With the holiday season upon us — and the end of the year rapidly approaching — John answers the most common questions he’s heard this year, including how much cash to have in your portfolio, when it makes sense to pay for long-term care, what steps you should take before December 31 and how to talk with family members about finances.
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!
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Transcript:
John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, I’ll share real world client and perspective client examples for you to learn from as well as answer your direct questions. Now, join me as I help you rethink your money. Well, it’s Thanksgiving weekend. I hope that you had a fantastic time eating way too much food, taking way too many naps. Hope your Turkey bowl was injury free. But it’s likely that your Thanksgiving consisted of time with friends and family. I want you to think about this for a moment and answer this question, are there people in your life that directly motivate your money decisions, that impact the way you think about the choices that you make when it comes to your finances? And my guess is the answer is absolutely. As a parent, I know this all too well. My decisions have a huge impact on not just myself, but my seven kids.
That ripple effect is significant, both positive and negative. And as Spider-Man knows with great power comes great responsibility. I’ve got a lot of eyeballs watching what I do. And occasionally when my kids do something that I don’t like and I say, where did you learn that from? And they kind of look back at me and point their finger, you said that dad. Whoops. And so if you’re still with family, or even if you’ve gone now for the Thanksgiving holiday, we’re in that holiday season, you’ll likely be interacting with family members all the way through New Year’s. And so I’d like to kick us off with a question that came up with a client of mine who is incredibly dialed in when it comes to their financial planning. Organized, has really made a lot of great decisions. And they were wondering what are some topics that are safe to discuss around the holidays with my family?
Because they’re very conscientious and they want to be intentional with their children and their grandchildren who are now getting older. And they want to open that door to those conversations to help impart some wisdom in what they’re doing. But they also don’t want to pry, they don’t want to be overbearing. And the reality is, we’ve all been in that awkward moment at holidays where a family member makes a controversial political statement and everyone in the family just collectively starts staring into their mashed potatoes, kind of just stirring them around with a gravy. Let’s just pretend that wasn’t said. Where do we go from here? And the discussion around finances is often kind of high on our list of things that we should probably just avoid when we’re in family group settings, but it doesn’t have to be. Productive conversations about money can be a great way for you to share some of your financial values that you can maybe help build some positive financial habits with those that you care about.
And one of the best ways to open the door around these discussions and make them not awkward is to ask for other people’s advice in areas where they have experience. So, if you have a parent there who’s been financially savvy and you respect saying, what did you do when it came to long term savings? How were you able to stay so disciplined and what were some of the principles that you applied that helped you be so successful in these ways? Can you share that with me? Or someone in your family that you know is really generous. Maybe asking them, are there certain strategies that you set up to be able to consistently give to make that a sort of automated priority within your plan? Are there even particular accounts that you’ve set up? Or what are some of the charities that you care most about? Because remember, a lot more is caught than taught. Younger ears and eyes are listening and watching this. And what you’re telling that generation by having this conversation is money’s not taboo.
Money’s not the root of all evil, but rather a tool that can be used for good or bad. And look at some of the ways that we are utilizing the resources that we’ve been blessed with to help others. Have gratitude for the financial blessings in your life. Celebrate those financial accomplishments in your family. Someone who just bought a first home or paid off their student loans or finally took a bucket list trip that they’ve been excited and saving up for. Another family member, maybe set up a college savings plan for their infant daughter. These are financial wins and we should provide encouragement to one another for some of these even seemingly smaller financial accomplishments that can be the spark that propels us to continue compounding these good decisions. When it comes to estate planning, this can be an awkward topic, but one that often is necessary.
And that subject can often be brought up by just saying, hey, we just worked on our estate plan. Here’s some things that we’re doing for guardianship. And a couple of things that I learned going through the process, follow that up with. Man, we were actually kind of deficient in some of these areas and we thought we had a good plan, but we were missing some things. Have any of you guys done your estate planning recently? I mean, a lot’s changed. Just asking open-end questions. And if it’s with a parent or a grandparent who’s elderly saying, look, I don’t need to know the numbers, or I’m not looking to make sure that I get some of this. That’s not my concern. But I just want your wishes to be carried out. I want to make sure that things are set up so that if something were to happen to you, not just your valuables, but more importantly your values are passed on in a way that’s consistent with the legacy you desire.
And so to summarize the answer to the question that my client had around how they can bring these things up with their family and how they can initiate these positive conversations with those that they care about, it comes down more than anything to ensuring that they know you care. Because if your family members trust that you’re genuine and you just want what’s best for them and that you don’t think you’re perfect at this either. But rather that you’re working through this, that you’ve learned some things and you want to share that with them. Because you want them to have contentment around their money and doing a great job with it. I think that’s foundational to any of these more specific financial topics. All right, let’s have a conversation about life insurance. Had perspective clients come in, we were working through their plan. They have about a $5 million portfolio, no children and have permanent life insurance.
That back when purchased made a lot of sense. There were some business risks and loss of income needs for the other spouse that had driven the initial purchase of this life insurance. And so their question was, hey, we’re making premiums every six months. The premiums are increasing on this permanent life insurance policy because they’re getting older and their cost of insurance is going up. But they’re still relatively young so there could still be multiple decades worth of premiums that would need to be paid. So, do they need life insurance? Maybe you’re wondering if you need life insurance. Of course the answer depends upon several factors. But let me unpack my thoughts around how you should assess whether you need life insurance or not. The first is obvious. Do you have loved ones who depend on your income? Would your spouse be able to pay for the household expenses and your mortgage and rent payments, student loan debt without your income?
If you have minor children, how would your loss of income impact them? Well, I’m in retirement, John, that doesn’t apply. Well, do you have a pension with maybe a reduced survivor benefit or no survivor benefit if you predeceased your spouse? So, if you were to die at 65 and your spouse lived in 95 without that income, do you need life insurance to bridge that gap? If you have maybe an older child with a disability, would he or she be able to access necessary services? In short, if your family members depend on your income, it’s probably going to make sense that you carry some life insurance should your unexpected death occur. Another reason you might want life insurance is because someone else is on the hook for your debt. A lot of times parents co-sign on private student loans. This is an example where you would want life insurance so they wouldn’t have to pay those off if something were to happen to you.
You also might want life insurance if your business would fail without you. If you’re a business owner and you pass away or all of your employees and business partners and clients in a situation where the business can’t continue on. If that’s the case, a life insurance policy can help keep your business afloat and your employees employed. And that can be done through by sell agreements and all sorts of other specific planning that I won’t get into right now. But we can help you with that here at Creative Planning if you have questions about that. And you can visit us at creativeplanning.com to discuss that further, if you’re a business owner with questions around the specific strategy that would fit for you. Now, who doesn’t need life insurance? And by the way, this specific example, these people did not need life insurance. Not anymore.
If no one’s depending on your income, no one’s on the hook for your debt, you don’t have a business that would fail, it’s likely wiser to save money on the premiums and invest the money you would’ve spent on life insurance into a diversified portfolio that has the potential to enhance your long-term financial goals. But any good wealth manager who’s not looking to sell you a bunch of permanent insurance for high commissions can help you determine whether it makes sense to implement any sort of life insurance policy based on your specific lifestyle and financial situation. And here’s a really good rule of thumb. If you have an existing life insurance policy that you’ve had for a long time, ask yourself this question. If all my money was stacked on my dining room table, would I take in this case 200 plus thousand dollars of the portfolio and buy a permanent life insurance policy that was costing me over $10,000 every six months in premiums? And if the answer is for that death benefit size, absolutely not. You probably want to look at what your options are to discontinue that policy.
Now, obviously I also want to point out that things like the tax implications, surrender penalties, relinquishment of the current death benefit are all major factors to consider. So, don’t just run out and surrender your life insurance. But you do want to ask yourself, do I have any need for life insurance? And those around me that I love no longer have the same risks if something were to happen to me. Let me transition over to another prospective client. And their primary question was around their asset allocation, how much should I have in bonds? This person was in retirement late sixties and had 70% of their portfolio in bonds. And I asked them how they arrived at that and they said, well, we’ve heard that you just kind of take your age and that’s about how much of your percentage of portfolio should be in bonds. So, they were about 70 years old and they had 70% of the portfolio in bonds and about 30% in stocks. Now let me just start by saying, and I’m not beating these people up over it.
You do hear that a lot. We need to rethink that. There’s really almost no merit to that strategy at all. In fact, your age in no way drives your asset allocation. Now, in general, when you’re younger, you have longer to let your money grow and therefore you can be more aggressive because you might not need to sell any of those investments. Certainly if you’re 30 and it’s in a retirement account that you’re going to be penalized to take distributions from for the next 30 years. You can subject that to more volatility because at the end of the day, you’re just saying, when I’m 60, I want this to have had the highest average rate of return possible. And as you age, you are often closer to needing withdrawals from the portfolio to use some of the money. And obviously when you sell those investments, the price at which you sell them matters a lot.
It’s like looking at the value of your home every quarter on Zillow, but you’re not going to sell it for 30 years. Doesn’t really matter what this estimate is. But if you need to sell your home, then the value obviously from year to year matters a lot. Same idea when it comes to your investment. So, there is a shred of truth to the idea of becoming more conservative for a lot of people as they get older. But in this case, it made no sense for this client. Between social security and two pensions, they had more income than they spent. Meaning they had positive cash flow before they took anything from the portfolio. And they were very charitably inclined and very focused on leaving a legacy for their kids and grandkids. Why would they want 70% of their portfolio in bonds that will likely never be sold until they die?
And so remember, it’s not age based, it’s time horizon based. When do you need to sell these assets? And so for this client, the more appropriate mix for them was 75% stocks, 25% bonds. I mean, you could argue that fundamentally that was even still too conservative relative to their need of income or their desire to sell any of these investments. But anything more than that just was a little more volatility than they were emotionally comfortable with. But they certainly shouldn’t have been 30% stocks, 70% bonds. Which leads to my question for you, what has driven your mix of assets? Like what’s informed how much you have in stocks versus bonds? Is it just something silly like your age or I don’t know, we just kind of went balanced because we seem like we’re moderate? Or was there a written documented financial plan sitting over the top of everything you were doing from an investment allocation standpoint so that you had the right mix of assets for your time horizons.
Which again, I can’t overstate this, is the number one driver of where you should be investing money. When do I need the money and how much of it do I need? Maybe your current allocation can be reaffirmed or maybe you need to rethink that asset allocation. Contact us here at Creative Planning today as thankfully this other family did that was inappropriately invested because that’s just what they thought was the way to invest per their age. Let’s make sure you’re not missing anything and instead you are receiving the advice that you need to make better money moves. Why not give your wealth a second look? Contact us today by visiting creativeplanning.com. Again, that’s creativeplanning.com to speak with a local fiduciary financial advisor. When we come back, I’ll answer how much cash should you keep within your plan, as well as four questions to ask your advisor in your next meeting. That and more ahead on the show.
Announcer: Are you only thinking about your taxes around April 15th? If so, you might be leaving a lot of your hard earned money on the table from tax loss harvesting to making tax marked charitable contributions. There are many ways to save on taxes and boost your wealth. At Creative Planning our wealth managers work with in-house CPAs and attorneys to proactively look for tax efficiencies in every element of your financial plan, helping ensure your money is working as hard as it can for you day in and day out. To see where you could be saving more on taxes go to creativeplanning.com/radio to set up a visit with one of our wealth managers. We’ll review your plan and identify opportunities to save you a bundle on taxes. If you’ve never had a financial advisor review your tax return, now is the time to go to creativeplanning.com/radio to set up a free introductory visit. Find out now what you could be doing to minimize your tax burden and maximize your wealth. Because it’s what you keep that matters. That’s creativeplanning.com/radio. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: All right, let’s jump right back into our questions. This one centers around cash in a portfolio. How much is too much? How much is not enough? Where is the sweet spot? And let me start by saying this question is particularly important when we are at near 40 year highs regarding inflation. I know it’s cooled off a little bit. We’re all really happy that it’s just under 8% now. Can you imagine being in a coma, waking up and saying, why is the S&P 500 up over 5% today? Oh, because inflation data was really good. What do you mean it was really good? I mean it was a little below 8%. Hold up. Wait. Of course, you’d say, well, why you were asleep some crazy stuff happened. But it’s simple math that your purchasing power is eroded even that much more dramatically when inflation’s at seven or 8% instead of one or two when you’re making near zero in cash.
So, painting with a broad brush, you want about six months of living expenses in cash. If you want to be a bit more aggressive, you could maybe argue three months, especially if you are a dual income household. But let’s just assume we’re keeping that around six months. And if you say, well John, well I need to buy a car soon. Include that in the six months. Here’s our living expenses plus this other large purchase coming up that can be in cash. But once you get beyond six months, even intermediate term treasuries right now are paying around 5%. And so if we’re talking a million dollars, and I know that’s a big number. But it’s round, so I’ll go with it. And by the way, in this person’s situation, over a million dollars in cash. And as a side note, it was more so because they were trying to figure out when to enter back into the market.
Is the coast clear? Is now a good time to invest? I think we’re going into a recession. And that prompts a different conversation in a different direction that I’m not going to go right now. Let’s just focus on the cash allocation. On that million dollars they’re losing about $4,000 a month of potential interest in other safety oriented strategies. That’s not nothing. 40, 50, 60 grand a year of interest. And one of the benefits of interest rates rising is that you can earn something now even on monies that you need safer and you don’t have as long of a time horizon on as you do with your stock investments. And so I want you thinking through this right now, how much do you have in cash, not just in your bank accounts but in your investment accounts as well? And I just saw this the other day with a prospective client where I was providing a second opinion analysis.
They had 16% cash inside of their 401k. They’re still over a decade away from retirement. They were in one of those automated portfolio robo advisory 401Ks where the custodians make it a bunch of money to keep part of the portfolio in cash so that they can earn interest in excess of what they’re paying out. By the way, that’s how custodians make a lot of money. You go, how do they offer this free robo thing? Free expense ratios? Everything’s free. Wow, this is incredible. Oh, 16% of our 401k is in cash that they’re making a huge spread on. Okay, that makes sense. This is actually not free. It’s crazy expensive. Think about that. Oh man, we’re saving the 15 basis points expense ratio on our mutual funds. Oh yeah. All the while, while doing that, losing 8% to inflation on 16% of the account. So, again, my question, do you know how much of your overall net worth is in cash? And is that around that three, four, five, six month amount?
If you have questions around that asset allocation where you could deploy cash that you currently have that’s consistent and aligned with your overall financial plan, visit us as this person did by going to creativeplanning.com to speak with a local advisor. Again, that’s creativeplanning.com. Here’s the question I received, not from a prospective client but from one of my friends at the Friends Giving dinner that we hosted at our house I spoke about on a previous show, they asked me, what should I even be asking my advisor? When we get together regularly, we kind of just end up talking about golf and the kids and we hit on a few financial things, but I don’t really feel like those meetings are that productive. I feel like I almost should stop having them or just making them a phone call. Their question was more, so is there anything I can be doing to make that more productive?
Maybe I’m not asking the right things. And of course I was thinking to myself like, your advisor’s probably just not very good. I know it sounds mean, but they should be running a productive calendar where they’re asking you, hey, let’s review your tax return in the next visit. Let’s run a mock tax return. Let’s review your estate planning. Let’s review tax loss harvesting opportunities or Roth conversions, or look at the asset mix. Let’s update your broad-based financial plan for the next 45 minutes. They should be doing that. But if you’ve ever wondered what should I even be asking my advisor when I come in for review meetings and maybe your advisor isn’t doing things the way we do. Here’s what I think you should know about your financial plan. It’s not just a set it and forget it approach. Because as I’ve said before, the value of a financial plan is not just in building it’s in changing it.
Sometimes you’re thinking to yourself like, isn’t that why I’m paying an advisor? They’re going to do all this. Well, yes, and if you’re working with a qualified fiduciary, they are legally required to act in your best interest, which is awesome, but it’s still valuable to have face to face visits. Like we encourage our clients to meet with us at least once a year for a full review of their plan. Now throughout the year, we’re executing on multiple strategies for them and we’re contacting them to discuss things. But at least once a year, you should be fully diving in to the entire plan. So, here’s question one I want you asking. What progress have I made toward my goals? This is essentially one of the main reasons you’re having the meeting. Your advisor should be able to answer that by providing you a clear picture of exactly what progress you’ve made over the last year and then hopefully even over the past several years if you’ve been with them a long time.
And it shouldn’t just be, well, your investment started here, here’s the performance of each fund and here’s where you’re sitting. This should be focused primarily on your goals, not just investment performance. And while I’m obviously biased as a partner in managing director here at Creative Planning, we use sophisticated planning software. We can show you exactly where you stand on your path toward achieving your goals. You don’t have to guess. And your wealth manager can help you visualize where you began, where you are now, and how far you still need to go. Work with your wealth manager to adjust any of the inputs and assumptions that maybe now aren’t correct and modify your plan accordingly. Question number two, what needs to be adjusted? Begin this conversation by discussing what changes have happened in your life, your goals, your financial situation. Here are a couple examples of major life events.
I got married. I got divorced. We have many clients in both of those camps. We had a child. I changed jobs. What else might need to be adjusted? Have you set new goals? Do you want to purchase a second home? Maybe you want to remodel your kitchen, you want to buy a new car, you’re looking to pay for college for a kid or a grandkid? Have there been any changes to your retirement goals. We put in there 67. I don’t think I can work there another three years. I’m miserable. What does it look like if I retire at 65? Have there been any changes to your health or the health of a loved one? What financial concerns keep you up at night? Maybe they’re different than the things you were worried about six months earlier. What would make you feel more comfortable about your financial situation? Have there been any changes to your income or your assets?
Have you changed jobs? Have you received an inheritance? Have you made a major purchase? Your financial life is dynamic, constantly changing and your financial plan needs to be changing and dynamic as well. And I will post to the radio page of our website at creativeplanning.com/radio, our annual financial planning checklist for a list of more items that you can review on a yearly basis. You can go there and download that for yourself if you’d like, again creativeplanningplanning.com/radio. Here’s question number three. Am I effectively minimizing my tax liability? It is incredibly important to ask about optimizing your overall tax efficiency. This conversation should cover the following, your portfolio taxes. Hopefully your advisor’s using several strategies to help minimize taxes within the portfolio. Asset location, which is actually a question I had from a client that I’ll discuss coming up later on this very show. How about harvesting losses?
Big opportunity this year for that has to happen before December 31st. Incorporate tax efficient funds, is the way you currently have the plan built out efficient? Charitable giving strategies, gifting, estate taxes, all of these are examples of areas that you should feel comfortable that you’re effectively minimizing that tax liability. Now at Creative Planning, we have 85 CPAs. We’re a tax practice. We file our clients tax returns if they’d like us to for them. And we are reviewing our clients taxes on a regular basis. The simple question I have for you around taxes is when is the last time your financial advisor reviewed your tax return? If they’re not a CPA, when’s the last time they sat down with your CPA and went through your tax return, together with you on your behalf? Not to file your taxes but to review strategies. When’s the last time they built out a mock tax return with proposed scenarios, examples of what you could be doing.
If you have IRAs or 401Ks or any types of accounts where you’ve been deferring taxes, if you have any big liquidity events that could be triggering capital gains, selling a rental property, a business sale, or inheriting money. These are all examples where you need tax integration along with your financial planning. And as I’m saying that, if you’re listening thinking, my advisor has never reviewed my tax return, they’ve never met with my CPA, or they certainly don’t do that on an annual basis. What I’m suggesting is not that they’re terrible advisors, you’re just receiving incomplete advice. They’re investment advisors. It’s great. Investment advice is important, but it’s not the whole picture. Your taxes and your estate planning are incredibly important aspects of your complete wealth management picture. Question number four, what fees am I paying? If you’re working with a fee only fiduciary advisor, quick and easy discussion.
Here’s what you pay. Your fee should be transparent and easy to quantify. You shouldn’t have to guess what am I paying? What is my advisor making? And by the way, your advisor should know exactly what you’re paying for advice as well as any and all other fees associated with your investments. When you work with a family advisor, you can usually expect to pay a percentage fee based on the assets they manage on your behalf. Your accounts get larger, your fee is larger. If your accounts get smaller, your fee is smaller. If they’re making commissions, if they’re receiving third party kickbacks, revenue sharing, bonuses, that will be a more difficult question for them to answer. It’s one of the reasons I suggest get a second opinion from a credentialed fiduciary acting in your best interest, not looking to sell you something. I have had countless meetings with people who thought they were paying one thing and I was able to show them, no, no, this is what you’re paying.
Oh, by the way, and all of this in the background that your advisor’s getting that is ultimately coming out of your pocket. And that maybe not directly, you’re not writing the check, but they’re getting you through this fee here and this fee here and this cost here. And that perspective client is blown away going, how would I have ever known this? This is ultimately coming out of my investments, but it’s all internal. Like it’s not line item, it’s not transparent. There are very few areas of our life where we would pay hundreds or thousands or tens of thousands of dollars in ongoing costs without actually knowing what we’re paying. It doesn’t need to be that hard.
And so to recap the four questions to ask your advisor in your next review meeting, what progress have I made toward my goals? What needs to be adjusted? Am I effectively minimizing my tax liability? And what fees am I paying? If you’d like to do what thousands before you have done and have us provide our perspective to reaffirm the areas that you’re doing well and also point out areas for you to rethink when it comes to your money. There’s a reason Barons has called us a family office for all. 85 CPAs, 45 attorneys, 300 plus certified financial planners, managing or advising on $225 billion for clients in all 50 states in 75 countries around the world. Why not give your wealth a second look by visiting us at creativeplanning.com.
Announcer: At creative planning, we provide custom tailored solutions for all your money management needs as our team is structured to cover all areas of your financial life. Why not give your wealth a second look. Visit creativeplanning.com. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: This past weekend, Disney announced that Bob Iger previous CEO of 15 years would be returning to run the Mouse in hopes of a turnaround over the recent dreadful stock performance. The Monday following Disney stock bounced over 6% in a day in hopes that some of his previous magic would return to the company. We think of Walt Disney as this innovator, a creative, and that he was. But did you know that Disney was extremely close to never actually making it? It almost went belly up, but then just when he was on the brink, snow White and the seven dwarfs happened and it changed everything. That one massive hit altered the trajectory of the entire company as well as the legacy of Walt Disney. And there’s a lesson to be learned here when it comes to our finances as well. Had someone this past week in a meeting at my office say, I try to invest like Warren Buffet. And I know what she means.
She wants to be a value investor, buy things while they’re on sale. But what if just like Walt Disney, Warren Buffet’s success is mostly attributed to one or two decisions that had they broke a different way, we probably don’t know who Warren Buffet is. Now with that being said, it’s not to suggest that we can’t learn things from Warren Buffet. But I contend we’d be far better off learning from the traits he possesses. The things that are actually repeatable, not just for us, but even for him. You see the idea that we’re going to read financial statements the same way that Warren Buffet looks at those or we are going to possess a sense of the capital markets and an understanding of those at the same level is probably unrealistic. But emulating things like his discipline, the way he thinks broadly about investing. Now, those are the realistic aspects of Buffet that may be attainable. Not the handful of random, somewhat lucky circumstances that a Walt Disney or Warren Buffet experienced and then say, well, how do we create that sort of wealth?
It’s not happening. It’s not happening because you’re not them and they likely could never repeat it again. But there will be a handful of your decisions just like them that will drive your success or failure as an investor. And the biggest of those is your ability to avoid the big mistake. And let me give you a few specific examples of how to avoid that big mistake. Number one, avoid buying individual stocks. Now what I’m not saying is that you can’t make money in individual stocks or that portfolios that we build here at Creative Planning don’t have individual stocks. But what I’m talking about is under diversifying in a few individual stocks with large percentages of your portfolio. I was just asked last week with a prospective client who had pretty concentrated individual stock positions, how much I thought was too much in terms of an amount or percentage of their portfolio that they should keep in these few stocks.
And I’ve been asked this before as well, my answer is as much of the portfolio that you’re okay losing everything on in the worst case scenario. You might say, well, John, what if they own like bigger household name stocks? I mean, that seems a little bit extreme. Oh, you mean like General Electric, Texaco, WorldCom, Washington Mutual, Layman Brothers, all went broke. No one prior to their bankruptcies thought these companies would go broke. Nobody thought General Electric that had been one of our countries largest companies for decades would go down 90% with no likely sign of it ever coming back. Those are the things that destroy a retirement. So, if you want to build a solid retirement plan and then have sleeved out this play account and you’re totally fine in the worst case scenario that it goes to zero, I don’t have a problem with that.
But again, you’re looking to avoid the big mistake. Another way to do that is avoid one concentrated strategy. And one that comes to mind recently from a prospective client meeting is going all in on a dividend oriented strategy. So, prospective client had about a million dollars, wants to live on 40K a year, they’re looking for 4% of the investment allocation. I talked about the 4% withdrawal rule and whether that’s sustainable on last week’s show. The basic concept here was that they would build out a portfolio that’s generating at least 4% in dividends, live off the dividends, never sell any of the shares of stock. So, regardless of whether there’s volatility on the underlying stock price. And on paper they have more or less money, it doesn’t matter theoretically because they’re never going to need to sell a share to get their $40,000 a year.
And by the way, this person couldn’t believe that I wasn’t a big fan of that strategy. It pays me my dividends. I don’t need to worry about volatility. Why wouldn’t you do this for everyone needing income? And there are a few reasons. The first of which is that when you go all in on dividend stocks, you cannot be as well diversified. There are great companies often which some of the growth stocks with the most upside that you would be excluding from the portfolio, there’d be certain sectors that don’t pay a lot of dividends like technology companies that would be extracted entirely from the portfolio just simply because they didn’t pay a high enough dividend. The second aspect is that it’s tax inefficient if it’s in non-qualified accounts. If you’re holding these dividend stocks and non IRAs and you maybe don’t need all the income and would just like to reinvest some of those dividends you have to pay tax on it before they’re reinvested.
But the third and most obvious reason is that dividends are not guaranteed. Meaning just because they’re paying 4% right now doesn’t mean that they’ll continue to pay 4% indexed for inflation for the rest of your retirement. And this isn’t theoretical. If you go back and look at an iShares Dow Jones Select dividend ETF, and by the way, I’m not picking on this ETF, it’s just a large ETF focused on dividends. It had a 31% reduction during 2008 and 2009 to the dividends. So, let’s assume that you embarked on this dividend based withdrawal plan in ’07 or ’08 and you bought just enough shares of this ETF to get you $40,000 a year in annual dividends in 2008. And let’s say that you planned on increasing it by 3% to 41,200 in 2009 to offset inflation. Instead, you would’ve received a little over 27,000. And by the way, almost all dividend strategies were getting clobbered.
There was nowhere to hide. And now you have to sell more of your shares while they’re down in value, likely more than they’ve ever been down since the Great Depression. Now you’ve cannibalized the entire portfolio. You’ve got to sell twice as many shares, and now even if the dividend increases, you don’t own as many shares. That’s how you run out of money in retirement until you blow up your plan. Again, what are we talking about here? How do we avoid the big mistake? A third way to avoid the big mistake having far too much in illiquid alternative investments. Now, prospective clients that bring these in often say, well, John, I don’t want to be in the market. It’s too risky, it’s too volatile. So, I own this private real estate and private equity and these other types of non-trad investments. I’m not against non-trad investments, although it is very much a fat head long tail environment, meaning the very top managers are likely to outperform and everyone else will likely underperform.
So, it’s very dependent upon you picking the right alternative investments with the right managers. But secondarily, in most of these, you have liquidity lockups, higher fees and less transparency. And I firsthand sadly, saw someone who had the vast majority of their portfolio in these high commission private investments that they were sold under the pretense that they’d be a lot safer than being in that darn stock market. And the vast majority of them blew up and they had to go back to work. It was terrible. So, again, a handful of decisions that you make will drive your success or failure. And the biggest of those regarding your success will be your ability to avoid the big mistake, avoid concentrated individual stocks, avoid going all in on one type of strategy like I only buy dividend pairs and avoid too high of an allocation into alternative illiquid, non-trade investments.
If you have questions about your financial plan, visit us at creativeplanning.com to request to meet with a local advisor who’s not looking to sell you something but rather acting in your best interest as a fiduciary. We’ve been helping families just like you since 1983 here at Creative Planning, serving clients in all 50 states, in 75 countries around the world. Why not give your wealth a second look. Again, visit us right now at creativeplanning.com for your complimentary second opinion. Let’s transition over to another common question I receive around paying for long-term care. If you’re in your 50s or 60s, maybe even late 40s, you’ve probably thought to yourself, should I be buying long-term care insurance? Well, let me talk to you about the changing landscape of your long-term care options. An estimated 47% of men and 58% of women over the age of 65 will require some type of long-term care support during their lifetime.
In 2020, the monthly median cost of having an in-home health aid was $4,576 per month, which equates to basically 55 grand per year. Which stacked on top of everything else, if you’re a married couple and the one spouse is still living in the house and has all the same expenses and then you just stack 55 grand more than what you had built into your plan on top of all the rest of your expenses, it can derail a retirement plan pretty quick. Fortunately, long-term care insurance can help cover the cost of extended care should you need it. The problem of course is what are the premiums? How expensive would it be to properly ensure against that $55,000 expense? That’s going to depend upon a myriad of questions like how old are you when you purchase the policy? How healthy are you when you purchase the policy?
The maximum number of years of care the policy is going to cover, the maximum amount per day the policy will cover. And then any other optional coverages or benefits like inflation adjustments and how high that inflation adjustment is that are added to your policy. However, especially after COVID with the increased demand for long-term care coverage, it’s made it even more difficult to qualify for traditional long-term care insurance. And so there are a couple of emerging solutions that I think are probably more viable for most people that ask me this question. The first would be some sort of hybrid policy. A hybrid policy generally will have a death benefit. So, you’re buying some form of life insurance and you’re going, John, didn’t you say earlier in the show I might not need life insurance? Agree, but this is why personal finance is more personal than finance.
This scenario may make sense, but after I explain this, I’ll also share with you the other option that’s probably even more viable than this hybrid strategy. But this life insurance vehicle essentially allows you to borrow against the death benefit once you have a qualifying event. Every policy’s nuance and fine print are completely different. So, I’m certainly not advising that you do this. But one of the benefits is if you never need long-term care, you didn’t make premium payments for 20 years and then watch all of those just go up and smoke. There’s a death benefit because you and I know that one thing’s for certain we’re going to die at some point and that death benefit can at least be paid to your beneficiaries. Now, if you pass away and you lived a really long life, you’ll look at that internal rate of return on the amount that you put into the policy.
Let’s say it was a hundred thousand dollars to start and look at what the death benefit was, and you’ll think that was a really bad growth rate, which is still one of the huge considerations to this strategy. Do I think there’s a better use of the money? Well, absolutely from a historical perspective. But the trade off is if I need long term care, I can borrow against that death benefit and use it to pay for my care. And so the flexibility is one of the huge benefits. But also unlike traditional long term care, your premiums don’t increase, you have no lifetime premium payments. You can just lump some single premium into it in many cases. And then it has some estate planning benefits because what’s not used to cover the long-term care will pass tax free through the death benefit to your heirs. So, that’s one viable strategy around long-term care insurance.
Another one is you run your plan with some assumptions that you’re going to need to pay for long-term care. And in many cases, self-insuring is still the most flexible viable strategy. Now, you don’t want to do that flippantly and just say, ah, I think we’ll be fine. We’ve got enough money. I mean, you really want to run the numbers and say, at what point of us being in a care facility, either one of us or both of us, if we’re married before our plan is really put in jeopardy? And if that’s the case, are we okay maybe transitioning at some point later in life to a Medicaid qualifying facility if we have no more money? And so how do we weigh the flexibility benefits of properly investing and having more uses of the money versus trying to designate specific dollars that will be unlikely to grow at the pace of the rest of our portfolio to try to hedge against this potential unknown expense?
And the last thing I’ll note on long-term care, legislation around healthcare is changing dramatically. It’s likely it won’t look exactly as it does today, 10 years from now or 20 years from now. So, avoiding paying annual premiums that you’ll lose should you never need them, has an additional risk because maybe at some point the government subsidizes even more than they do right now with Medicaid, some of these expenses. And so if you have questions around just broadly your financial plan, maybe it’s long-term care, maybe it’s alternative investments, and maybe it’s just a broad overview, looking for a new perspective on what you’ve worked a lifetime to save. Regardless of what’s on your mind, we are here to help as we have since 1983, request your complimentary visit with a credentialed fiduciary, not looking to sell you something, but rather give you a clear breakdown of exactly where you stand with your money, by going to creativeplanning.com right now. That’s creativeplanning.com to get your questions answered.
Announcer: Have you been rattled by the markets this year? Maybe lost sleep, obsessively checked your balances, or even pulled out of investing altogether? If this sounds familiar, you either don’t have a financial plan or you’re not confident in the one you do have. And it’s time to change that. At Creative Planning our wealth managers, CPAs, and attorneys work together to create plans and portfolios that balance your long-term growth needs with short-term stability so that you can prosper in any market condition.
To get started on a plan or to get a second opinion on one you already have, go to creativeplanning.com/radio to schedule a meeting. This one small step could change your entire perspective on your financial future. Why not give your wealth a second look. With our team’s expertise across investing, taxes and estate planning, you can be confident every element of your plan is working harder together no matter what the market is doing. Just go to creativeplanning.com/radio today to request your free meeting. That’s creativeplanning.com/radio. Now, back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: Well, a couple weeks back, it was Veteran’s Day and I expressed my gratitude and thankfulness to all of you veterans. But I don’t know if I really emphasized truly how grateful I am for all of you who have served our nation. It’s just an unbelievable act of selflessness for a greater good. And this Thanksgiving, I was reminded of this. As Beck, our oldest son, whose active duty army was not with us. His seat was empty and all six of his siblings are there and we’re enjoying one another’s company. And it’s tough for Britney and I because we miss him. We know what he’s doing is incredible, and we couldn’t be more proud and more honored that we’re a part of this amazing country that he’s serving. But it’s hard not seeing him at holidays. And it’s just a reminder that our freedoms come with a price.
And I know for me, I forget that sometimes, like far too often, I don’t think about it like I should. I don’t think about that price that’s been paid by millions of courageous veterans who sacrificed so much and even in some cases paid the ultimate sacrifice of their lives so that we could eat Turkey and toast a family members and play board games and try not to tear our ACLs in Turkey Bowl and whatever else we do. And so for those of you who also had an empty seat at your table, I know it can be hard, but what an opportunity for us to make sure that those in our military who are away know just how grateful we are and how proud of them we are. And this leads me to a question that I received from a current federal employee who has that thrift savings plan.
A TSP you’ll hear it referred to. About 750,000 in that plan. Done a great job saving, also had a hundred thousand dollars in a non-qualified account and about 50,000 in cash. Her husband and her were just selling their home to receive about $300,000 of equity from the proceeds. And her question was, should they combine those proceeds with some of that after tax money and just pay cash for their new home? So, here is how I think about paying cash versus financing a home. If you’ve read either of my books, I’m generally a fan of locking in a relatively low interest rate for 30 years, making the minimum payment and properly investing the rest of the money to earn historically a lot more than you’re needing to pay an interest to the bank for your mortgage. And obviously times have changed recently with mortgage rates going from in the threes all the way up into the 7% range.
The challenge with this person paying cash for their home is that it basically takes all of their liquid assets outside of the TSP, which is all tax deferred, meaning everything they take from there is taxed at ordinary income rates and has some liquidity constraints and leaves them with only about $25,000. So, I don’t think that not doing any mortgage is viable because it runs them down to even below what they would want in their emergency fund purely to avoid a mortgage payment. However, this person is also a conservative investor. They don’t want to invest heavily in stocks. Well, if they’re in bonds paying four or 5% and their mortgage is at seven, that also doesn’t make a lot of sense. So, here’s what I told them. Finance a small portion to give yourself enough liquidity. And remember, you’re not married to your mortgage, you’re dating it.
The moment rates drop, refinance to those lower rates and bring your payment down. And my general advice that you’d like to carry a mortgage long term still holds true. And we’re seeing the reason for that. Let’s say you’re someone with a 15 year mortgage that you got it 2.75% or even a 30 year fixed at three and a half. You can get high quality intermediate term government bonds right now paying over five. And so for that person, you’re making a couple percent of extra interest and practically speaking can simply take the interest you’re earning from the other investments, use it to pay your mortgage payment. And after doing so, look down and say, wow, I still have a bunch of money sitting here because I’m earning more. Now I can reinvest that in over 30 years. You end up with a lot more money.
So, this was more nuanced, but these are the types of financial planning questions that should be considered within the context of all your goals, your tax situation, your retirement projections, your appetite for risk, and countless other factors that a good fiduciary financial planner can walk through with you when making that decision. If you have any questions around real estate, your mortgage rental properties, you can visit us at creativeplanning.com to request a second opinion and get those questions answered. Well, for about the 10th time in the last couple of months, I talked with a prospective client who had the exact same investments in all of their different accounts. We need to discuss this and unpack this because I do not want you making the same mistake. And what I’m referencing is when you looked at their Roth IRA, it was the same holdings as their IRA, which was the same holdings as their brokerage account, which was the same holdings as their spouse’s IRA, as their spouse’s Roth.
So, essentially they were in a 60/40 portfolio and actually how they were invested was mostly fine and there was nothing that was alarming about it. But this is not the most efficient way to invest money. Think about this from a tax standpoint, a Roth IRA grows tax free. So, that’s generally the account that you for most people’s plan want to be the most aggressive of all of your accounts. Now, hear me saying that it doesn’t mean your overall plan needs to be more aggressive. It means that you divert some of your safer assets to other accounts and keep the Roth in a vacuum more aggressive than your overall portfolio because the huge value of tax-free growth and the longer time horizon before you’re likely to ever touch that account. Conversely, they had bonds spitting off taxable interest inside of their non-qualified account. Now they had the bonds because they wanted to dampen some of the volatility over the next five years to buffer that uncertainty short term for their stocks, which I think is great. That’s what I would advocate. But they weren’t using any of the income from these bonds.
They were reinvesting it. Why would they not take the bond heavy part of the portfolio and put that in their traditional IRA where all of the interest, as long as it stays inside the IRA can be reinvested and it’s not taxed until there are withdrawals. So, you’re not siphoning off part of the income every single year and making tax payments and then subsequently are only able to reinvest the net difference. And so even if your overall appetite and capacity for risk doesn’t change, which types of investments you hold in specific accounts can make an enormous difference in what you have 10 or 20 years later. And the crazy thing, and I don’t want you to miss this, is that you’re not actually changing any of the investments. You’re just changing the location of these assets. If nothing else, request a second opinion from a firm.
Doesn’t need to be Creative Planning, but like us whose a tax practice and has CPAs involved as well as attorneys, as well as CPAs, because we’re able to look at your plan comprehensively. And from an angle that I’ve found when I bring this up to these prospective clients, it just hits them like, oh yeah, that’s completely logical. It makes perfect sense. Why have I not ever been told that? I don’t know why I have it this way. I don’t want that for you. If you have any questions around this and you’re not sure where to turn, go to creativeplanning.com, speak with a local advisor, and we’ll ensure that your assets are located in the right place. And I want to conclude with the top financial tasks for you to complete before year end. You can visit us by the way, at creativeplanning.com/radio.
I’ll post our year end checklist so that you can look through this for yourself. Let me highlight a few of the bullet points that I want you thinking about before the end of the year. First, check your FSA balance. That’s that flexible spending account you usually have until the end of the year to spend your balance on qualified medical expenses. And if you fail to do it, this isn’t like the HSA, the FSA is a use it or lose it. I’ve seen people lose $3,000. It’s in there in December, January 1st they wake up. Oh, dang it. And as the name suggests, it’s very flexible. There are many things you can buy with this that qualify. Number two, donate to charity. Next financial task to complete before the end of the year, take or establish your RMD that required minimum distribution. If you’ve reached age 72, you need to take the required minimum distribution from your traditional IRA by December 31st or face a 50% penalty on the amount you should have withdrawn.
Next, review your retirement contributions. If you have an employer sponsored retirement plan, make sure you’ve contributed enough throughout the year to take full advantage of any matching your employer is offering. I’ve spoken at length about considering a Roth IRA conversion. If your earnings are down, if you think taxes are likely to increase, if you’re in a lower bracket, which again, if you’re married finally jointly, anything below $340,000, you’re in a 24% bracket or less. Anything below about 170, you’re in a 22% bracket. Don’t leave historically low brackets available on the table, especially while the markets are down. Also, don’t go about this alone. It’s irrevocable. Once you’ve made the conversion talk with us at Creative Planning before you initiate a Roth conversion. But you only have, again, until December 31st to do so. And speaking to the market being down, the next thing is harvesting losses.
Tax loss harvesting allows you to realize investment losses in order to offset gains in the portfolio. Again, has to be done by December 31st to offset some of those capital gains. More broadly, review your goals and plan for any life changes. A lot of us wait until January and then set new Year’s resolutions that we break a couple weeks later. But the year end is a great time to review your goals and just evaluate any changes in your life to make sure that your financial plan remains relevant. Review your estate plan, review your beneficiaries, enroll in any benefits as most employers right now are in open enrollment. So, double check all of those things for the coming year. Review your insurance policies, review your credit report. Maybe contribute to kids college savings accounts. And hey, I’ll end with a little more of an exciting one. Plan for a fun purchase.
I mean, your year in doesn’t need to be all about checking these boxes. Maybe plan something for the next year around a family vacation or to remodel a bathroom or some other long anticipated purchase. The satisfaction of enjoying something you’ve saved for can really help you stay motivated toward achieving your goals. Now, I know I ran through a lot of different questions today. Even that checklist was long. This is why in some cases you pay a financial advisor. Sometimes you hear that list and you’re like, John, that’s a lot of work.
Like harvesting losses, considering conversions, reviewing my insurance policies, my estate plan. I get it. It is a lot of work. To maintain a fantastic financial plan takes a ton of effort, and if you don’t have the time or the desire or you don’t feel like you have the knowledge and expertise to really do it on your own, that’s why you delegate it to a team like us here at Creative Planning who takes the reins and works together with you, but executes these things on your behalf so that you can do other things that may be more important and more enjoyable to you with your time and your energy.
And if you have questions about how we might be able to help, visit us, but we are now near December 31st and time is ticking. Visit us at creativeplanning.com to request a second opinion with an independent fiduciary not looking to sell you something. Again, that’s creativeplanning.com. Do what thousands of others have done, get a fresh perspective on your life savings. And remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter. Happy Thanksgiving weekend. If you enjoy the podcast, please subscribe, share, and leave us a rating.
Disclaimer: The preceding program is furnished by Creative Planning, an SCC registered investment advisory firm that manages or advises on 225 billion in assets. John Hagensen works for Creative Planning and all opinions expressed by John’s guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of in investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives and suitability. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
