On this week’s episode, John talks about the power of compounding and how this frequently underestimated, misunderstood concept can be one of the most powerful tools you have when it comes to your retirement. Plus, get six time-honored retirement tips to help you boost your savings.
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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 Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, six time tested tips to boost your retirement, as well as a game of rethink or reaffirm as it pertains to one of the most common sentences used throughout finance. And lastly, the new rules for investing success in today’s environment. Now, join me as I help you rethink your money.
So often we focus on how much we are saving, and it’s not that that doesn’t matter, that it’s not impactful, but much more impactful even. It’s not just how much you save, but how early you save. Now, let me ask you a question. If you could choose to receive $5 million now, or you could receive one penny a day doubled for an entire month, which would you select? Most people would take the $5 million and be cruising off into the Maui sunset to forget the pennies. I don’t need those stinking pennies, but let’s first think this through. That’s a penny today. Then it’s two pennies tomorrow, it’s four pennies the next day, eight pennies the day after that, and so on. So how rich are you at the end of this? If you do the math at the end of 30 days, you’ll be handed $10,737,000. And by the way, if it’s a 31 day month, that one day difference where you get to finish at the end of 31 days, it’s obviously double that, $21,474,836.47.
Don’t forget about those cents, they’re going to compound. That’s the power of exponential growth. You’ve done way better off, four times better off than selecting the $5 million all up front. And this power of compounding is something that I’ve tried to explain to my children. [inaudible], our 11 year old, is in fifth grade, and he participates in this really neat extracurricular club at school called The Startup Club. And it’s all about learning entrepreneurship and selecting a product that people actually want. Figuring out how to price it, figuring out how to market it, and figuring out your “pitch” when people arrive at your booth. And I’m really proud of [inaudible], he has started a business called Adopted Blooms. Where he takes upcycled mugs that he has donated from others in the neighborhood or goes to thrift stores and purchases and fills them with soil and succulents and sells them for $10.
And they’re actually really cool, kind of funky, people like them as decor in their homes, only $10. So not a terribly high price point, but still has decent margins, talking with him about profit margins. And by the way, there’s no website or any plug for you to go buy Adopted Blooms, that’s not what I’m doing. He sells through the 100 or so that he makes at the market. That’s not what I’m doing here. What’s really neat is that [inaudible] adopted, and so the name Adopted Blooms has a bigger meaning and he in fact donates a portion of his proceeds back to Christian Family Care, which is the adoption agency that we adopted [inaudible] through, and that helps fund other adoptions so that other children can find forever families. So Britney and I are really proud of him for his generous heart and for his efforts with this business.
But then there’s always the conversation of what are you going to do once you’ve given back to Christian Family Care and you’ve paid for your mugs that you had to buy and the succulents and the soil and the booth and the sign, now what? Got a decent amount left over for a fifth grader. Well, of course he wants to buy an air soft gun and new roller blades, the very typical things. And not that any of that is bad because there has to be a balance with your money. You don’t want to be the person who spends absolutely nothing, isn’t generous, who dies with millions of dollars and never enjoyed any of it. So I do want him to strike a balance, but I’m also trying to share with him this idea of starting early. And let me share with you a hypothetical example of two brothers to help illustrate the impact of compounding.
Their names are Jackson and Zach. Jackson saves $250 a month from age 24 to 34. So for 11 years, saves. Zach by contrast, saves $250 a month from age 35 to 64. So Zach saving for 30 years as compared to Jackson’s 11 years of saving. At age 65, Jackson has about 1.2 million. Zach has a little north of 600,000. Think about that. The one who saved 11 years instead of 30, but started 10 years earlier, ends up with twice as much money. The lesson here is start saving as early as you can. Now, if you’re listening and you’re saying, “John, thanks for telling me this. I’m already 60. Well, what do you want me to do now? I’m not even Zach, I’m older than Zach.” Start saving now. Or if you’ve already been saving, put as much away now as possible. We can’t get in a time machine and warp back 25 years, but also give yourself a little grace on this because the entire concept of retirement is relatively new.
Think about this. A hundred years ago, social security hadn’t even been enacted yet. You basically worked as long as you could and then eventually when you couldn’t work any longer, you lived with family members and they cared for you. So if you’re a baby boomer, maybe a little behind for retirement or you feel like you had to learn some of these things later in life than you wish you had, join the club. Your parents had no one teach them when they were kids because their parents certainly weren’t talking to them about this because it didn’t exist. But this idea today that we are confronted with as a society, one where we can live into our nineties and even past 100 with no pension yet an expectation that we’re going to retire in our sixties and have a 30-year plus retirement, puts a huge emphasis on saving as much as possible, saving as early as possible.
And if you’re not certain, whether you’re on track for that, is there a shortage? Is there a surplus? Can I retire at that date? If I retire at that date, how much income can I drive from the plan? This is still the number one question that we help solve here at Creative Planning. Sure, we can do our clients’ taxes and do all the tax planning, and that’s important. And sure, we can help you invest wisely and in alignment with your priorities and your goals. And we can help with your estate planning, elder law, real estate, contract law, all through our various attorneys. We’re a trust company. We can help you with risk management, Medicare decisions if you’re approaching 65. But the number one question we still receive is, can I retire at this age, have the life I want and not end up in my kid’s basement, not become a burden on my family if I live a long time?
And if you’d like us to help reaffirm and solidify some of the questions in your mind around retirement, whatever those are, we have been helping people just like you since 1983 here at Creative Planning. Visit us creativeplanning.com and request a second opinion from a credentialed fiduciary, not looking to sell you something just as thousands of other radio listeners have also done. Again, that’s creativeplanning.com to get your questions answered. So let’s continue on this discussion around retirement. And specifically I’m going to share with you six time honored retirement tips. Now, if you’re within about 10, 15 years of retirement, these are especially applicable. But whether you plan to retire early, late, or never, like, “I’m never retiring, John, I’d be way too bored.” Having an adequate amount of money saved can make all the difference, both financially and psychologically, emotionally. To have that peace of mind and freedom that you’ve got enough. Your focus should be on building out or don’t feel bad if you’re one of the people that also said, “John, I need to catch up.”
It’s not just building out, it’s catching up, that’s okay too. So the first time honored retirement tip, fund your 401k to the absolute max. And this opportunity is increasing because here in 2022, 401k plan contributions top out at $20,500, if you’re under 50. If you’re 50 or older, you have the catch-up contribution provision and you can save up to 27,000 per year. And to be clear, you don’t need to be behind on your retirement plan in any sense to make those catch-up contributions. You just need to be 50 or older. So don’t let that phrase confuse you. Due to high inflation, this is going up $2,000 in 2023, and meanwhile the catch-up contributions are going to increase from 6,500 to 7,500. So if you’re 50 or older, starting in 2023, it’s an even 30,000 if you want to max out your 401k.
Now, if your employer offers some sort of percentage match, you certainly should contribute up to the match because that’s basically you getting a 100% return on whatever investment it is. Second time honored retirement tip is to rethink your 401K allocations. Conventional financial wisdom says if you’re older, you should be more conservative, put more money into bonds, less money into stocks. Well, I just talked about this. This ain’t our grandparents’ retirement. Many retirees need the money that they saved to last them 30 or 40 years, maybe even at a minimum 20 years. Well, unless you intend to spend everything in your 401K over the first five or so years of retirement. Which you probably won’t because if you retire at 67, you’re hoping to live beyond 72 and you certainly don’t want to be broke at 72. Well then anything that will still be sitting in your retirement accounts unspent at age 73 or certainly age 78 or 80 or 85 should not be in bonds.
Remember, time horizons, not age, as I spoke about last week, is the primary driver of your allocation. Furthermore, if you are someone who is 10 or 15 years or more out from retirement, I want you to look at your 401k. And if you have any investments in bond funds, I want you to look at yourself in the mirror and say, “I am an idiot.” No, I’m joking. You don’t need to do that. Don’t beat yourself up over it, but it actually isn’t smart. Makes no sense. This would be akin to you telling me that you’re going to take a trip from Boston to Los Angeles and I ask you which airline you’re flying and you say, “No, I’m going to drive. It’s just safer. I fear flying. I fear heights.” No, actually, statistically you’re 2000 times more likely to die in a car than an airliner.
So it might make you feel better because you’re on the ground, but it’s a much less efficient way to get from point A to point B on a cross-country trip like that. And the same thing is true for retirement. All you’re looking for is when I want to sell this investment in my retirement account, I want it to have grown as much as possible on average during my working years. The volatility or turbulence that you experience along the way make no difference when you finally land at LAX three days before your alternative option, just buckle up and sit there, watch your movie, listen to your podcast. You’re not opening the emergency exit and jumping out because there’s turbulence. And a good fiduciary financial advisor can help you assess your 401k allocation. Is it efficiently aligned with your retirement goals? Our third time honored retirement tip, consider adding an IRA.
Now, if you happen to be someone who does not have a 401K plan available at work or if you’re already funding yours to the max, another retirement investing option is an individual retirement agreement, also known as an IRA. You’ll hear it referred to also as an individual retirement account, all the same thing. People call it an IRA, same thing. And the maximum you can contribute to an IRA coming up here in 2023 is $6,500 plus another 1000 if you’re 50 or older for that catch-up. And it’s worth noting because I see this trip folks up, if you’re married and you file taxes jointly, you can often fund two IRAs even if only one of you has earned income. So if one spouse stays at home with the children like my wife does, we can still both fund an IRA. Hers would be technically through a spousal IRA.
But the point of number three is that even if you have a corporate retirement account, you should also consider a traditional or a Roth IRA on top of that if you’re looking to save as much as possible. Number four, know what you have coming to you. What am I talking about? Social security, pensions, inheritance. You might be listening going, “John, I got nothing coming from an inheritance.” Well, I’m sorry, but maybe some of you do and it matters regarding your retirement. And one of the neat things about social security is that it has a cost of living adjustment and it’s set to go up at 8.7% in 2023, which is the largest inflation adjustment in over 40 years. And this additional income is one of the most important components to consider because if you’re married, let’s say, and you and your spouse are going to receive 50 grand a year combined in Social Security benefits indexed for inflation, and you spend $80,000 a year, well, obviously we only need to produce 30,000 a year out of the portfolio.
That is significantly different than you needing your portfolio to produce all $80,000 a year to support your lifestyle in retirement. Number five on my time honored retirement tips. Leave your retirement savings alone. Aria, our three year old keeps picking at her lip. Her lips got chapped about a month ago, and now her new thing is she just picks at her lip all day long. Well, of course it’s scabs, she picks it off, it’s scabs, she picks it off, it’s never ending. And I keep telling her, “Your lip is never going to heal.” Of course, she’s three. So she’s just like, “Where’s my baby doll? Cool dad, thanks. I’m picking my lip.” But your retirement’s never going to get healthy if you’re continually siphoning off dollars and essentially reversing the power of compounding. And just a few quick header reasons why you don’t want to touch your retirement.
You’ve got big penalties if you haven’t reached 59 and a half, you’ve got a 10% early withdrawal penalty. You’re going to have to pay income tax on any of these withdrawals which will stack on top of all the rest of your income. You obviously lose the time value of money, which I talked about at the top of the show. Retirement funds are legally protected. So if you hit hard times financially, creditors can’t attack your 401k, you take it out of there, now all of a sudden it’s accessible. And number five, retirement funds are for retirement. And that’s the most important reason of all. This is not used as an emergency fund. This is not to be used to go buy a car that you want. This is for retirement. And my sixth and final retirement tip is don’t forget about taxes. And I’m going to post an article to the radio page of our website at createaplanning.com/radio on how to prepare for the 2025 tax sunset and things you can be doing right now before the end of the year to take advantage of these historically low tax rates.
But the primary suggestion I have is don’t just put your head down and defer all of this money into your retirement accounts. Not considering Roth contributions, not considering Roth conversions, not considering backdoor Roths or mega backdoor Roths and not considering the overall allocation of all the various types of savings accounts that you have accumulated. Maybe some for retirement, some for short term needs, some for education. Because remember, it’s not just what you’ve saved that matters, it’s how much you keep. This is why we’re a tax practice with 85 CPAs, a law firm with nearly 50 attorneys and 300 plus certified financial planners here at Creative Planning. A complete retirement plan means accounting for your taxes. It’s not just a retirement plan, it’s not just an estate plan. And certainly not just going to your CPA in March and saying, “Please accurately report what I already did.”
Complete wealth management means coordinating all of those aspects of your plan, which by the way, they all matter and they are all directly impacted by one another. And if you’ve got questions about any of these things, visit us right now st creativeplanning.com to meet with a local advisor. Again, that’s creativeplanning.com to speak with a fiduciary who isn’t looking to sell you something. Let us provide clarity around your retirement. When we come back, I’ll be interviewing an estate planning attorney Jerry Bell, as we talk about the legal needs of active seniors. That and more ahead on the show.
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John: Well, my extra special guest today is back by popular demand. This is, I believe, his third time on Rethink Your Money. One of my favorite guests, he’s an estate planning attorney here at Creative Planning and he focuses specifically on elder law planning as well as helping special needs families navigate the complexities of those situations. And with that said, Jerry Bell, thank you so much for joining me again here on Rethink Your Money.
Jerry Bell: Hey, it’s great to be here. Looking for an opportunity to talk about what we’re doing with seniors.
John: Well, elder law is something that we hear more and more about. It’s certainly a growing niche within estate planning. Is it just that we’re living longer? I talked about that last segment. Is that the reason? It’s just frankly that we need it more than 30 years ago because of our longevity?
Jerry: Well, I think a lot of it just has to do with demographics. That’s an overused term, but we are living longer, that baby boomer generation is getting older. If you look at the medications that are available, most of the time people are taking those to extend their life, to extend the quality of their life. And the good news is seniors aren’t just sitting still. When they retire, they’re trying to be active, they’re trying to do things, and that just has them more involved in the things that all of us were during our career. I think social media has something to do with that because seniors want to experience some of that. There’s more seniors and they’re more active. Unfortunately, that leads to more legal situations that we have to deal with. And that’s what drives them more than anything else.
John: But you’re so right, I think, Jerry. You’ve got seniors on Facebook looking at what their grandkids are doing, saying, “That looks pretty fun. I want to be on that cruise. I want to be playing pickle ball.” That’s a great thing that they’re probably more active than ever before. My grandmother just passed away at 95 years old. So I can see even firsthand that longevity in my family, which is awesome because we had more years with my grandmother who was an amazing person. But as you alluded to it, certainly creates new and more common legal challenges than in past generations. We throw that phrase elder law around. But maybe just describe for us, Jerry, what is the term elder law referring to?
Jerry: It’s one of the few areas of law that’s defined by age. I think the only other one might be juvenile law in some ways. But it’s really very broad because when you say elder law, it corresponds to whatever senior is and usually depends on how old my client is. I don’t want to say something wrong there, but say 75 or older and somewhere in that range. But a lot of it’s just basic estate planning for some things and they find that something as simple as a power of attorney is a pretty big deal. When you deal with capacity issues, a lot of it is asset protection. Sometimes that has to do with government benefits and all the things, whether it be real estate, whether it be negotiating agreement with a care facility, all those things fall under elder care. Unfortunately, one of the things that gets a lot of attention sometimes is elder abuse, whether it be fraudulent, financial elder abuse, things of that nature.
And that’s a really sad area, but elder law covers all of that so it’s very broad, and I’m not trying to throw a big blanket out there. But again, seniors are active, they’re busy and they have needs. And so it’s taken a lot of those legal disciplines and applying it to that age group.
John: And the reality is we are aging as a society.
Jerry: Our clients are getting older too. So when we look at why are we even doing this? Well, our clients are getting older, so they have those needs. But some of the things that we spend most of our time on are helping them understand where am I going to go next in this long term care journey? Because hopefully our lives are healthy for a long period of time. And then what happens is something starts sneaking into our world, whether it be that backache that for a long time it was just, I’m getting old to maybe arthritis. Uncle Arthur starts showing up at the door more often. And so they start thinking about the reality of getting older is happening. And so we try to take a look at where a client is and a lot of it is anxiety around where this will go.
Unfortunately, sometimes things like dementia/Alzheimer’s and other forms will sneak into the picture. And so one, we do a lot of consultation around what to expect with long-term care and how that matches up with their financial plan. We talk a lot about asset protection and how can I protect the lake cabin? How can I protect the farm? There’s a lot of work in the government benefits area, and I’m specifically talking about social security, Medicaid, Medicare also comes into play. We do a fair share of work in veterans benefits as well. And those are all ways to help defray the cost of that long-term care. So we try to identify where the client is on their journey and then meet them there and then help them understand what to look for going forward.
John: Those government benefits are confusing and I see them often missed. So if you’re listening and you have any questions about that, don’t go about this alone. We’ve been helping people navigate these confusing benefits now for decades. Contact us at createaplanning.com to get connected with Jerry’s team. And Jerry, this can be confusing, can’t it?
Jerry: There’s plenty of room for confusion. Our VA department does a great job in other areas, but they’re not known as a marketing organization, so some benefits aren’t as well known. And the other thing about Medicaid, it is state specific, so it can vary based upon where you’re at. So yes, there’s a lot of confusion. Yes, we try to cut through that where we can, but we also have to make sure that we’re really able to help that client and not speak to every state in the country because sometimes we have to use the local council there as well.
John: Well, absolutely. Sometimes the best estate planning advice that I’ve seen is telling somebody to move from one state to another that just has more favorable laws or taxes. And in your previous guest appearances here on Rethink Your Money, you’ve spoken about helping special needs families, and I know there are also meaningful experiences and stories that you have working with seniors as well, kind of on the other end of the spectrum. But what are some of the differences in working with seniors versus special needs families that often have younger children?
Jerry: My experience with seniors, and this is not true across the board, seniors know how to say thank you. They’re very gracious. They don’t call them the greatest generation for nothing because they’ve been through a lot. So they’re very authentic, they know genuine when they see it, and they’re always going to tell you thank you. We always have the challenge of making sure we’re covering a lot of clients, but are also going deep with those clients. And I feel with special needs as well as with elder clients, you have to go deep with them because they really want to feel the care, feel the love in helping them with whatever situation may be. And we’re truly dealing with life and death in those situations and they know the end story. It’s the same for all of us, Mother Nature’s undefeated. We just have to help them enjoy that as long as possible. I’ve had some great experience with some clients. I can share some stories on some of them, but it’s interesting, they all come back to one thing. They’re very gracious for what you’ve done for.
John: Well, Jerry, you’re the great storyteller. I love hearing your stories. The listeners love hearing your stories. How about you give us one?
Jerry: My favorite is this lovely lady, her name’s Willie. Unfortunately, we do see a lot of single ladies, sorry, us guys end up going earlier. But Willie was 99, which you don’t get too many 99-year-olds, much less ones that have pretty clear mind and very good physical shape. She had a walker and we were helping her with pretty much basic estate planning, some benefit planning as well. And her family was involved and took a little while to get it all in place. But long story short, when she was done, as much as she could, hop up out of the chair, she grabbed her walker and she gave me a big hug, which isn’t unusual when you get hugs from clients. She looks you in the eye with those big bright blue eyes that have lasted 99 years.
And she goes, “I just want to thank you so much. You’ve been so nice and so kind and how you’ve dealt with this and help me understand it. And Jerry, I’m not going to be here too much longer. I know that and so I just want you to know that I’m going to be looking for you up there in heaven, because I know that’s where you’re going to be.” And I’ve got a lot of thank yous over the years from clients, but when your grandmother comes up and says something like that to you as heartfelt and genuine as she did. It grabs you, sorry I’m a softie but that one sticks in my mind. And she passed before she turned a hundred, but she lived a very fine 99 years and I still work with her family, but I’ll always remember Willie. She was a piece of work that had all kinds of energy. And for a 99-year-old, if I can live 99 years and have that energy and have that heart that she had, life is good. No doubt.
John: Willie sounds like a real spitfire, that’s for sure. Well, in the irony is you were probably able to tell Willie, well, let’s start doing elder law planning for your kids now, because they were probably almost 80 years old at that point as well. And that’s a great story. It’s meaningful work that your team and you are doing, whether it’s with special needs families or with this elder law planning that we discussed today. Thanks for sharing some of your wisdom and insight with us today on Rethink Your Money.
Jerry: Thank you, John. Look forward to helping many more. Take care.
John: Again to reach out to Jerry and his team for a second opinion on anything regarding planning around elder law or special needs, visit us now at creativeplanning.com. Again, that’s creativeplanning.com to request your complimentary second opinion. We’ve been helping folks just like you since 1983. Why not give your wealth a second look? Well, we are halfway home, but don’t go anywhere because we are just getting started. Around the corner, we’ll be playing a game called rethink or reaffirm, as we break down one of the most common pieces of wisdom that we often take for granted. Is it truth or is it myth? We’ll answer that together. Coming up next.
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: If you and I were to start from scratch without all of the biases that our life experiences have brought about, what conclusions do you think we’d arrive at? Would they resemble how we currently think? In Adam Grant’s book titled Think Again, he makes the captivating argument that if we have humility and curiosity to reconsider our beliefs, we can always reinvent ourselves. But the reality is it can be very uncomfortable for us to question things that we have believed over many years and in some cases have been cemented into our identity from childhood. I just think about my own life. I grew up in Seattle, Washington. I went to church on Sunday mornings and Sunday evenings and Wednesday nights, sometimes. At the Nazarene Church memorizing Bible verses, only really allowed until high school to listen to oldies music and Christian music.
And I know right now you’re thinking, “Man, this explains a lot. John, thank you. I’ve been wondering what was up with you. Now I know.” No, my parents were just trying to protect me from all the provocative music that my friends were listening to on KUBE 93.3 FM. See, I still remember, cemented in my brain. And growing up in the Pacific Northwest, I’d walk myself into the [inaudible] with my dad, go to batting practice with my glove in hand, hoping I could catch a ball off the bat at Ken Griffey Jr. I was a lefty and eventually played center field in college. I wanted to be just like Junior without the crazy athleticism, 600 plus home runs, once in a generation type talent. But other than that, I was basically just like GriffEy. But then we grow up and you take some of those things from childhood, those beliefs that were instilled in you, and you either pass those down to your children or you learn from those things.
And say, “You know what? I think I feel a little bit differently. I’m not going to do things exactly like my parents did.” But regardless, those experiences shape our mindset. And in particular, when it comes to our money, the biggest mistake and challenge that I see in helping families accomplish their financial goals is that they can’t get out of their own way and they don’t even see it. Don’t hear me saying this condescendingly, but rather through the lens of that idea that we have to be self-aware, we have to know thy self. We have to understand why we might be thinking the way that we are so that we can then deconstruct that to learn and grow. And that’s why I think it’s important that each week I break down common wisdom or a hot take from the financial headlines and together we can rethink or reaffirm that idea. But we can only really do that objectively if we’re willing to unlearn what we currently believe to be true and say, “Let’s truly reexamine this.”
And today’s common piece of wisdom is that past performance is not indicative of future results. Let’s rethink or reaffirm this together. Now you know on this very show, one of our disclosures is that past performance is no guarantee of future results. You see this on every prospectus. And so it’s sometimes easy to brush that warning off as just, “That’s a CYA for that company. And it’s just a requirement from the regulators.” But in reality it’s a lot more than that because in most aspects of our lives, we attribute what someone has done in the past as a very high predictor, as a matter of fact, of what we can expect in the future. For example, if you needed one three pointer from the top of the arc to win $5 million and you could pick any person on the planet. You’re picking Steph Curry. He’s chewing on his mouth guard.
There’s spit dripping off of it. It’s sitting out the side of his mouth, but he’s the guy shooting it for you, with his sharp shooting little baby face because the dude is money from beyond the arc. His past performance tells us he’s the wise selection. He gives us the best opportunity for success. And there are multiple other examples all across our lives where we use this past information as a barometer for what to expect in the future. And so it’s sensible that I am often asked, “Hey John, what’s your track record?” Because it’s logical. But unfortunately, when it comes to money managers and even individual stocks, the data does not support that intuition. There are significant bodies of study examining the performance of various mutual funds and top performing funds typically don’t remain top performing funds, even merely above average funds tend not to stay above average for very long.
Academics will say that there is no persistence in performance. You say, “John, give me some meat behind this. Give me a little more data than just your opinion.” Well, for instance, a broad-based study showed that for the one year period that ended in June 2019, 71% of US stock funds underperformed the S&P Composite 1500. So basically 71% of all the professional money managers that are out there trying to beat the market lost to essentially just buying everything. But what if you happen to be in the 29% that won? Well, that’d be pretty sweet, but again, the question is what’s the likelihood that those managers will continue to win? Well, a year later, less than half of those funds, only 47% were in the top quartile. By the end of the three-year period ending in September 2019, the number of funds that had consistently beat their peers went down to just 8%.
Under 10% of the domestic equity funds remained in the top quartile. It wasn’t long ago that Warren Buffet or the Oracle of Omaha, one of the greatest investors of all time, one of the richest people in the world that said, and I quote, he’s had a tough time trying to beat the S&P 500. Buffet went on to say that his two investing gurus, Ted Weschler and Todd Combs have each had a difficult time outperforming the market. And even so he added, but their stock picks have done better than mine. When you have Warren Buffet’s estate plan laid out to allocate his tens of billions of dollars into low cost index funds. It does make you wonder with this guy’s acumen, track record access to the smartest, brightest, best people in the world, he’s concluded that he can’t base things just on past performance defined future surplus returns.
Yet I see this so often. We pile money into fund managers who are Morningstar rated as five stars. Now don’t act like you don’t know what I’m talking about. You’ve looked at your 401k statement and got the little rating thing next to it and selected your allocation based on that, haven’t you? Everyone’s done that. Hopefully over time we learned that that’s not a great approach, but we’ve all done that. I remember as an airline pilot, I got my 401k. That wasn’t a certified financial planner at the time. I didn’t have any experience in wealth management. I looked at the three year, five year and 10 year track record of the funds that were available to me. And I selected the allocation on a few of the different funds that had the best performance over the last 10 years. And now I’m talking to my younger self, “Hey John, you’re an idiot.”
At worst, there will be mean reversion, at best it’ll be random. But what else was I to go on? And unfortunately, we see this often, Teladoc, Peloton, Zoom, Meta. We pile into these investments that have phenomenal past performance with the false belief that they’ll also provide a higher expected return. So if we’re looking to rethink or reaffirm today whether past performance is not indicative of future results, it is a big fat reaffirm. It’s absolutely true and not just the common disclosure that you hear on shows like this. However, there is another side of this coin, and that’s the past performance trends at a much more macro level should inform our decisions. They do play a role in expected outcomes. And to be clear, not that they guarantee them, but they can be used for a great barometer. Now what I mean is this, if you were to ask me exactly six months from now, if I thought it would be rainy, sunny, could I determine whether there would be wind or it would be calm?
Of course the answer would be no. Because as we know, if a butterfly flaps its wings in Madagascar, you can finish the sentence. But while that would be impossible, the broad trend would tell me that it’s fairly safe for me to assume that it won’t be a high of 40 degrees in Phoenix because it’ll be June and it’ll be the desert. And so there are some fairly predictable aspects at a much higher, broader level. And so when we think about that analogy related to wealth management, here are a couple conclusions that I think are important for us to learn from and base our planning around. We know that stocks in the past have been the absolute best inflation hedge on earth. There was a chart put out by Goldman Sachs asset management that illustrates this fact perfectly. Over the last 70 years, stocks have beat inflation 100% of the time.
They’ve been a more reliable inflation hedge than commodities, certainly than bonds or cash even considerably better than gold. And the reason for that is because you’re an owner in the best companies on earth and companies raise their prices as costs go up in the real economy, revenue increases, profits increase, and as a shareholder you’ll benefit from that. And I thought Josh Brown did a really nice job explaining this on his blog, as a practical example of why stocks are so effective at beating inflation. Just take Chipotle for example. The cost of a barbacoa burrito, I love the barbacoa, was $7.50 in 2017. At the end of 2021, it was $9.10. So the napkin math there is that you saw a price increase of a little over 21%. If Chipotle’s cost of making and selling that burrito only rose maybe 15% during that same period, by the way, that’s not verified data.
Let’s just go with this example. Then Chipotle’s shareholders, if you own their stock, just benefited from increased earnings in both nominal and real terms. Chipotle’s net income, by the way, was 176 million in 2017. It was 652 million last year according to Brown. Now, inflation’s obviously risen, but Chipotle’s ability to increase prices, open more stores, sell more burritos, sell the bowls, sell those quesadillas my kids love, has far outpaced a bar of gold. And by the way, I’ll be talking next week on reaffirm or rethink about gold could perhaps maybe keep pace with inflation, but a burrito? Properly prepared and marketed can blow inflation’s doors off even if the burrito costs more to make each and every year. And so no, past performance is not a certain guarantee, but it’s a pretty decent starting place if the name of the game is providing yourself with the highest probability of success given the information that you have.
Another fairly predictable broad indicator is that bonds have a lower expected return due to that tighter range in their variance of returns. Less volatility, less risk is one way to look at that equals lower returns, more predictability. By the way, if you have any questions about your financial plan or any of the things being discussed right now, maybe you’re feeling like, “I do normally look at past performance and you have kind of reaffirmed and I agree that’s probably not the best indicator, but I don’t have a better process.” Visit us right now at creativeplanning.com to request to speak with a local fiduciary that’s not looking to sell you something. We’d love to help in any way we can. If you’re not sure where to turn, again, that’s creativeplanning.com. Do what thousands of other radio fans have also done. Let me also share with you something that Jonathan Clements, our director of financial education here at Creative Planning, longtime contributor to the Wall Street Journal, and also the founder of the HumbleDollar website where he wrote this past week, just a fantastic article on the new rules for success.
So if you’re thinking to yourself, “Well, John, the old rules don’t work trying to look for past performance. What do I do?” Follow some big trends. I get that. Well, let me hit on seven new rules that are relevant for right now. Because for decades we’ve had falling inflation and declining interest rates, and obviously that’s come to an abrupt halt. And for the first time in a long time, it has changed the calculus on our financial decisions. So number one, carrying debt is less foolish today in some cases. So what am I talking about? Well, thanks to inflation, you can now repay money that you’ve borrowed with depreciated dollars. It’s certainly not going to help you with credit card debt where obviously rates have continued to soar along with inflation, but if you have a fixed rate mortgage from earlier than 2022 or a low interest car loan that you got at 0% or 1%, your debt is shrinking rapidly due to the 7.7% spike in the consumer price index over the past 12 months.
So the implication here, as Jonathan puts it, don’t rush to rid yourself of these debts. Second new rule for success, buying bonds beats paying down older mortgages. And I know you’ve listened to Ramsey and Suze Orman and you’re crazy if you don’t pay off your mortgage and you should pay cash for everything. And you’re walking into grocery stores with envelopes, and I think a lot of those principles are great. But if you have a fixed rate mortgage at 3% and you can go get a treasury at 4%, or you can buy other high quality bonds at five or 6%, why would you not arbitrage those? Third new rule for success? Well, asset allocation, it matters once again. Because when bond yields dropped to one or 2%, some financial experts noted that holding taxable bonds in regular taxable accounts wasn’t really a problem because the tax owed on those bonds was tiny.
But now that bond yields are climbing along with inflation, it’s time once again to keep your bonds. Obviously, aside from municipal bonds, which may be federally tax exempt in your retirement accounts. You don’t want to pay income taxes on the interest you earn by keeping bonds and taxable accounts. Number four, extending bond maturities is more appealing. Now, if you’re fairly astute, you might be thinking to yourself, “Well John, the yield curve inverted.” And all that means is that you actually get paid a higher interest rate to lend money for a shorter period of time. Here’s the reason this inversion happens. There’s a sentiment that once the Federal Reserve decides inflation’s under control and that the bigger threat is now a recession, they’ll start cutting short term interest rates. At which point you don’t want your bond that you were able to get like right now at a high interest rate to mature because it’ll require you to then take on a new bond that’s not paying you as much.
You’d rather lock in an interest rate, even if it’s a little lower today for 10 years than one that you’re going to have to renew one or two years from now. The fifth new rule for success is that bonds, again, offer the chance to beat inflation. Now, we can’t know for sure what’s going to happen with interest rates and inflation over the next few years, but we do know that it’s now possible to outpace inflation with bonds. If you purchase inflation indexed treasury bonds or Series I savings bonds. Number six, selling a home has become a lot costlier, hasn’t it? And it isn’t simply that you might need to slash your asking price to find a buyer as the market softens, amid today’s much higher mortgage rates. But on top of that, if you have a mortgage, you’re also giving up that really low current mortgage rate and taking on a much higher one.
Of course, this is a primary factor to the aforementioned slowdown in the housing market. Number seven, future profits are less valuable. And of course, if you’ve been listening to the show or paying attention at all, you know that this has been and is been baked into the cake. It’s why the stock and bond market has had one of its worst years in 50 years. It’s also why speculative investments like crypto and NFTs along with high flying growth companies have gotten pounded significantly harder than value and dividend oriented stocks. And if you’re thinking here as we approach the end of the year, are there any year end moves in these last few weeks that you may not be aware of? If that’s the case, contact us today at creativeplanning.com to request to sit down with a local advisor. We have 85 CPAs, nearly 50 attorneys, and over 300 certified financial planners managing or advising on $225 billion for families in all 50 states and 85 countries around the world. We provide advice as fiduciaries acting in your best interest and have been doing so since 1983.
Why not give your wealth a second look? That’s creativeplanning.com. When we come back, I’ll answer listener questions so that you can learn from others and make better money moves. 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 mark 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: Having gone to Ethiopia multiple times over the course of a couple of our kids’ adoptions, I was taken aback by just how many people are on the street, how many are without shelter, are without reliable food sources. But our church, the past couple of Sundays, have been highlighting this campaign here around the holidays, really putting an emphasis even in the city of Phoenix here, of the desperate need and homelessness that is really right here in our own backyard. And I thought it was pretty neat that earlier this week it was announced that Jeff Bezos donated a total of $123 million to 40 different groups that are fighting homelessness. And through his Bezos Day One Families Fund, he’s made a $2 billion total commitment to help Americans who are homeless. And I bring this up because my first question is from Jane here in Phoenix, who asked, “The holidays always make me think about how I can be more charitable. Do you have any tips or suggestions for where or how to give?”
And first of all, of course, this is an amazing question. I love it because Jane’s obviously thinking about how she can use her wealth to do more than just buy things for herself or enhance her life, but rather how to make the greatest impact. And if you have questions that you’d like to ask me, you can do so by emailing firstname.lastname@example.org. Again, that’s email@example.com. And I will respond to that question and maybe even share it here on the show. And with that being said, if you feel stress around your money or you tend to have anxiety or maybe a bit of a scarcity mindset, I don’t know, maybe it comes from your childhood, like we talked about earlier on the show. Maybe you didn’t grow up with much or you had a parent or grandparent who went through the Depression and instilled some of those values of frugality, which by the way are not a bad thing.
But if that’s you, one of the best ways to at least begin to liberate yourself from that fear of running out is give some away. It’s counterintuitive, of course, because you think to yourself, “Well John, if I give more away, I have less money in my accounts. My plan is less stable, I have less of a safety net, I’m going to be more nervous. I’m going to be more concerned that I’m going to run out of money.” But in fact, that’s not the case because when you give, you unlock a piece of your subconscious that says, “I have enough, I have abundance.” And I know, you and I aren’t Jeff Bezos, we can’t just throw 2 billion in a fund and say, “I don’t know, [inaudible] I don’t even know if I’ll miss it.” But we can commit what we are able to give. And so in answer to Jane’s question, I’ll be posting an article at creativeplanning.com/radio written by Troy [inaudible], who is a certified financial planner here at Creative Planning. Where he wrote about your options and reasons to make charitable contributions.
Let me just run down some of your options for where to give here in the final month of 2022. You can make a direct gift to an individual. Here in 2022, that limit is 16,000 per person or 32,000 per couple. You can provide a direct gift or an asset to a charity. And the two most common types of charitable donations are cash and marketable securities. You can make a gift to a donor advised fund. Again, if you want to learn about donor advised funds, check out this article on the website. You can make a gift to a family foundation, you can make a gift to a charitable trust, you can make a gift to a 529 plan, which is that college savings plan. And they are subject to similar rules as gifts made to individuals. However, 529 plans allow for an acceleration of giving for five years.
Now, I think the other component to this that might even be more important is what are the reasons for giving? Well, obviously there are far more of these than even the options that are allowed in terms of how to give. But a few of the examples I see often with our clients are they want to leave a long term legacy. Your charitable gift can benefit others obviously well beyond your lifetime. Some people give because they want to see the benefits. If you make a gift to an individual or a charity and it’s during your lifetime, you have the opportunity to experience the benefits of that gift, maybe a gift to help someone get started. I know for me, much of the modest success that I’ve had has come on the heels of a lot of people helping me, a lot of support by family members and friends and mentors.
And so providing financial assistance, maybe it’s a college scholarship, I don’t know what it is, can help you get back to someone else as they begin their own journey towards success. Sometimes I’ve seen people give out of guilt. It sounds kind of weird, but there’s no shame in giving because you feel guilty. Think about the story of when Alfred Nobel’s brother died. Well, the newspaper accidentally published Alfred’s obituary instead of his brother’s. He was still alive and up to that point in his life, Alfred was known for invention of explosives, dynamite, and was actually condemned for this in the accidental obituary. Well, not wanting to leave this as his lasting legacy upon his death when he actually died, he established the Nobel Prizes. So guilt can serve as an inspiration to make a difference as well. And last but certainly not inclusive of all the reasons to give not even close, are the tax benefits.
The US Tax Code provides multiple advantages for charitable giving. But if you’ve got questions, do what Jane did, reach out, visit us at creativeplanning.com if you’d like to schedule a meeting before the end of the year. To ensure that you are optimizing your giving and that you are aligning your giving within the framework of your entire financial plan. And continuing on with a theme of coordinating different aspects of your plan. In this case, just referencing gifting, it’s vital that these things work together. And I think about this because I met with someone recently who really liked their current investment advisor. They felt like they were doing a good job for them. And overall, from what I saw in our analysis of the investment plan, I think they were doing a pretty good job for them. But the problem is that’s not wealth management, that’s investment management. That’s not comprehensively building a plan for your entire situation. As a former airline pilot, here’s the best example that I can think of.
When someone says, “Well, I do my own investing, I think I do a great job at it.” Or they’re like this gentleman, “I like my advisor. I think they do a good job. My pilot seems to take off well and kind of avoid some of the turbulence and knows how to land the plane and has all the appropriate licenses. So I don’t know what’s the difference.” Well, here’s the difference. Just because I’m an airline pilot sitting in the cockpit doesn’t mean that I’m responsible for every aspect of your trip. And so first off, there’s another pilot in the cockpit, so there’s two of us to hold one another accountable, to back one another up, for one of us to be on the coms talking to air traffic control while the other person’s flying the airplane. When you’re on the ground the captain’s got the nose wheel steering, first officers talking to passengers in the back, as well as ground control.
You got flight attendants, customer service reps, baggage handlers, ramp agents, gate agents, maintenance crews, catering. You get on a five hour flight that has no beverages, the bathroom’s full. You don’t board on time. There’s no flight attendants, that’s not a good flight. You’d say, “Well, the pilot’s good at flying the airplane.” But not trained in those other areas. Plus, as a pilot, I didn’t have the ability to do those things while I was flying the airplane. It wasn’t reasonable. And so the question I have for you may be different than what you’ve thought as you’ve listened to the show about a second opinion. You might be thinking, “Well, I have a pilot.” My question, do you have a pilot? If you don’t have a pilot and you don’t have a flight plan, well, certainly you need to get that. But even if you have a pilot, do you just have a pilot or do you have all of those other things?
And obviously in this analogy, what I’m alluding to is, do you have an attorney that’s engaged in your financial plan and is updating your estate plan in coordination with your wealth manager? Do you have a CPA who is regularly reviewing your tax return? If your plan is incomplete, if you’re on a flight with one pilot sitting in the cockpit and nobody else around, you’re likely missing out on significant opportunities. I don’t want that for you. And there is still time to make a course correction in 2022, but do not let Christmas and New Years come by without ensuring that you have a truly complete wealth management plan. If you’d like to speak with a local advisor here at Creative Planning, simply go to creativeplanning.com right now to get your questions answered to ensure you’re missing nothing. Again, to schedule that visit, go to creativeplanning.com.
And I want to end with a quote from Creative Planning President Peter Mallouk, who said, “Money does impact happiness, but only to a point. Once income is high enough that basic needs are fully met, then it requires gratitude, being around positive people, experiences over things, being proactively kind and time with key friends and family.” And here’s the beauty of that, all of that’s within your control. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter. 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 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 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.