate process, in a lot of cases. We’re not talking about contested probate, that’s a whole nother ball game. Will you explain briefly what it looks like when it’s contested probate?

Annie:  If you have a will and you’ve disinherited a beneficiary, or not left somebody something they think they should have received, somebody can contest what the will said, and then there’s a litigation about, did they have capacity when they made this will? And then it ties up the assets. And that can happen with the trust too. There can’t be any distributions made while they are disputes about who should get what. And it can spin down the assets in the estate pretty quickly in litigation costs, because usually, the estate would cover the cost to defend against a claim against it. So that can create a lot of issues. And thankfully, we don’t see that happen very often, but it does happen, and then that’s a whole other ball game.

John:  It’s public, it’s expensive, it takes forever, what’s the solution here? I don’t want to leave listeners thinking, “Well, I’m pretty sure at some point I’m going to die, and now, Annie just told me that it’s going to be terrible for my family.” So this isn’t a throw up your hands in the air and give up. What do you suggest, and what do we do for clients here at Creative Planning,

Annie:  Even if a will-based plan is right for you, some states allow for transfer on death deeds or beneficiary deeds, where you can file a deed that says, “Upon my death, I want my home to go to my kids.” You can also put beneficiaries on assets, because those supersede a will. If you have a joint ownership like with your spouse, with a right of survivorship, it’s like the survivor gets everything, that usually works upon the first death, but on the second death, sometimes it creates an issue, because you don’t really have joint ownership anymore.

John:  That can solve a lot of the big assets. You’ve got an IRA, you have a brokerage account, some of those can be transferred on death or beneficiary directly to people to avoid probate with at least that part of the estate, even to your point, if they’re in a situation, for whatever reason, where it doesn’t make sense to have a trust. Let’s talk about a revocable trust though, because you start talking about $30,000 on a $2 million estate in California for probate. A revocable living trust is a heck of a lot cheaper than that, plus it’s going to make things significantly easier. I think there’s misconceptions about trust too, and that’s not what we’re talking about today, but I feel like that’s one of the big answers.

Annie:  Right. A revocable living trust is this entity you create that holds your assets, and either things are titled in it now or upon your death, and the trust itself governs what happens and doesn’t require probate. And this is especially important in those states that don’t allow for beneficiary deeds, because a lot of times, people’s homes are their most expensive asset, or if you have real estate in more than one state, because if you own property in more than one state, you have to have a probate in the state where the land lies. So if you live in California but you own a place in Tahoe and on the Nevada side, you’re going to have a probate in California and in Nevada. And so then that’s doubling your attorney’s fees and the time it takes to get everything resolved. So a trust is that-

John:  Your California attorney is going to say, “Oh, yeah, I can do that part for you, but you need to call somebody else in Nevada.”

Annie:  It creates even longer period of time, more cost. People think, “Oh, I’m not uber wealthy, I don’t need a trust.” And that’s not necessarily true. A trust is a really great vehicle to pass on assets, and be able to be a little bit more specific about how your beneficiaries receive the assets. For me, my daughter’s 13, I have one, but I joke that I’m a mean mom, and the jury’s still out on how responsible she’s going to be. I joke about that, but my trust says that the assets are held in trust for her needs until she’s 30, and then she doesn’t even get everything all at once, she can get a third at 30, 35, and 40. So hopefully, at those milestones, she will have matured and be launched and be making good financial decisions.

And the nice thing about that is I can tweak that over time. So by the time she gets 30, maybe she’s really in a good place, and I think, “Okay, I’m comfortable with her getting it all now.” Maybe they don’t ever get it all and they can be their own trustee of their own trust share. We have a lot more flexibility with what’s right for an individual beneficiary or your family, and we can do some estate tax planning through a trust. It’s easy to update and easy to make sure that reflects what you want for your family.

John:  For a few thousand dollars, you can change it whenever, you don’t lose any access to the money, you don’t lose any flexibility, you don’t lose liquidity, and it can make things so much easier for those around you, plus, to your point, you can create some customization that you just simply can’t do within a will. So for most people that have a fair amount of assets, and I’m not talking about $50 million, but have a house and they’re the millionaire next door, a trust can really save you a lot of money and hassle. So again, if you’d like to discuss your estate plan more, you’re interested in whether yours is up-to-date for your wishes, up to date for the current laws, we are happy to help. To speak with us, visit creativeplanning.com/radio, or call 1-800-CREATIVE. Why not give your wealth a second look. Thank you, Annie Rogers, for joining me here on Rethink Your Money.

Annie:  Thank you. Always a pleasure.

John: Is it time to relent and acknowledge the only way you’ll retire with solvency, with peace of mind, is by trading in that fancy expensive peppermint mocha for the giant red tub of coffee grounds? Because the best part of waking up is Folgers in your cup. Well, growing up in the Pacific Northwest, I was a huge Seattle sports fan. And of all my teams that I loved, the Mariners with Ken Griffey Jr., and the Seahawks with Bosworth and Largent, it was the Seattle Supersonics who really held that special place in my heart. And that’s why it was so disappointing to see the Sonics franchise sold and then moved to Oklahoma City, the franchise now known as The Thunder, the number one seed in the Western Conference, who has one of the great superstars in the league. It’s painful to watch as someone who lost their team. Well, the owner who sold the Sonics was Howard Schultz, founder of Starbucks, and there was a big push in Seattle to boycott Starbucks coffee.

And I was torn because coffee was one of the few things I actually like more than even the Sonics. Not to mention the fact that 10,000 people not buying Starbucks coffee probably isn’t going to bother a billionaire. Some financial experts are quick to point out that giving up a small daily expense, like coffee, could free up much needed money for your savings. The idea being that, over time, those tiny contributions that you’re redirecting away from a latte and to your investments add up in a sizeable way. For example, let’s suppose you spend $5 a day on a latte during the work week. But instead, you put that $25 a week, or $100 a month, into your 401(k). You do that over 40 years, and your investments generate an average annual return of 8%, which, by the way, is a little bit lower than the average stock market returns, historically, you would end up with $311,000, which is pretty staggering, and just speaks generally to the power of long-term exponential growth.

So if we stop there and that’s the end of the story, it’s like, “Wow, maybe that is a great idea, to pass on the pumpkin spice latte in the fall.” But while there’s a shred of truth to that, from a principle standpoint, giving up your daily coffee by no means is the only way obviously to build up your nest egg to improve your retirement situation. And if you’re like me and you love coffee, and it’s going to be a huge negative for 40 years of your life to not be able to sip on your hot beverage in the cup holder of your car, then maybe that’s not worth it. Here’s a better bet. If you’re struggling to find money for retirement savings, rethink not the small purchases, not the $5 per day purchase, but the big ones, the huge expenses.

The budget here within a family who’s nitpicking every single tiny expense isn’t wrong, it’s not that it doesn’t matter, and maybe once per year you are evaluating to see where you could cut back, what expenses aren’t bringing you joy or a lot of value, especially those subscription-based payments that you’re not even thinking about and are flying out of your account each month. But the far bigger impact are things like your house payment, what are you paying for a mortgage or rent, your car payment, or here in American culture, your car payments, plural, how much are you spending on vacations, on clothes, on entertainment? It’s the big items that make a massive difference in your retirement projections.

And remember, that’s only one side of the ledger. You know what also is a lot more important than whether or not you buy a latte? The income piece of the equation. Asking yourself questions like, “How can I make more money each month by increasing my skills, or potentially getting a promotion, or switching jobs to a higher paying one? That is usually a far better use of your energy and your efforts than isolating $125 per week expense. Because unless you make a million dollars per year and your preferred lifestyle is 50 grand, you’ll have to give up some things, making present sacrifices for your future benefit. But again, as a guy from Seattle who runs on caffeine, financial pundits, can we please stop singling out the lovable morning Americano? I’m begging you, please.

I had a prospective client come in recently, and their main concern centered around their investments. Man, I looked at their current account statement, and they pulled out the cover page, and it had this fancy pie chart with all sorts of different colors representing each quadrant, and they said, “Can we go through this? I don’t know if I’m well diversified. I see that I own a lot of things. My returns don’t seem that great. My volatility seems pretty high. I just want to make sure I’m not missing something. What do you think?” Well, diversification absolutely is one of the core tenets of managing risk, creating durable returns, not blowing up the entire portfolio, having things that zig when other things zag, not having all your eggs in one basket. You can pick your favorite metaphor, but John Huber said, “The minimum level of diversification you need is the level that allows you to zoom out, meaning, the level that allows you to behave in a rational manner at all times.”

And that means in both bull and bear markets. Diversification isn’t just owning a lot of stuff. If you own five rental properties, but they’re all on the same street, yeah, you could argue that it’s better than only owning one because you have multiple tenants, and if one house floods or burns down, the other four don’t. That’s very true, but it’s not optimizing diversification, because if a tornado blows through your town, or the major employer of your town goes bankrupt, and the local economy is terrible… We see this in oil towns all the time. They’re booming, and then they’re a ghost town, because oil prices plummeted. All five rental properties would all possess many of the same risks. Think about if you own two cars and you said, “Well, I want to be diversified,” but you own the exact same make and model, and neither of them has four wheel drive and now you need to go on a trip up to the mountains.

Well, they’re both terrible in the snow. Both of them are susceptible to having transmission issues at about the same mileage. Neither seats are whole family because they’re both five-seaters. That certainly doesn’t work for me with seven kids. And again, it’s better than only owning one car because you have some level of diversification, like one person can take a kid to soccer while the other one’s off to theater practice, but it’s not optimal. And the same is true with a diversified portfolio. Five stocks is more diversified than one, but if all five are tech companies within the United States that are about the same size, they’re going to move mostly in tandem with one another. Think of diversification as simply smoothing out your returns, in an attempt to avoid a scenario where you go broke, where your plan just blows up because something out of your control occurred.

You only diversified because you believe, and by the way, I do believe this, that it’s impossible to predict which asset class will do well in any given year, or conversely, which asset classes will do poorly in any given year. Areas that are winners in one year often sink to the bottom in later years. We know that the markets are cyclical, holding a variety of asset classes helps guard against being overly exposed to an area that unexpectedly falls out of favor. Let me hit you with five bullet points around diversification that I think you’ll find relevant. The first is that correlations between stocks and bonds, they have increased, but bonds still provide diversification benefits. When the Federal Reserve began aggressively raising rates in 2022, stocks and bonds began moving more closely in tandem. And you heard many pundits and money managers say, “Oh, 60/40 portfolio is dead. 60% stocks, 40% bonds, it doesn’t work anymore. They’re both going down. You’re not receiving that non-correlated cushion that benefit that buffer.”

And while that was true with longer term bonds that were very disrupted by those fast rising interest rates, shorter term bonds were down a couple of percent, while the stock market was down about 20. So there will be periods of time where bonds provide less diversification than potentially in other environments, but they still have a lower correlation versus US stocks than almost all other major asset classes. Number two, publicly traded real estate is a questionable portfolio diversifier. I don’t feel strongly, one way or another, you should never have publicly traded real estate, or you should always have publicly traded real estate. Morningstar looked at this, and when you look at real estate measured by the US Real Estate Index, it’s been a really underwhelming diversifier over long periods, with correlations typically hovering around 0.7 and more than 0.9. So probably, a lot more correlated to US large stocks than you might have thought.

Number three, high-yield bonds don’t make the best portfolio diversifier either. Now, remember, high-yield is just another word for junk bonds. But over the past few years, when you look at the Morningstar US High-Yield Bond index, its correlation was over 0.8 with the equity market. So not only do they move often in tandem with stocks, but they have much less defensiveness than other bonds, and are far more sensitive to economic stress. And my second to last bullet point here on diversification is that international stocks from developed markets have provided modest diversification benefits in recent years. I’m a believer in globally diversifying to protect yourself. Yes, the US stock market is the 800 pound gorilla. Yes, we make up more than 50% of the entire global market capitalization. Some of the best companies in the world are here in the United States. We’ve had a phenomenal run over the last decade plus.

But when you look at the ’80s, international one, the ’90s, the US one, the 2000s, international one, the 2010s, US one. Very cyclical. And so again, if diversification’s purpose is to minimize your overall catastrophic risk, international stocks provide that. And finally, commodities, including gold, can provide compelling diversification benefits, although performance has been very weak. You know what also provides good diversification benefits, throwing half your money on red at a roulette wheel in Vegas. It’s not correlated with US large cap stocks, yes, but it doesn’t improve your expected outcomes. Ultimately, though, portfolio diversification doesn’t have to be complicated. And a great financial advisor who understands your goals, your time horizons, your risk tolerance, your tax strategies, your estate planning objectives can help you define the asset allocation, that colorful pie chart, that provides you with the highest probability of success.

This week’s one simple task is to get your digital assets in order. Now, while a social media update might be the least of your concerns while preparing your affairs, we are in an age of an online footprint, and it’s a great idea to sit down and make a list of all your digital logins, all your passwords, so that if anything happens to you, your loved ones can access important pieces of your plan. Consider some of these apps and websites within different categories, just between messaging and social media, Facebook, Twitter, Instagram, Pinterest, TikTok, Snapchat, wherever else people are congregating, maybe LinkedIn, I don’t know, that’s the only one that I have, is LinkedIn. And then transactions and banking are very important. PayPal, Venmo, Cash App, online banking, and lastly, email. Many of your regular bills will come if you’re signed up for electronic delivery with a notification to your email, and that can be extremely helpful for anyone trying to handle your affairs in the event that you are incapacitated or unexpectedly pass away.

Once you have that complete list, give someone you trust the authority to access those digital assets in the event something happens to you, so that they can act according to your instructions. There’s a link on the radio page of our website to view all of 2024’s simple tasks so that you’re in a better position than you were at the beginning of 2024. It’s time for listener questions, and one of my producers, Lauren, is here to read those questions. Hey, Lauren, a lot of questions, let’s see how many we can get through. Who do we have up first?

Lauren Newman: Sure. First up, we’ve got Rob in Austin, Texas. “Can you weigh in on this situation? We’re currently in our 40s and plan to retire early, around 55. At this point, our kids will both be in college. We have about 250,000 saved in a trust, and 700,000 in retirement accounts. We also have a pension that goes into effect at 57. What is the best way to pay for our children’s education and retirement when we will not have access to our funds initially?”

John: Rob, the best part of this is you’re asking in your 40s. Without knowing your exact tax bracket, I would stop funding deferred accounts, and instead, begin maxing out the Roth side of your 401(k). Because liquidity is going to be important, and you already have 700 grand deferred in retirement accounts, if that doubles over the next 10 years prior to you retiring, that’ll be near one and a half million dollars. So you’re trying to build up balances in accounts that are more accessible and provide more tax diversification. When you do retire, do not roll your 401(k) blindly out into an IRA. Bunch of the annuity salespeople out there masquerading as financial advisors are like, “Well, this annuity is amazing. You can’t do it inside of your 401(k), roll it out so we can do this annuity.” Well, that could be a big mistake because most retirement plans allow penalty free withdrawals in your mid-50s.

You don’t have to wait to 59 and a half as you do with an individual retirement agreement those IRAs. I would also start funding a 529 account to have some tax-advantaged dollars to pay for college expenses. To summarize, Rob, I would find a great advisor that’s experienced. If you don’t have a plan already built out, get one, view all of your projections based upon assumed college costs, retirement income needs, your current savings rate, and if you’re not sure where to turn, here at Creative Planning, we could map out and systematize the next 10 to 15 years, and reverse engineer exactly what needs to happen so that you’re well positioned at 55 years old. If you’d like to schedule that, we have multiple offices there in Texas and you can request that visit at creativeplanning.com/radio. All right, Lauren, who’s next?

Lauren: So next up, we’ve got Carol. She says, “I was previously married for 15 years before we divorced. I’ve now been married to my second husband for two years. I hope to retire at 67, which is about four years from now. Can I claim my first husband’s social security benefits?”

John: Carol, I have bad news, the answer is no, because once you’re remarried, you cannot claim on an ex spouse. You can get 50% of your current spouse’s benefits, if that 50%, that half of your current husband’s benefit, is more than yours on your own earnings record. The key number, just in general, with divorce and social security benefits is 10. 10 years is the minimum length of time you need to be married to claim. And you solve that with the 15 years, but by getting remarried, you then disqualified yourself from that ex spouse’s benefits. All right, Lauren, next question.

Lauren: Next up, I got Alice in Littleton, Colorado. She says, “My husband and I created our trust in 2000 but have not made any changes or updates since then. We finally decided to schedule an appointment with an attorney and make updates. What should we be aware of when going in?”

John: Well, Alice, because it’s so dated, you’ll most likely want to do a restatement, so it’ll be a refresh of the entire trust. It’ll cost, comprehensive, with all the documents, 2 to $3,000 for most good attorneys, can be somewhere in that range, maybe a little more, maybe a little bit less, depending upon who you go see. And without looking at your trust, it’s a little bit hard to say on any specifics, but federal exemptions were really low in the year 2000. Now, you need to have nearly $30 million as a married couple to start having issues with that estate tax, that wasn’t the case in the early 2000s, it was around a million dollars. And so you may currently have it set up where there’s an A/B split when the first one of you passes away, and you probably don’t need that anymore, as just an example, unless you have a huge estate like I just mentioned.

So the Secure Act also passed in 2019, which impacts how beneficiaries receive inherited qualified accounts, how they’re able to stretch those accounts, that’s all been changed. Your powers of attorney should be updated as well to prevent them from appearing stale, if you ever end up needing to rely on those, because stale, by the way, is just the idea that an entity, like a bank or a hospital, could refuse to honor your existing documents because of the age of them. They’ll just say, “These look stale. These are old. We don’t want the liability.” And a state where I’m talking to you from here in Arizona, institutions are not legally required to honor powers of attorney. I’ve certainly had the acting agents very surprised, when they took in a power of attorney, the bank’s legal department got back to them and said, “This is 23 years old and was printed off the internet. You’re not getting access to these accounts. It’s too big of a risk for us.”

We have over 50 estate planning attorneys here at Creative Planning and an office. They’re in the Denver area, if you’d like to meet with us, you certainly can, Alice, we’d be happy to provide a free consultation, and discuss your situation in a more individualized way to answer your specific questions. Lauren, we have time for one more. Let’s go to the last question for today.

Lauren: Jen wrote in and asks, “What’s the best way to take my RMDs, monthly, quarterly, or yearly? What if I don’t need the full amount?”

John:  For simplicity, Jen, most take them annually. However, if it’s a fairly large distribution, and you’re using some of those distributions to live on as income, and so you don’t want to wait 11 months while it’s just sitting in cash, you certainly can set it up as monthly income, as long as the total amount of those monthly payments meets or exceeds the required distribution amount. Now, I’m guessing you don’t need at least some of it for income based upon your question, and with what you don’t need, you can simply transfer that into an after-tax account. So you’ll pay tax on the distribution, and then you can keep the remainder invested in a trust account or a joint account with rights of survivorship, instead of your IRA. If you’re charitably inclined, you have another option, you can utilize a qualified charitable distribution, where you send your RMD amount, directly from the IRA, to your charity of choice and it satisfies the RMD.

The reason QCDs have become more popular since 2018 is because the Trump tax reform doubled that standard deduction. And so many people used to get a tax benefit for donating money, and no longer do because they’re not itemizing. So mechanically, let’s say your RMD is $10,000, and you don’t utilize a QCD, you would take the distribution out, so you don’t get hit with that 50% penalty, you’d put the $10,000 in your bank account, it’d be counted as taxable income, you then send a $10,000 check to your church, but if that doesn’t get you into itemizing territory, essentially, you still owe a couple grand in taxes. So now, it’s basically costing you 12,000 to get 10,000 to your church, or you only send 8,000 to the church because you hold back a couple grand that you know you’re going to owe in taxes. Through a QCD, all $10,000 goes directly to the charity from your IRA, and the IRS gets zero, which is a much better outcome. Thank you for those questions. To all you listeners, if you have questions of your own, email those to radio@creativeplanning.com.

It’s been said, “You cannot change the people around you, but you can change the people that you choose to be around.” As a parent, one of the best proxies of how my children are doing is who are they hanging out with? Who are they spending time with? Who are they gravitating toward? Jim Rohn famously said that, “You become like the five people you spend the most time with, so choose them carefully.” This isn’t exclusive to children, this is very relevant for us as adults as well. The Bible says that, “Bad company corrupts good character.” Mark Ambrose says, “Show me your friends and I’ll show you your future.” Who are your five people? Who do you spend the most time with? The best indicator of where you’ll be in the future is who you’re spending time with in the present.

Consider these two important qualities in your closest relationships. Number one, high expectations. Do those around you see you for your full potential? Are they willing to hold you to that standard and remind you of that standard? There were a few times early in our marriage where my wife had to hit me with some truth serum, and I’m so thankful she did. “Hey, John, this isn’t the type of person you want to be. You don’t want our kids assuming they can’t drink from your cup in the evening because it’s probably vodka on the rocks and not water.” That’s becoming a pattern to the point where they’re asking, I mean, is that who you want to be? You don’t want to have your face in your phone emailing people for work from 6:00 to 8:00 PM when our kids are wanting to engage with you in the evening time where we’re all together.

You want that to be a memory of theirs? “Yeah, dad was on his phone all the time.” These are precious years. As a lot of us men do, I’d sometimes get a bit defensive when she would first point it out, “Oh, I’m not doing that. I’m barely on my phone. I charge it most of the time. I only had a drink one day the whole week.” No, she was right. And having people who say, “Here’s who you were created to be, and I’m holding you to that because I love you, because I want you to thrive.” As a parent, we’ll spend 90% of our FaceTime with our kids between ages zero and 18. If your kids are out of the house, you’re acutely aware of this. And if you have kids in your home currently, remember, you are one of their five. Make it count. So number one, high expectations.

Number two, high support. Make sure you are surrounding yourself with people that provide love and tangible support to help you meet those high expectations. So here’s your response for the week, are your five people holding you to that high standard and providing you high support? And in a role reversal, maybe just as important, are you one of the five in someone else’s life? And if you are, are you helping them reach their potential and be their best self through high expectations and high support? And remember, we are the wealthiest society in the history of planet Earth, let’s make our money matter.

Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes, or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.

Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliates, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. United Capital Financial Advisors is an affiliate of Creative Planning. John 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 the 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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