This week, John discusses the often-forgotten benefit of high inflation, the most important trait in order to be successful with your money and how one man’s oversight led to a huge windfall for his ex-wife. Plus, John is joined by Annie Rogers, Estate Planning Attorney at Creative Planning, to discuss the actions one should take after the loss of a spouse.
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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John: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen. On today’s show the most important trait you’ll need to be successful with your money. How one man’s oversight led to a huge windfall for his ex-wife. As well as the often forgotten positive of high inflation. Better money moves start here.
But I want to start here as a boy who grew up in the Seattle area at a Nazarene church. My parents had me there Sunday morning, Sunday night, and Wednesday night for caravans, where I wore a sash and I’d get all these different patches sewn on there as I memorized certain verses. I loved it because I was hyper-competitive even then and wanted to memorize more verses than a kid named Jordan Shank. Jordan, if you’re listening, he was really smart and fantastic at memorizing verses. We had some real battles back in the third grade at caravans in the basement of the Nazarene church. And as a good church boy, you know I knew the fruit of the spirit. Love, joy, peace, patience, kindness, goodness, faithfulness, gentleness, and self-control. These are the fruits of the spirit.
Okay, I promise I won’t subject you to that singing again, at least for a couple of weeks. But while we all have strengths, some of those characteristics that maybe we find easier to exemplify than others, patience, man, that one for me is a tough one. With seven kids, it was inevitable that God would just mess with me by blessing me with a couple, let me just say very patient, relaxed, chill, I’m going to be honest, slow as a snail kids. And as someone who generally isn’t very patient naturally, I mean, I’m out in the driveway waiting to leave and I’ve got two kids walking around lollygagging, and I’m just bouncing my knee, getting more and more frustrated. Where are they? What are they doing? Let’s go. If you’re a parent, you know what I’m talking about.
Behavioral intelligence is far more important than IQ when it comes to financial success. Let me put this another way, self-awareness and your attitude is at the heart of positive money moves. I’ve got three behavioral traits that I’d like to highlight. The first is gratitude. You say, why is gratitude important to me being successful? Because when you have gratitude, you are far less likely to have envy and let greed seep in. The moment greed and envy start to rent space in your head, you are far more likely to be discontent with long term stable returns. You’re more likely to chase riskier investments that can lead to bad outcomes.
The second behavioral trait is optimism. You can’t and will not be a long term investor if you do not have optimism. You’ll sit in cash and CDs, and right now get blown up by inflation, while the stock market averages 8 to 12% a year. Being an investor and owning shares of companies all across the world requires you to say, “I think that the world is going to move forward, and seven or 8 billion people are going to need to buy things. And there will be companies to produce those goods and services.” And the third trade is the one I just shared, patience. Patience might be the most important behavioral trade that is required for you to have success with your money. Warren Buffet said it best when he said, “The stock market is a device for transferring money from the inpatient to the patient.”
Let me dive a bit deeper into the value of patients. I’m going to give you a quick trivia question. What do you think these numbers represent? 50, 70, 91, and 99. You’re going, “John, they could be anything. It’s a ridiculous trivia question.” I know it is. Here’s what those represent. 50% of the time, just north of it I should say, about 51% of the time, if you looked at your statement every single day, you’d be up. About 49% of the time you’d be down. It’s basically for all intents and purposes, a coin flip. Well, 70 was the next number. What does that represent? That’s if you just looked at your accounts once per year. You’d have more money about 70% of the time, about 30% of calendar years are down in value. The next number was 91. That would be if you looked at your statements only every five years. Historically speaking, you’d have more money than you started with five years earlier, 91% of the time.
And the 99%, you probably see where I’m going with this, that’s if you looked at your statements once every 10 years, so shredded your statement for nine years, didn’t log in, 10 year mark hit, opened up your statement, 99% of the time. In a diversified stock portfolio, you would have more money than you started with 10 years earlier. Now, here’s the irony, these were all the same investment portfolio. The only thing that changed was how often you viewed your investments, daily, annually, every five years, every 10 years. And so, being patient, means taking a chill pill on short term market movements. By the way, my sister used to always say that to me, she’s four years older. She was a cool high schooler and I was a dorky little sixth grader, “So, John, take a chill pill, man.”
Another example of patience is to remember that the market doesn’t move in a linear fashion. I mean, I think we all understand this because the market’s averaged about 10% a year since 1926, but it certainly isn’t that it goes up a little less than 1% every single month of every single year. In fact, it’s the opposite. The market returns generally come in relatively quick bursts, followed by long periods of, well, like yawn, just sideways markets, and then they pop. I saw something a while back that showed the markets almost never actually earned 10% in one year on the nose. It’s very, very rare, even though that’s what it averages. There’s a lot of deviation both up and down from that average.
And if you look going all the way back to 1926, at an 85% stock, 15% bond allocated portfolio. Your best year, up 136% in one year. But the other side of that coin, your worst year, down 61% in a single year. Now, of course, that’s over almost 100 years, and that’s the best and the worst, those are outliers. Your best 30 year return annualized, you were up about 13 and a half percent per year, over a 30 year period. Your worst 30 year annualized return, not terrible. You were still up 7.44% per year, over a 30 year period. And it averages that as I said, to about 9.65, and that’s not entirely stocks, that’s 8515. But remember, coming out of the dot com bubble bursting, one year from the bottom the market was up 36%. One year coming out of the financial crisis, in 08 and 09, the market was up 72%. And a year coming out of the pandemic, even more.
And so, if you understand that there are one year periods where the market will go up 70 or 80%, there are also going to be a lot of periods where it’s not doing a whole lot, because it doesn’t average 70 or 80%. You better capture the 70 to 80% times when they occur, or you will miss significant portions of the growth that is there. And so, the next principle here is that being patient means staying invested for the long term, so that you don’t miss out on market spikes. A third point around this principle of patience, you better marry your asset allocation and stay faithful to your underperforming asset classes over long stretches of heartache. You need to be incredibly committed to your asset allocation. We’ve had many five to 10 year periods, where say small cap value has underperformed large cap growth.
So, those are small companies with a high book-to-market, that historically have outperformed large growth companies with low book-to-market by 3 or 4% a year. But there are several five year periods and 10 year periods and eight year periods where you look up and say, “Large growth has absolutely clobbered small cap value, why do I own these? What’s even the point? They seem more volatile and they don’t earn as much.” Well, if you span back to 20 year periods, they almost always outperform, but sometimes it takes 20 years for that return premium to be reliable. That takes a lot of patience. And so, the final thought I have around patients is that being patient means rebalancing to maintain your long term strategy, not running and divorcing your underperforming assets, leaning into them. Hey, we’re going to marriage counseling, small cap value. We got to get this thing right. I’m committed.
And while you might be thinking, “Man, John, I mean, those three things seem really simple. Isn’t it true that simple things, they’re not always easy?” Well, I can tell you what I’ve seen in helping thousands of families across the country with their money, it’s a lot more realistic that you are going to have patience if you believe in the plan that’s in place. If you have conviction and an understanding of why everything is where it is, and you know that that’s been designed with intentionality. And conversely, if you don’t have that peace of mind and that confidence and that clarity, it’s very difficult to stay the course and be patient. But you’re going to need to, because as I just outlined, it’s one of the most important traits that is required for you to accomplish your goals. If you have any questions around this, go to creativeplanning.com and one of our credentialed fiduciary is happy to answer any questions you have.
I want to transition over to still what remains the number one personal finance question across the board, and that’s pertaining to inflation. Data this past week came out and July’s inflation rose 8.5% year over year, which was flat compared to June. The Dow jumped 500 points on the news. And you may be scratching your head saying, “John, why would that be? 8.5% is still near a 40 year high? Why would the market respond positively to that?” Well, because everybody thought it was actually going to be worse. Economists were expecting it to rise to 8.7%, which would’ve been a 0.2% increase, and instead it just stayed where it was. And this is a fantastic reminder that the market is forward-looking. In fact, I was just explaining this to my wife as we ate brunch the other day, that the market doesn’t move on the news, it moves on how closely that news reflects what was expected.
Mean, Apple can have amazing revenue, but what was priced into the stock and what was expected was even better revenue, and the stock could drop after an earnings call. That confuses people. They’re like, “Wait, Apple’s doing great.” Yeah, but what was priced in is that it was even going to be doing better. Well, one of my colleagues here at Creative Planning and also a close personal friend of mine, Dr. Dan Pallesen, he’s a certified financial planner. I’ve had him as a guest on the show. He’s also a doctor of psychology, wrote for our clients a creativeplanning.com, four tips to help protect your portfolio during inflationary periods. And I’m going to summarize, because I’ve spent a lot of time over the past several months discussing this, but I think these are great reminders.
Number one, remain diversified. This is a principle that in my opinion, you should always adhere to. But inflation impacts different companies and sectors more than others. As a parallel example to this, think about during the pandemic. Well, cruise lines got crushed and streaming services went through the roof. Well, because the pandemic and everyone staying at home had a positive impact on Amazon and a terrible impact on brick and mortar retail. You want to be diversified because you don’t know whether the next thing will be hyperinflation or a pandemic. Dr. Dan’s second tip in the article was to include an allocation of international assets. The principle of diversification of sectors and stocks holds true in this tip as well.
Tip number three, consider other inflation hedging assets. In an inflationary environment, you certainly don’t want to be holding a bunch of long term bonds and longer term CDs. If you have bonds, you want them to be short duration bonds. And then in addition to that, you want stocks, and real estate, and other assets that tend to do well in inflationary environments. And tip number four, which is constant for this show, plan in advance. Once you’re in an inflationary environment of 8.5%, it’s mostly too late. Everything’s priced in, everyone knows about inflation. You have to be diversified in advance of the inflation. But there’s so much more in that article.
If you’d like to read it again, you can go to creativeplanning.com to check that out.
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Give your wealth a second look at Creative Planning dot com and connect with a local adviser.
Now back to Rethink Your Money presented by Creative Planning with your host John Hagensen.
John: I want to stay on the topic of estate planning, because I saw one enormous mistake that was made. And frankly, it’s not that uncommon. I want to make sure you avoid this.
So, here’s what happened. Husband and wife were married, they get divorced. Husband never changes or updates beneficiary designations, husband dies. $1 million of life insurance goes to, who do you think? Yet, it’s not quite the Mr. Deeds, Adam Sandler, finding out some rich aunt that you’ve never met left you $100 million, but it’s not bad for an ex-wife to find out, “Wait, I’m getting a million dollars tax free from my ex and we didn’t end on great terms? That wasn’t intentional, but I’m a million dollars richer.” And by the way, do you think that in that scenario a child can bring a will or a trust or something like that to the courts and say, “Look, we were supposed to get this clearly.” No, no, no, no. The beneficiary designation trumps all. So, just a little reminder, if you’ve had any sort of life changes, just review your beneficiary designations.
It’s something that we do here at Creative Planning for our clients on an annual basis, because it’s really easy to miss and you don’t want to be given money to the wrong people when you pass away. And so, while staying on this really uplifting topic of people passing away, as promised, I’m joined now by Annie Rogers, estate planning attorney here at Creative Planning. Thank you for joining me on the show today, Annie.
Annie Rogers: Hi, thanks for having me.
John: It’s incredibly important what we are discussing. And so, I just want to jump right in and ask, heaven forbid, something happens to your spouse, they pass away, what should the other spouse immediately be doing afterward from a financial perspective, obviously in the midst of their grief?
Annie: Well, probably the first thing people do is, when you’re at the funeral home, you’re going to order death certificates. So, you usually want to get five to 10, because that’s what you’re going to show to different financial institutions and places like that, that your spouse has passed away. You’ll also want to notify social security, if they don’t already know. If they are receiving social security, you just want a heads up that might come back out of that account. So, with managing your finances, you might want to be aware of that. You have enough money in there to make sure automatic payments and things are being made and locating your estate planning documents, if you have them. Even seeing how your accounts are titled, are they joint? Was there a beneficiary on this account? You’re going to have to adjust your finances to see how all of those things play out.
If you have a will, even if you don’t need to use it, I mean, a will is really just a letter to a judge about what is supposed to happen when you pass away. If everything has a beneficiary or is jointly owned, you may not need to use it, but it’s still a really good idea to file it for record with the court in case something pops up later, where you do have to go through probate. Every state is different, but there’s usually a statutory period where you have to file that will, if you want to use it. If you miss that deadline, you don’t get to use the will. It goes back to whatever the statute says happens to the assets. So, it’s a good idea to make sure you just check that box and make sure that’s done. And there are a lot of attorneys that can help with those types of things, if people need help with that.
John: And realistically, how quickly does that need to be done? I mean, sure, we could say immediately, but in the midst of everything else going on in their life, what do they need to be thinking about in terms of a realistic timeline?
Annie: Well, I mean, so getting the death certificates, that happens pretty immediately. Usually the funeral home gets those. So, that’s going to happen when you’re meeting with the funeral director and figuring out the funeral details. Notifying social security sometimes happens automatically. Sometimes when you request the death certificates and they get notice, that happens already. But within probably a few weeks time, that’s probably something you want to do. Filing the will, you usually have several months to do that. I mean, I think you get through the funeral, get your bearings, and then maybe the time is to meet with an attorney, look at your estate planning documents, and figure out what you need to do with that next step.
John: Let’s suppose that they’ve done some good planning in advance and they have a trust, does the surviving spouse need to update accounts, those assets that are titled in the name of the trust?
Annie: Generally, no. Although with the joint trust, it can use either one of the spouses social security number. So, before the year ends, the surviving spouse is going to want to make sure they take the deceased spouses social security number off of those accounts, because a joint trust is a disregarded entity for tax purposes. And while you’re filing a joint return, you just report everything on your joint return. But the year after your spouse passes away, you’ll be filing an individual return. So, you don’t want to get any 1099s or any tax documents to the deceased spouse the year after they pass, so that’s an important thing to do before the end of the year. If everything goes to the surviving spouse, the joint trust just continues on.
If you are someone who has high net worth or have done some estate tax planning or have a blended family, where the trust is supposed to split into different buckets, a marital share, a credit shelter trust, things like that, that needs to happen within nine months of the first spouse passing away. And I would recommend you have an attorney and a financial advisor help you figure out how to do that. Those new accounts will get their own tax ID numbers and become irrevocable. So, an attorney can help get those. Depending on how complex your estate plan is, you may need some help. So, it is good to consult with your attorney after your spouse passes, just to see what you need to do and make sure you’re meeting those deadlines.
John: We are talking with Annie Rogers, estate planning attorney here at Creative Planning. Another question I get often as a wealth manager in these difficult situations, pertain to documents required. So, my question is, what will the surviving spouse need in order to update information at financial institutions? What do they need to bring to the bank, Annie? What documents are necessary for them to be able to make these adjustments?
Annie: I generally recommend that once you lose a spouse, at a minimum, we update the certification of trust, which is that two page summary of the trust document that shows that one of the spouses has passed away. And then it updates what the tax ID number should be for the trust, so it’s all spelled out, who the trustee is, who the successor trustees are, the name of the trust. It’s all in this one document that makes it easy for the client to give that to the financial institution. The financial institution is probably also going to want one of those death certificates I mentioned. So, you’ll take that in, they will show that your spouse passed away and they will make a record of that. They’ll probably just make a copy of it and give the original back to you. But those are the two main ones.
I also recommend, generally, when clients come after a loss of a spouse, we usually update their power of attorneys, their medical power of attorney and their financial power of attorney. I myself have lost my mom. I did this for my dad, because I was the next in line. I didn’t want to show my mom’s death certificate every time I went to do something for my dad at this point. So, we took my mom off, I’m now first, so that if I need to make medical decisions for my dad at some point, or he needs me to help with his finances, I can just show the document and it makes it easy. So, I think it’s good to refresh those documents as well, to make sure those are up to date.
John: As you know, Annie, we have many clients who have a lot of their assets registered in their trust, and then in addition, they have their retirement accounts. And if you’re listening, this might sound similar to what you have set up. And so, when something like this occurs, most of their non-qualified monies are already titled in the trust. Can they use that trust account to pay for some of the final medical expenses and funeral costs of the decedent?
Annie: Yes. Generally with a joint trust, they can just go ahead and pay for those funeral expenses because they’re in joint accounts. If there is a joint trust that requires creating an administrative trust upon the first death, they might have to wait to get the new tax ID for that trust before it’s paid out. But generally the answer is yes. And certainly, if it’s a single trust, an individual trust, there are generally provisions in the trust that allow for any expenses like that to be paid.
John: Great. Well, there’s a little bit of good news here. That’s convenient. You don’t want to have to take a taxable distribution from a retirement account to settle up some of those expenses. And I’m being joined by Annie Rogers, estate planning attorney here at Creative Planning. To wrap this up, are there any other considerations a surviving spouse needs to think about or things they should do?
Annie: Well, one thing that you might consider is, right now I’m talking about estate tax. The exemption is so high, it’s over $12 million today. But I always tell clients, this is a moving target. In 2001, the exemption was 600,000. We do not know what it’s going to be when somebody passes away. So, a lot of times with joint trusts, there’s some estate tax planning language in there, like I mentioned before with, if the bucket’s going to split to preserve exemption. But another option is filing a estate tax return for your deceased spouse, which is a Form 706. This also has a nine month deadline to do that. And basically by filing that estate tax return, you’re preserving your deceased spouse’s exemption so you can use it on top of your own when you pass away to try to eliminate estate tax for your children or beneficiaries.
I do think it’s good, if you think you might have some estate tax issues, to consult with an attorney. At Creative Planning, we have several tax attorneys that prepare these documents. I talk with clients about it. It’s good to just go through that exercise of evaluating whether you need to do that or not. Because if you don’t do it within that nine month period, I will say that if you ask for an extension on that return before the nine months is up, you can get a six month extension like you can on your normal taxes.
But if you don’t do it, you lose the ability to do it. So, it is one of those things. I know I always tell clients, it’s really hard because it’s a short timeline to do these things. Nine months passes really fast when you’re grieving a lost spouse. So, I reiterate that nine months is really an important amount of time to have in the back of their head, that they need to at least talk to somebody to make sure they don’t need to do one of these things.
John: That is such great advice, Annie. It’s one of the common things that I see missed when providing a second opinion and talking with prospective clients. Maybe it’s been two years that have passed since they lost their spouse, and when I mention this, they look at me confused and usually are telling me, “I’ve never even heard of that. What are you talking about, John?” But it’s essentially a free opportunity to use up some of that $12 million plus exemption that your spouse had to ensure that down the road, if it drops, you’re not subjected to estate tax. And of course, none of us know where it’s going in the future, but I believe this could be something folks are looking back on 10 or 20 years from now and really regretting that they did not take advantage of the $12 million opportunity. And now maybe even with not that large of an estate, are subjected to 35 or 40% estate taxes.
Well, it’s been a pleasure talking with you, Annie. As always, great information for our listeners. And even though the subject itself is a depressing one, it saddens us, these are areas that we need to ensure are taken care of and handled correctly. So, thanks again so much for sharing your wisdom with us today.
Annie: Yeah. Great. Thanks for having me.
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Now back to Rethink Your Money presented by Creative Planning with your host John Hagensen.
John: I want to speak about something that I think really trips people up and makes it difficult for investors to make progress. I was asked a while back when I was being interviewed why I thought so many people stay in suboptimal relationships when it comes to their money. And let me pause there for a moment. What I’m referencing is you have an estate attorney, but you know they’re not that great. Or you have a CPA that’s not very responsive, isn’t proactive. You know that. But they’ve been your CPA for 12 years. Why do we have this blind loyalty or this just maybe not blind, but unfounded loyalty?
I think the answer is twofold. One is that we’re busy, and because we’re busy, inertia itself is a huge driver of suboptimal relationships. It takes more work to adjust or change something. In the case of your CPA, “I don’t know. They already know all my stuff. They got my rental property information. I mean, it’d be a pain to have to switch all that. Again, I’d have to research and ask around and interview and figure out who to switch to. That just seems like a lot of work.”
I think we have a recent example of this in the NFL. So Sean McVay, the young, handsome, Super Bowl-winning LA Rams coach, by the way, the youngest ever to win a Super Bowl, just announced this last week that he signed an extension. So Stan Kroenke and his Walton wife, I mean, that’s a multi-billionaire couple, they said, “All right, we’re locking up what many believe to be the best young mind in football that just led them to a Super Bowl, probably a good investment.” But their quarterback, Matthew Stafford, was originally drafted by the Detroit Lions. He was the first pick in the entire draft out of Georgia. After spending nearly a decade with the Lions and mostly being known as someone who was really talented but not really a winner, he goes to LA, and for the Rams in his very first season wins the Super Bowl. The question is, well, what changed? Did Matthew Stafford become a completely different player? No. He went from being surrounded by a bad organization with bad to mediocre coaching, not a lot of talent around him, a culture of losing, to a completely different situation with far more talent and better coaching and better stability in the organization.
Matthew Stafford gave the Lions everything. He played through injuries. He showed up early and watched film, and by all accounts was a great teammate and a great member of the community in Detroit. But he should have been conditionally loyal. When he had the opportunity to join the Rams, I think we’d all agree, “Yeah, makes sense.” Be conditionally loyal. And that leads me to my rule for money on today’s show. I want you to be conditionally loyal in your professional relationships. I can’t tell you how many people work for five or 10 or 15 or 20 years with a financial advisor, again or a CPA or an attorney, that aren’t very good, and they know they’re not very good. But they play golf with them or they’re in the neighborhood or their kids go to school together and they see them at church. I don’t care. This is too important. The stakes are way too high with your entire life savings to not be working with someone that you confidently can say, “They’re fantastic. I can’t think of anybody better.”
I mean, think of this, have you ever referred anyone to your current advisor? If the answer is, “Not really.” or “I haven’t in a really long time,” you’re probably not that thrilled with them. You don’t want the reputational risk of saying, “Yeah, work with my person.” Because you probably know that if your friend were to go to them, they may not be all that impressed. And so, as you’re listening to this, I just want to make sure that you’re not sitting on a four-win Detroit Lions sidelines when it comes to your financial planning. Because even the best, the first pick in the draft like a Matthew Stafford, needs talent to win. Michael Jordan couldn’t get by the Bad Boy Pistons until he got Scottie and then had a great coach in Phil Jackson. All of us need help. And much of our outcomes will be determined not just by our talents, but by the environment and people we surround ourselves by.
John: There’s a reason Barons has called us a family office for all. Law firm with 45 attorneys, tax practice with 85 CPAs, over 300 certified financial planners managing or advising on 225 billion. What might you be missing in your current relationship? If you’d like to get a second opinion, it costs nothing. Go to creativeplanning.com, just as many before you have done. Again, that’s creativeplanning.com and sit down with one of our credentialed fiduciaries who aren’t looking to sell you something but are interested in giving you a clear breakdown of where you stand. One more time, that’s creativeplanning.com to request your second opinion.
As promised, I have five questions I’ve recently been asked. I’d like to share those with you as well as the answers so that you can learn from the questions of others. The first is along the lines of what I just shared. I’ve been asked many times from prospective clients who have chosen to work with us, “Hey John, last step, what does this look like to fire my existing advisor? Because that doesn’t feel very good. I do golf with them.” or “I do go to church with them.” or “I do see them in the neighborhood. It’s going to be really awkward. Do I have to go Donald Trump on The Apprentice and walk in and point my finger at them and tell them they’re fired? How do we do this?”
And so, if you’ve wondered that before, I can assure you, it’s extremely easy. You don’t even need to ever talk to that advisor again. Now, if you have a good relationship with them, you might want to give them a heads up that you’ve signed paperwork to transfer your money and thank them for their service, or however you want to handle that, every relationship is different. But generally, it is as simple as signing either in person or DocuSigning paperwork to transfer assets from the company you’re with to the new firm. It’s usually pretty quick and very simple. So if you have an IRA and inside of that IRA you’re invested in 10 index funds, those 10 index funds get picked up and set over in the new IRA. No tax implications. You don’t have to be out of the market while that transfer’s occurring. So it’s actually pretty seamless. That shouldn’t be a big roadblock in your pursuit of finding the best advisor possible.
Number two, questions, of course, all around inflation. One of the interesting ones in a conversation I had about a week ago was the question, “Are there any benefits of inflation, John? All the news, that’s really negative, the sentiment’s terrible. Is there anything good that happens with inflation?” There are, there’s a bit of a silver lining here. People who hold assets like stocks and real estate tend to see those assets increase in value during high inflationary times. Now, obviously, inflation’s high as well, so it doesn’t necessarily equate to more purchasing power, but this, by the way, is also what leads to even increased wealth inequality. Because if you hit an inflationary environment like we’ve been in now for the last several months and you’re a renter who owns very little stocks and no home and stock prices start increasing with inflation and real estate value starts going up with inflation but you don’t have much or any of those things, you’re getting left even further behind to those haves versus the have-nots.
But probably the most positive components of an inflationary environment relate to debt. I talked about this last week regarding home mortgages, but it applies to all debt. When you owe money in today’s dollars, inflation rises, but your debt obligation is remaining the same. It’s becoming easier and easier to pay back. Fortunately, for us as a country, this is true of our national debt as well. We’re sitting on approximately $30 trillion of national debt, and it sounds like a lot, and it is a lot. But 3.2 trillion, that sounded like a lot as well in 1990 because it was in 1990. 3.2 trillion, of course, is still we’re talking about trillions of dollars, but relative to 30 trillion, it doesn’t sound as daunting to pay that off 32 years later because, in part, inflation has chipped away at what $3 trillion of national debt actually means or looks like. Which is why, again, if you have very low interest rate debt at 2, 3, 4% and inflation’s still over eight, I can’t figure out from a financial perspective why you’re rushing to pay that off.
Third question today is, “How often should I rebalance?” The primary answer to this, I’ll get to the nuance in a moment, is you just need to make sure you do rebalance. If you look at all of the studies on how often, at what parameters, how much deviation before you rebalance, when should you not rebalance, you’re splitting hairs. The one thing that everyone agrees on that’s not controversial at all and makes an enormous impact is just making sure that you do, in fact, rebalance. But I do think that there is a way if we are going to get into the details that is the most effective, and I’ll share with you how we rebalance at Creative Planning. It’s really just a strategic and tactical and proactive approach to rebalancing.
What we don’t do at Creative Planning is say, “Every single calendar quarter, we’re going to look at your accounts and determine if we need to rebalance based upon too much deviation.” I think the reason for this is somewhat intuitive. Think about the pandemic, the market tanked, it went down about 35%, fastest bear market we’ve ever seen in the middle of the first quarter of 2020. And then it started screaming back the final week and a half of March. If you weren’t rebalancing earlier in March when the market was down 35% and buying while everything was on sale, by the time April 1st came around, you had missed some of the opportunity to rebalance.
And so, our belief is that you rebalance only when necessary, but always when necessary. Rebalancing should be based upon how much drift do I want between my different assets that I’m comfortable with. But when we get outside of those, I don’t care whether it is a Friday in the middle of a quarter, if it’s December 20th, if it’s the first day of the year that the market’s open after New Year’s Day, and maybe that means you have to rebalance three times in one quarter, but then you may have a nine-month period where you’re watching it but there is no need to rebalance, there isn’t enough deviation between asset classes. Why are we rebalancing every quarter when we don’t need to? Here at Creative Planning, we’re obviously evaluating the tax implications of all of those trades and rebalances as well, which is a very important component. But the key here is make sure you are rebalancing when necessary.
John: My fourth of five questions is something that a friend who was standing in my kitchen, just this past week we had them over, and she was asking me whether they should sell their current home, which has some nice equity in it now because they bought it in 2019, or whether they should rent it, whether it be a long-term rental or an Airbnb when they buy their next home. Now, this is a perfect example of why I often say personal finance is a lot more personal than it is finance. And so, here were the questions that I asked her because this truly is not a one-size-fits-all answer, the first is, “What is your current mortgage, and what could you rent it for? What’s the age and condition of the home?” The next question is, “Can you qualify for another mortgage of a larger, more expensive home without using any of the equity in your existing home?” Because obviously, if they sell the home, they can use all of that equity as a down payment, or at least a big portion of it. If they don’t sell the home, they’re going to need to come up with that down payment from some other source.
John: She told me, “Well, John, we’re absolutely going to need that equity to use for the down payment.” So now if they choose to rent it, they really have two choices to tap that equity. They can take a home equity line of credit, which has a floating interest rate, or they can do a cash-out refinance on their current house. But what is that going to do? It’s going to increase their mortgage payment. They’re going to have to refinance it, interest rates on their mortgage that are significantly higher than what they currently have, which is in the threes, at which point their mortgage payment will be higher than they’d be collecting in rent. So you can see where you want to go through a process here to determine what makes the most sense.
And probably even more important than that for this family, she has two young kids, one being an infant. And so, I asked her, “You’re either going to need to pay a management company, which is going to cut into your profits, or you have to be prepared to get called at 11 o’clock at night because a pipe’s leaking or the dishwasher doesn’t work.” So for this family and their situation, it absolutely didn’t make any sense to rent the property because, number one, they needed almost all the equity out of their current home to purchase the new home, it was barely going to cash flow, if at all, once they had to refinance, and they didn’t want to be landlords.
That’s why financial planning is so multi-layered, because renting a house that you own right now might be the right decision, it might be perfect, “Hey, John, I can rent it for 2,500 a month. Our mortgage is 1,200. We’ve got outside monies. I don’t mind going over there because we live two blocks up the road in our new house.” It might make sense for that person to not sell the house and rent it.
The fifth and final question I’d like to share with you was someone that came in and had just switched jobs. Their question was, “What are the pros and cons to rolling my 401(k) into an IRA?” Again, this is not a one-size-fits-all. Some 401(k) plans are extraordinarily high cost, the investment options are terrible, you don’t want to be tied in with that company anymore. And it’s a no-brainer, you do a qualified transfer directly into your IRA. You don’t ever have to deal with that company’s HR anymore. You have lower cost investment options. You can even buy individual stocks if that’s your thing. And it makes more sense.
But in other cases, I’ve seen where the 401(k) plan is really low cost, it has great investment choices, and maybe the participant is under 59 and a half. And one of the things that you might want to consider in that scenario, where we sometimes will advise our clients to not roll the 401(k) into an IRA, is in a scenario where you’re 56 years old. And if it’s in an IRA, you’re going to have to take an early withdrawal penalty or do a 72(t), which I’m not going to get into right now, just to access that money without a 10% penalty before 59 and a half.
Well, in most 401(k) plans, that 56-year-old can take a distribution from the 401(k) without paying the 10% penalty. So the liquidity aspects for someone under 60 sometimes can be more important than maybe saving a little bit on cost or having more investment options. So you don’t want to just roll it out without considering those things. A good fiduciary advisor can help you determine that. In this case, the person’s plan wasn’t very good. It was high cost. They were over 60 years old. And so, it was a no-brainer for them to move it into an IRA.
If you have questions just like these that I just shared, reach out to us at creativeplanning.com. We are happy to offer a complimentary second opinion from one of our independent fiduciaries. Again, go to creativeplanning.com to sit down in person, chat on the phone, hop on Zoom, whatever is easiest for you. We’d like to help you gain clarity around your money just as we’ve been helping family since 1983. One more time, go to creativeplanning.com to get your questions answered. And when we come back, I’ll share with you what I found to be the number one driver when it comes to happiness with your money, and this one may surprise you.
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John: Welcome back to the show that’s committed to helping you find a richer way to wealth. Well, before I get to what I found to be the highest correlator to happiness when it comes to your money, I want to talk a little Tiger Woods and golf. You ever wondered why Tiger Woods had a golf coach? I mean, really, think about that for a moment, a golfer who’s considered the best ever in terms of winning more tournaments than anyone in the history of the tour, had easily, far and away, the most dominant decade stretch in golf history, and all that time would have a coach giving him feedback and input for hours and hours per day. Why would someone who’s the best ever to do something need a coach?
John: Well, the answer is because we have blind spots. We know from all the studies, we are the worst source of diagnosing ourselves. I mean, shoot, I know if I want to actually know how I’m doing in an area, go ask my wife. There’s the true serum, whether good or bad. She’s got a way better pulse on whether I’ve been an involved dad the last couple of months. I’m going to be one of the worst people to answer that for myself. The second reason is that we need accountability. To maximize our probability of the best outcomes, we need people there alongside us challenging us, encouraging us, and holding us to the things that we say are important.
John: This comes up from time to time when it comes to investing in our money. You might be thinking to yourself, “Well, John, I’m pretty sure I’m okay. I’ve run a basic financial plan. I have $2 million saved, and we only need to spend $30,000 a year out of the portfolio. So I’m taking a one and a half percent withdrawal rate. I’m pretty sure that we’re going to be great. So how important really is it for me to have professional guidance?” By the way, I actually understand where that question’s coming from, but I look at it a little bit differently. Hiring professionals to help you is a lot like insurance, in this case for your retirement plan. Let me expand on this a bit more.
If you’re confident that your plan is going to work, as long as you don’t make a huge mistake or something doesn’t dramatically change, well then, wouldn’t it be worth paying a professional to give you a really high probability that you’re not going to make a huge mistake? Most people, even that are handling their own money, are not a certified financial planner or a chartered financial analyst and an attorney and a certified public accountant. Most people don’t have that much knowledge like a team of professionals would.
The reality is I don’t ensure something worth $20, it’s not worth it. But the more valuable the asset, those are things we ensure. We ensure our automobiles. We ensure our homes. I know hiring a financial advisor isn’t actual insurance, but it is absolutely another layer of protection, assuming that they’re really good at what they do, in helping you avoid common pitfalls or things that could derail an otherwise good plan. Jay Beebe, a certified financial planner here at Creative Planning wrote a great piece on our website at creativeplanning.com outlining why ultra-high net worth individuals, people with $30 million or more, and why even those people who certainly their plans are going to be okay and hold up, why they still need an advisor.
The first thing is tax planning. Tax planning for ultra-high net worth individuals can be, as you’d probably expect, really complex, in part because of the tax treatment of the country’s wealthiest citizens, it’s constantly changing. And most of these people realize, “This is far too complex for me to try to go about this without a CPA.” So things like tax loss harvesting on investment portfolios, maxing out HSAs, coordinating Roth conversions to take advantage of low brackets, establishing backdoor IRAs, orchestrating intergenerational gifting strategies, formulating a charitable giving plan, providing proactive tax guidance and return prep, these are all really important things, not just for ultra high net worth individuals, but maybe for you too even if you’ve got a plan that you feel comfortable is going to work.
How about investment management? One of the ways many ultra-high net worth individuals are able to achieve higher levels of wealth is by investing in vehicles that have the ability to outperform the publicly-traded market, and navigating this space is really challenging because there’s an estimated 3,500 portfolio managers to choose from just in the US alone. But if you’re working with a qualified advisor, he or she can provide much of the needed due diligence, like we do here at Creative Planning for our clients, to access top quartile performers, something extremely important to achieving success in the area of alternative investments and non-traded investments. That’s kind of the Wild West. There’s not as much transparency. They’re less r. You want to really know what you’re doing before you go into those, but a lot of people whose plans are going to be okay and have higher portfolio amounts see value in adding another layer of diversification outside of just public markets of stocks and bonds.
Another component to this is charitable giving. Do you use a donor advised fund? Do you go the private foundation route, charitable trusts, in kind gifts of public and private investments? There’s a lot going on with charitable giving. How about estate planning? I had Annie Rogers an estate planning attorney here at Creative Planning in the first half of the show, and we just scratch the surface of some of the things to consider when a spouse passes away or a parent passes away. But for especially those of you that are ultra-high net worth or high net worth, or I’m even just speaking to you if you’re someone who says. “I’ve got a million dollars saved and I’m pretty comfortable. I think it’s going to work,” estate planning is a really important aspect of this.
An estate valued at up to 12.06 million is exempt from estate tax. However, anything above that’s taxed at 40%. Obviously, for an ultra-high net worth family with over $30 million, that’s a lot of tax. And in addition, certain states levy their own estate or inheritance taxes as well. Even if you’re not over that 12 million, like the vast majority of Americans are not, utilizing some of that current 12.06 million exemption today while it’s there before its sunsets at the end of 2025 can be a really important strategy. But most wealth management firms are not like us at Creative Planning where we have a law firm with 45 attorneys, and that can be coordinated with your plan.
But also, what I’m pointing out is if you’re trying to do this on your own, unless you’re an estate planning attorney who has a lot of knowledge in this, you might be missing important opportunities. And so, four challenges that are faced by ultra-high net worth families but also apply to those who are just in good situations and not really sure. I mean, you might not be Tiger Woods, but you’re going, “Do I need a golf coach? I’m pretty good golfer. I don’t know.” If you feel like that about your financial plan, just remember, there are a lot of tax planning opportunities that a CPA might be able to help and add value, the investment management piece, charitable giving, as well as estate planning.
And so, if you have questions about any of those topics, feel free to visit us at creativeplanning.com, and you can request to speak with one of our credentialed fiduciary about your situation. You don’t need to worry about paying anything or having an obligation to become a client. There’s no pressure. We would love to help you gain clarity around your money in any way we can. So again, that’s creativeplanning.com.
John: Well, as I wrap up today’s show, I wanted to provide you with an observation that I think has great impact. I have the opportunity to get this inside look at thousands of families and how they interact with their money and the questions that they have and the things that bring them joy and the things that create anxiety. What I’ve learned, which is a truth that I think most of us have figured out by now, money, in and of itself, isn’t going to make you happy. There are so many wealthy families that are completely miserable. They got all the money, and they’re not happy, because there isn’t a reliable correlation between amount of money I have and my happiness. But here’s the strong correlation that I’ve seen: the more generous that you are with what you have, whether that’s a lot or a little, the more you sacrifice for others and are willing to approach things with an open hand rather than a tight fist, you will feel more peace around your money. You will feel less anxiety, more fulfillment in doing that for others.
It’s actually a really neat aspect of being generous. You’re blessing someone else, but in the end, we’ve all figured out, when we do that, we feel really good. You almost feel bad. You’re like, “Man, I did this to be nice, but I feel really good about this. I recall a couple of years ago, I gave a very small amount on a prepaid gift card to a group of our clients. I sent them a note and said, “All I want you to do with this is use it to bless someone else, to pay it forward.” It was on what’s called National Pay It Forward Day, which is this idea of a ripple effect of kindness all over the world.
We had a client event with about 100 clients at it. I asked a few of the people who were willing to stand up and share what their experiences were and what happened when they used that money to unexpectedly bless someone. A couple of people shared, and there wasn’t a dry eye in the entire restaurant. And that goes for me as well. I remember thinking and I think saying to the group, “This was something as minimal as I think $25, but look at the impact it made on not only the person you blessed with that $25, but the person who shared the story and with all the rest of us hearing the story in this room, how inspired and encouraged we are.”
And so, as we continue to navigate all things personal finance on this program, we talk about a lot of technical topics, I don’t want to lose sight of the fact that really the only thing that’s going to bring a lot of lasting fulfillment and joy is what we’re able to do for others. I want to end today’s show with a challenge: do something unexpected. Doesn’t need to be expensive, but do something unexpected this week to be generous and bless someone else. Because in the end you’ll be the one that wins just as much. And remember, we are the wealthiest society in the history of planet earth, let’s make our money matter.
Disclosure: The preceding program is furnished by Creative Planning, an SCC registered investment advisory firm that manages or advises on 225 billion dollars in assets. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there could 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 a wealth path analysis by going to CreativePlanning.com/radio. Creative Planning tax and legal are separate entities that must be engaged independently.