Navigating the sea of financial news can be overwhelming, with most of it merely adding to the noise. But fear not — John breaks down the essential retirement strategy that cuts through the clamor, teaching you how to discern what truly matters and leverage potential opportunities for your investments. (1:18) Plus, what valuable investment lessons we can learn from OpenAI’s situation (5:03) and where is the best place to save your money? (29:57)
Episode Notes
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, we remember the great Charlie Munger. The pay raise Americans say they need just to be happy. As well as how to utilize a mega backdoor Roth strategy to your advantage. Now, join me as I help you rethink your money. Jerry Seinfeld said it best when he said, “It’s amazing that the amount of news that happens in the world every day always just exactly fits the newspaper.” Most of the news that you hear this week it’s not that important, and it likely won’t be relevant a week from now let alone in five years. But the media curates and even, in some cases, manufactures it, if necessary, and then dramatizes those events to create emotion because it leads to ratings and it leads to clicks. And that’s the entire goal of the media, that’s how they make money. Creative Planning President Peter Mallouk recently tweeted, “Great investors put money away regularly, preferably with every paycheck, ignoring all the news.” And when it comes to your success as an investor, Peter’s right.
There are three primary reasons I want you to ignore the noise and turn off the news. The first being that the market is forward-looking. The news reports past events, the news is history. And this is a key driver as to why today’s news isn’t relevant with the world moving incredibly quickly. There was a funny meme that showed a financial headline of the Dow plummeting 600 points. That was the major headline. And then the live ticker also shown on the screen just above the article shows the Dow Jones positive on the day. I mean, this is how quickly things move. By the time they posted the article about how terrible the market drop was, it had already recovered intraday into the green. The market’s looking through the windshield, the news through the rearview mirror.
And so the question becomes, how can you make profitable actionable change based upon news that you are now aware of, when millions of others are also aware of that news, and it’s already baked into the price of the investment? The second key reason to ignore the news is that it’s almost entirely focused on negative stories. Now I realize I’m not telling you anything novel, we all know this it’s obvious. But it’s worth reminding ourselves of this negative bias. Here are a few headlines from a year ago as we closed out 2022 speaking of this coming year. NPR said a recession might be coming here’s what it could look like. CNBC, why everyone thinks a recession is coming in 2023. Forbes, will there be a recession in 2023 and how long will it last? Were any of those headlines positive? No, of course not, they were meant to scare you.
And many investors repositioned their investment strategies based upon these negative headlines that, by the way, will always be negative, as evidenced by the biggest finance stories and headlines of 2023. I mean, check these out. The rate hikes just keep coming. We witnessed the three largest bank collapses in US history. The debt ceiling crisis came down to the wire. AI has buoyed the stock market. Warning signs still loom but no recession yet. War in the Middle East. All of those, other than AI being positive for the stock market, were negative headlines. If all you did was listen to the news and read those headlines you would think your investments are doing horribly, wouldn’t you? I mean, your portfolios probably tanked and it may never come back.
Except, of course, the exact opposite has occurred. The stock market’s up about 20% and bonds are yielding around 5% interest. Things are really good. And 2023 has been a fantastic year. Aside from first-time home buyers, it’s looking pretty rosy for most Americans. Even wage increases have outpaced inflation. So the news you hear isn’t generally relevant for the long term, it’s almost entirely negative. And the third reason I want you to ignore all the news is that reactions to that news are often wildly different than you could’ve ever forecasted. This is why market forecasters and economists are ultimately really articulate at explaining exactly why they were wrong on their prediction. I couldn’t tell you what any of my seven children are going to do over the next week, let alone billions of irrational humans reacting to unpredictable events.
COVID was a perfect example. The world was shut down and the stock market ended up nearly 20% in 2020. I mean, think about the story of the year, it’s been artificial intelligence. And the headline news just from the last couple of weeks was, if you missed it, a shocking move where the board of OpenAI removed the co-founder, Sam Altman, completely out of left field, he didn’t know it was coming. And it wasn’t, frankly, for any of the reasons most assumed it would’ve been for, fraud or some sort of sexual impropriety or some big huge thing that forced him out. No, it was just, he hasn’t been as transparent with the board about the objectives of the company. And there’s some friction between the nonprofit entity of OpenAI and the aspect of the company that’s trying to make money for its investors.
But with Altman being swiftly ousted, it was followed by Microsoft offering him a job and almost all 700 employees signing a letter to the board that they were going to leave from Microsoft as well. So this was arguably the most important company of the last decade and the biggest new technology, and in one week it almost imploded entirely, wiped off the map. Then because of that, multiple board members were let go and Sam Altman was reinstalled as CEO. This is why buying individual stocks is so difficult. It’s why professional money managers cannot consistently and predictably outperform the market by purchasing the right stocks. Because even if your macro strategy is correct on artificial intelligence, there’s no certainty that it will be open AI that emerges victorious. But the same thing happened to BlackBerry and cell phones, America Online and the internet, Yahoo, and search engines. Remember, there is a huge difference between the bleeding edge and the cutting edge.
All right, so what’s the takeaway? What am I suggesting? I’m going to try to land the plane here after jumping around to several different ideas. Is it to turn off the news? I mean, honestly, my personal take, yeah, probably should. I don’t suggest that an alcoholic who’s trying not to drink go hang out in a bar every evening, even if they just plan to drink club soda. Why give yourself that level of stress and temptation? And I’m not trying to be hyperbolic, I absolutely believe that the news is toxic, it’s a poison. But specifically to recap, it won’t be relevant in the long term, it always looks backwards, it changes abruptly. And because it’s negative it greatly reduces your peace of mind and ultimately distracts you from what’s most important in your life, what actually matters. It pulls your attention from important things to mostly irrelevant topics.
And if you are feeling uncertain or a lack of clarity around your financial plan, around your income in retirement, when you can take social security, how to reduce your taxes, how to even proactively strategize your taxes … I mean, if your advisor’s not a CPA, or your advisor doesn’t meet with your CPA, or your advisor hasn’t reviewed your tax return over the last year, you may be missing something. And in light of that, if you believe it would be useful for you to sit down with a wealth manager here at Creative Planning, just like myself, visit creativeplanning.com/radio now for a second opinion.
Now, what I don’t want to do is leave you with this hopeless feeling that all information is bad, or that you should bury your head in the sand because there’s no reason to even pay attention to the world, that’s not what I’m suggesting. I’m talking about news headlines of the day and their relationship to your financial moves. There are some practical examples of utilizing new information to your advantage in a proactive manner. Refinancing your home when rates were the lowest they had been in decades. Looking at the duration of your bonds when interest rates go from basically zero to 5% and you have an inverted yield curve. And short-term bonds are paying more than long-term bonds. How would that fit into an income strategy, and the piece of the portfolio that is meant to be less volatile? Making tweaks to your tax strategies as tax laws change. Or maybe your income goes up and all of a sudden it makes sense to buy municipal bonds instead of taxable bonds because you’re in the top tax bracket. These are great reasons to utilize information to your advantage.
Maybe your portfolio deviated, it lost money like in 2022. Should I harvest losses? Is it time to rebalance based upon this information? Oh, the housing market tanked like back in 2009. Is it time to pick up a rental or two with some of the dry powder, and finance the rest at low mortgage rates, and purchase those homes at basement prices? Along those lines, what about when the stock market’s down in value? Maybe you increase your retirement contributions to buy more shares while they’re on sale. Or you have highly appreciated stock. Is it time to donate that rather than contributing cash to a charity that you care about?
Had a wealthy client recently looked at the estate exemption which is right now at nearly $13 million per person. Meaning, if you’re under that amount you can avoid paying the 40% estate tax. Well, that’s set to drop in 2026, and so they used up some of that exemption now while they have more room. Smart. Had another client whose industry, at a macro level, isn’t doing great, their company’s not doing that well. So within their financial planning visit, we decided to increase their emergency fund slightly and divert a bit of their stock portfolio into bonds so that they have more cushion because they think it’s decently likely that they’ll be laid off or have to retire sooner than we currently show within their financial plan. And they don’t want to have to sell stocks if that were to happen when the market was down. These are examples of using information wisely. And that’s very different than reacting to the day’s headlines.
I want to transition over to Charlie Munger, the Vice chairman of Berkshire Hathaway. Warren Buffett’s business partner, his right-hand man for the last 50-plus years. He died this week less than a month short of his 100th birthday. And he was still sharp as a tack even at the age of 99. He was known for his dry wit and his depth of wisdom, and he had plenty of both. He was instrumental in Berkshire Hathaway’s success, one of the more brilliant investors. And will certainly go down as one of the most admired as well.
John Jennings at Forbes wrote a fantastic piece on Charlie Munger. And a couple of Munger’s most applicable bits of wisdom were found in his caution for investing based upon forecasts that I just briefly highlighted, as well as being a lifelong learner. Given Berkshire Hathaway’s success, many thought that Munger and Buffet had some sort of crystal ball, and the opposite was true. A pillar of their success was actually acknowledging they had no idea what was going to happen in the future. Munger was quoted as saying he’s never been able to predict accurately. He said, “We just tend to get into good businesses and stay there.”
People have always had this craving to have someone tell them the future. Long ago kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecast is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over. If Munger and Buffett, two of the greatest investors of all time, don’t think that they can predict the future or listen to expert predictions why should we think any differently? And Munger said, “To be wise you must be a reader.” He said, “In my whole life I’ve known no wise people who didn’t read all the time, none, zero.” You’d be amazed at how much Warren reads and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out. End quote.
And so while he ate a lot of peanut brittle and drank Diet Coke, and notoriously refused to exercise, he lived till nearly 100 years old and was still actively involved in one of the most famous, largest, and successful investment companies in the history of the world. And I think it speaks to his desire to be a lifelong learner. And I’ll leave you with one final Charlie Munger quote, it’s one of my favorites. “You must force yourself to consider opposing arguments, especially when they challenge your best loved ideas.” Charlie Munger, you will be missed.
Richard Cushing said, “Always plan ahead. It wasn’t raining when Noah built the arc.” Estate planning is the specific area within personal finance where this couldn’t be more descriptive. Think about it. With taxes, you get penalized if you don’t file them annually. If you don’t pay your debts you get hounded by collection agencies. Eventually, they repossess your assets. But with estate planning nothing happens, at least in the short term, if you procrastinate. And it’s very easy to think, I’ll get to that later. We do that with a lot of things in life, but in particular with areas that feel far off, albeit in this case inevitable. And when I look at the landscape of the most detrimental estate planning blunders, by far the largest, is simply not having one. If you don’t have documents get those updated. Make a point to do that before the end of the year. But if you have family and friends whom you love, this is the absolute best holiday gift you could ever give them.
And if you’d like help with your estate plan, we have over 70 attorneys here at Creative Planning and have helped thousands of families align their wishes with a great estate plan. Visit creativeplanning.com/radio now to meet with us. Why not give your wealth a second look? I am joined today by one of those 70-plus attorneys here at Creative Planning. Maggie Fisher is an estate attorney, and I’ve asked her to join us today to address what you can be doing before the end of the year. Maggie Fisher, thank you for joining me on Rethink Your Money.
Maggie Fisher: Thank you for letting me be a part of it.
John: Let’s divide our conversation into a couple of categories, those who already have a plan and those who do not. For those who already have an estate plan in place they might be thinking well, I already have this box checked, my documents are done. In some cases, it was even pretty recent, but in other cases, it may have been 10 years ago. In fact, I met with someone earlier this month, Maggie, who told me they had documents but then they chuckled before they qualified that they completed those over 35 years ago, and those were definitely in need of a refresh. So Maggie, for those who have completed estate planning in the past, what do you advise they consider as 2023 comes to a close?
Maggie: I think it’s important to note that life changes every year. Have you had any changes in the past year? Have you moved? Have you gotten a new job? Has someone maybe that you’ve named in your documents passed away? Maybe your documents aren’t as up-to-date as they need to be. Do you need to change your beneficiaries? Do you need to update your powers of attorney? Just update your documents, make sure that they’re not out of date.
John: So, what I hear you saying is review your plan.
Maggie: Yes.
John: Right. Would that be a good way of putting it? You have a plan but how accurate is it? We see all the time here at Creative Planning … We do an estate planning diagram that you’re well aware of, but for the listeners that … Break down in plain language exactly what existing estate plans say. With a lot of new clients, they’re surprised by some of the things that they see because they haven’t actually gone through and read the 300 pages of estate planning documents that they did eight years ago. And they say, “Wait a second, that’s my ex-spouse, what are they getting if something were to happen to me” right?
Maggie: Right.
John: Or I don’t even like little Johnny anymore. He never comes over for Christmas, I don’t want him getting 3/4 of the estate. How about updating balance sheets? I see that from time to time too where it may not be the beneficiaries but just assets have changed.
Maggie: Exactly. You’ve opened a new bank account or you’ve changed investment companies. You’ve moved to Creative Planning. That’s something that we always were very aware of and made sure that the beneficiaries … If you have a trust, that the trust is named as the beneficiary. Or, if you have a will plan, that you named whoever you want to inherit, your assets are on the account. You’ve got to have beneficiaries on the accounts otherwise that account has to go through probate and that is what we want to avoid at all costs.
John: And we live in a digital world so organizing passwords for your survivors. Or if you’re incapacitated that people know how to get into your email, how to get into your cell phone. I was just listening to a Dateline … I know I’ve got issues, I listen to these true-crime podcasts, I think it says something about me. All the evidence that the detective needed was on the deceased cell phone but they couldn’t get into it. And so a big part of the entire plot was that nobody could get into the cell phone because they didn’t know the password. Finally, they were able to get into it and it was just a treasure chest. I hope that this doesn’t apply to any listeners. To a lesser degree, that’s your life, and it gives a lot of information that can be valuable for those that you’ve left behind. So making sure that you have those stored somewhere. Do you have any advice for people in terms of how they can store those securely? What do you recommend for that?
Maggie: I use a password app that I store everything in. I have three grown children and I make sure that I tell them exactly where all my stuff is. They know my passwords to get into my phone, get into my apps. They know everything. And every time I leave to go on vacation, I said, “Everything you need is right here in this cabinet. Or, here’s the person to call if anything happens to me.” And I think that’s important, especially if you live by yourself, or even if you have a spouse, something could happen to both of you. That somebody knows whether it’s your next door neighbor or your children or your sister, how to find the information. And you can write it down, keep it in a notebook, keep it in a spreadsheet, whatever helps you. But somebody’s got to be able to get on that computer, somebody’s got to be able to find the spreadsheet, know that there is a spreadsheet. In the old days you could wait for it all to come in the mail and that’s what people had to do.
John: Well, that speaks to knowing people’s email password because that’s where a lot of those digital statements come. And not everyone works with us here at Creative Planning and has a client binder that basically puts every single part of their financial life in one spot. That’s part of the idea is that it’s organized taxes, estate planning, risk management, and insurance documents, balance sheet, financial plan, estate planning diagram, as we mentioned, so all of those things in one spot which sure can be helpful. In fact, Apple now has with the iPhone a trusted contact for this very reason where you can put it inside of your phone in the event something happens to you, you’ve basically authorized that they reach out. I think it’s the person’s email, it might be their cell phone number. But that’s a fantastic tool as well that I think came out about a year ago.
I’m speaking with Creative Planning attorney Maggie Fisher. Let’s transition over to what people who have no current estate plan can make for their estate planning New Year’s resolution. I know everybody’s pumped up about the estate planning New Year’s resolution, right, Maggie, so let’s talk with them here about what they’re going to be able to do.
Maggie: So, I think the most basic documents to get in place, and they’re not expensive to do, are the incapacity documents. And those are the powers of attorney: the healthcare power of attorney and the financial power of attorney. Those would come into play if you’re ever incapacitated and you need somebody to make decisions for you. Your healthcare decisions, maybe pay your bills. I mean, when COVID hit there were so many people that went into the hospital for long periods of time. They needed somebody to make healthcare decisions for them, they needed somebody to pay their bills. If they didn’t have those documents, and if you didn’t have a spouse, it was harder for everybody else to figure out what to do. And if you had little kids-
John: Do you go on a ventilator or what do you do, right? I mean, it’s such a good point. People just assume that estate planning is once they’re deceased. And in many cases, if they don’t have children or they don’t really care where it’s going, they’re like “Well, I don’t need to do estate planning because I’ll be gone. And it’s like no, no, this might really matter like the example you just used of COVID. Probably the more impactful situations are when you don’t pass away.
Maggie: And also, my mom has Alzheimer’s so I’m so glad that she did documents 20 years ago before she was sick. And she named my dad, and then my sisters and I so that’s not unusual. But my dad was easily able to sell the house, downsize to something that was easy for her to get around in. Nobody wants to be the person that gets some long-term dementia or anything but we know it’s happening, it happens a lot. To be prepared for it can mean a lot to the family that has to be the caretakers.
John: So how about for people who do not have a plan and have young children?
Maggie: Oh, absolutely. That is also very important. If something happens to both parents at the same time or close together, they want to make sure that their money is well taken care of and is used for the benefit of their children, and they want to make sure that their children are well taken care of. So they have the opportunity, by creating a will or a trust, to decide who’s going to take care of the money and who’s going to take care of the children. It can be the same person, it can be different people, but being able to make those decisions gives young married people a lot of peace of mind.
John: Absolutely. And for those who have furry children, how about pets? I know a lot of my clients that are in retirement, that their kids are long gone, I mean, they’re pushing their pets around the neighborhood in their strollers. And they’re mixing their wet dog food and the whole kitchen stinks because they’ve got the gross dog food, but their dog is way too high society to have the dry food. So how about pets? How do people need to plan for those?
Maggie: So, I have fur babies of my own and they take more prominent positions on my mantle than my own children do. Even if they have children, but they have fur babies or they have people that they want to give most of their money to, they’re worried about their fur babies and who’s going to take care of them. We make a plan. We say, “If I have any pets at the end of my life I want my pets to go to this person.” And a lot of times they’ll give a certain sum of money because taking care of a pet is expensive.
John: We’ve got our family dog Maverick. We feel a little bit bad because we’ve got seven kids so he’s just around hanging out. But we all love him he’s a big part of the family. As we wrap this up, Maggie, any closing thoughts other than if you don’t have a plan get one?
Maggie: Get one, yeah.
John: And if you have a plan review it. Does that pretty well summarize what we talked about?
Maggie: Yes. And I do think a lot of people shy away from doing this because they think it’s going to be so unpleasant and they don’t want to think about their death. But at the same time, we go about it in such a way that it’s just the next financial plan. Planning for whatever you’re saving for, and planning what’s going to happen to it after you go. I know everyone leaves after they’re finished with a feeling of oh, thank God I’ve got this all in place. It’s such a relief-
John: It really is.
Maggie: To everyone to know there is a plan if anything happens to them.
John: Well and avoiding it’s not going to stop your death. Put everyone on notice here, we’re all probably going to die at some point. And I think often people think it’s going to be too expensive or it’s going to take way too much time. You and I know firsthand working with thousands of clients, you know what’s way more expensive and way more time-consuming? Is when you don’t have a plan.
Maggie: Exactly.
John: If you’d like help from Maggie and the rest of our team here at Creative Planning you can visit us at creativeplanning.com/radio to get this estate plan either reviewed or knocked out. Thank you so much for joining me here on Rethink Your Money, Maggie.
Maggie: Thank you.
John: Matt Damon once said, “The moment you become rich and famous you stop growing. You don’t mature anymore because now everyone around you treats you differently.” And I remember reading a story about one of the Vanderbilt kids. Now we’re talking some of the wealthiest people in the history of the world, inflation-adjusted. One of the little Vanderbilt kids wanted to play soccer so they got like 12 of the servants and had them go out on the lawn and play soccer. And, of course, the kid scores a million goals, and he’s got his arms raised, and he runs inside this big mansion and he says, “I’m great at soccer.” And, of course, he was great at soccer, they were all letting him win. They don’t want to get fired. They’re certainly not going to slide-tackle him from behind, get red-carded. Tear the little kid’s ACL, that’s not happening. He had no perspective on the real world.
And I ask myself this often as a parent, how do I help my kids see the bigger picture? Understand that the world is bigger than just their everyday life in, let’s face it, the most affluent time in the history of the world living in America. And there was an article in Fortune that jumped out at me along these lines. They asked Americans, “How much money do you need to be happy?” And one generation, and it’s my generation, the millennials, shocked me with the answer. Gen Zers said they needed about $128,000. That was the salary they needed per year to be happy. A net worth to be happy of 487,000.
Millennials, I just teased it but get this. Millennials say they need a salary of $525,000 to be happy, and a net worth of 1.7 million. This is why millennials we get a bad rap. 500 grand is what millennials think they need to be happy. Gen Xers, 130,000 and a net worth of only 1.2 million so way less than millennials. Boomers, the most financially successful generation in America’s history need $125,000 and a net worth of a million. So the takeaway there is that millennials are nuts and have no perspective.
But here’s the more prescriptive component of this survey was related to how much more specific individuals needed than what they currently make. People making 50,000 said 75 grand would do it. Those making 75 grand said 99,000, right around six figures, that’s what I need. Those making 100 grand said 150,000, that’s the number. Those making 150,000 said, a little over 200K. And those making $250,000 said, 350,000 that’s what I need. From 250 to 350 and I’d be happy.
Think about that for a moment. It didn’t matter how much the person was making, 75 grand or 250 grand, they all said, “We need just a little bit more than we’ll be happy. Just a little more than we’re currently making.” Which if you think about that at a micro level it’s a tragedy. It means we’re never content. No matter how much we have we want a little bit more. At a macro level, this is probably what powers society and capitalism. This is our natural slant. If we do not combat this and recognize it we will live our entire lifetime without true contentment with where we’re currently sitting. Robert Sterling tweeted about this and I thought it was fantastic. Specifically thinking of our future generations, our kids, our grandkids, and back to how do we provide them some perspective so they don’t wind up on this survey?
Like my millennial brethren who just say they need to have a million dollars. He said, and I’m paraphrasing, “An under-discussed and semi-controversial topic within wealth management is how high-income parents who can provide their children luxuries but who either don’t have sufficient wealth to provide financial support the rest of their lives or don’t want to continue to provide financial support into their adulthood, it can cause big problems for the kids. Because they grow up with this extremely high quality of life because they’re staying at places like the Four Seasons, not the motels that you drive up to and park in front of the door. They’re flying first class, not coach. They’re wearing lululemon, and $250 Jordan’s, and then are shocked when they finally realize how difficult it is, as an adult, to maintain that sort of lifestyle when they have to fund it on their own. And it can lead to really poor decision-making, oftentimes a lot of credit card debt, especially when gasoline is essentially being thrown on the fire with their social media.
So if you’re a parent and you’re in this situation where you’ve done pretty well for yourself, are you setting the lifestyle bar too high for your kids and just creating standards that aren’t realistic for them once the direct deposits start coming in from their entry-level job rather than from your checking account, or handing them your credit card? And I think it’s important that we ask ourselves this because how can we expect future generations to not answer surveys, with the results of this one from Fortune, if we’re not keeping their expectations in check while they’re in our homes? It’s not the only answer, but one of the answers to this is provide your children while they’re in your home with opportunities to see how others live. Because ultimately you have the opportunity to impact the way they think while they still live in your home. And when it comes to our kids, far more is caught than taught.
Well, a common piece of wisdom that I’d like to rethink with you is that the best place to save is in your retirement account, it might be. Like if you’re getting a match, you’re crazy to not fund up to your match. There is no other investment that I’m aware of that will guarantee you a 100% rate of return on your money with no risk the moment you make the contribution. That is the employer match. It is the best place to invest certainly up to your employer match. It may also be a great place to invest from a tax advantage standpoint because you can contribute $22,500 if you’re under 50 years old, or an additional $7,500 taking it all the way up to $30,000 if you’re 50 or older. And you can either allocate that to a traditional 401(k) where you’re able to defer that income through a tax-deductible contribution, then it grows off your tax return. And when you take those distributions later in retirement they come out at ordinary income.
Or, in most plans now you also have a Roth option where you make the contribution to the Roth, it doesn’t provide a benefit. You still pay tax on that contributed amount but then it’s tax-exempt moving forward assuming you follow a few basic rules. You can’t put $30,000 into a Roth IRA. You can’t put money into a Roth IRA if you earn 300 grand a year. But right now you’re still married filing jointly in a 24% tax bracket. It might make sense from a tax standpoint to utilize a Roth, and that’s going to have to happen inside of your 401(k). So another fantastic reason why maybe the best place to save would be that retirement account.
But I want to share with you a story from just this past week, providing a second opinion for a prospective client who contacted us. Listens to the radio show, just like you are right now, said, “I want a second opinion.” They were very well funded for retirement. But almost 100% of their liquid net worth was inside of the husband and wife’s 401(k)s, and all of which in the traditional side which presented a few problems. Number one, they were hoping to retire before 59.5. That creates complications because 401(k)s have early withdrawal penalties. You don’t want to pay a 10% penalty.
And they didn’t have enough money invested in after-tax accounts or Roth accounts that they could have accessed without penalties. They were also in the type of 401(k) plans that had very limited investment choices. Pretty expensive options, very vanilla options, certainly no access to professional money management so their returns just hadn’t been very good. They didn’t have an advisor helping them with those allocations. It was one of the main reasons they’d reached out to us here at Creative Planning. So in the same way that diversification is a pillar when it comes to reducing risk with how you’re invested, keep in mind you want to also apply that same principle of diversification to where you are invested. And this is why we need to rethink that the absolute best place to save is inside of a retirement account.
Another opinion I hear expressed often is that money in emergency funds or extending that to money in bonds, non-growth oriented assets is only going to drag down your returns. So why not be 100% in stocks? Well, there’s one very important explanation. Because by having an emergency fund and by having bonds, and other similarly less volatile, safer parts of your portfolio, it allows you to preserve your stocks, especially in the bad times. So I had an example of this in 2022. We had a client who had a medical event, they were also laid off. And we all know what was going on in the stock market in 2022, it was down about 20%. But they had a six-month emergency fund. They had five years worth of what they would need for their expenses in shorter-term bonds. And that was plenty enough to cover them during this time without needing to sell a single share of their stocks which have now, of course, recovered and are up 20% in 2023.
So yes, if you look at your money market return in 2023, or your bond return this year relative to your stocks, you’re going to say to yourself, “Well, stocks always make more money. They’ve averaged almost 10% a year for 100 years. Bonds don’t even make half that. Why in the world do I have anything in bonds?” Well, because as the great late Charlie Munger said, “Never interrupt compound interest unnecessarily.”
And when you don’t have enough of a cushion and times get rough, the single most detrimental thing you can do to your long-term financial prospects is selling shares of stock while they’re down in value, and you don’t want to, but you’ve got no other choice because there’s no other option for you to get money. So yes, when you isolate them by themselves they don’t earn as much. But when you look at them as a compliment, as a piece of the pie within a much bigger plan, you realize that those emergency funds and those bonds they’re not going to drag down your long-term return over the next 30, 40, 50 years, they’ll help you maximize it because your stocks will continue to compound year after year after year. Even though, and it’s not an if it’s when, uncertain events occur when life throws you a curveball and it impacts your money, you won’t need to dump stocks simultaneously to weather the storm.
My last piece of common wisdom that I’d like to rethink is that if you’re already excelling at something, well, then you don’t need any help. Why does Tiger Woods … Tiger’s a bad example, he’s not very good anymore. Why does Rory McIlroy or John Rahm or Victor Hovland, why do these guys have swing coaches? Why does Novak Djokovic have a hitting coach? He’s won more Grand Slam titles than any tennis player ever. He could beat his coach likely playing left-handed. Why does he one, hire a coach? And two, why does he care what they say? Why does he listen to them, I’m way better than you at this game? What could you possibly say that would help me? They have a different perspective.
And when you want to be great at something, and this applies to your money as well, the margin for error is so slim that you need every bit of help and every edge you can possibly acquire. Now, conversely, if you want to be average, your margin for error is huge, it’s not hard to be average. Financial advice and hiring a financial advisor isn’t just for the person who has no idea what’s going on and wants to be decent at this, it’s also for the person who stays on top of financial topics, and really cares about these things, and wants to do an amazing job, and feels like, you know what? I’m pretty knowledgeable on this.
And yes, while I’m biased. And you could say, “Well, John, you’re a financial advisor, of course, you think this.” I apply this to every single aspect of life, not just finance. Shoot, I have a different wealth manager at Creative Planning run quarterback on my plan. Why? They use the exact same software I use and I’m knowledgeable on. We’re both certified financial planners. What would be the point of me having someone else? Because they’re not me and I want to be amazing. And I believe my margin for error is razor-thin. Not because if I make a tiny mistake I won’t be able to put food on the table, but because every little mistake impacts my optimization of the resources that I’ve been blessed with, and I want every bit of help and perspective I possibly can get.
And so regardless of where you are at in your financial literacy, a great coach, a great financial advisor pays for themselves. And it doesn’t have to be Creative Planning. If you feel like you found someone that’s a great fit, and they’re independent, and they’re credentialed, and they’re fiduciaries, and they’re not pedaling proprietary products or charging you big commissions or ridiculous fees, but they’re actually doing a great job in helping you with your tax planning, your estate planning, and building out your financial plan. That is going to be worth it for you regardless of where you’re at on the financial spectrum. And if you’re not sure where to turn, we are happy to help as we’ve been doing so since 1983. To request your complimentary second opinion with myself or one of my colleagues, visit Creative Planning.com/radio now. It’s time for listener questions. And as always, one of my producers, Lauren, is joining me now to read those questions. Hey, Lauren, who do we have up first?
Lauren Newman: Hi, John. This week I’m going to start with Carolyn in New York. She writes, “My granddaughter has special needs and I’m always on the lookout for ways to support her financial wellbeing. Could you shed some light on what ABLE accounts are and how they can specifically benefit individuals with special needs? I want to explore all possible avenues.
John: Well, Carolyn, let me start by just saying you’re awesome, I can tell that you really care about your granddaughter and you want to take care of her which is amazing. So let’s talk ABLE accounts. By the way, it stands for achieving a better life experience. It was authorized by the ABLE Act which was enacted back in 2014 so these are relatively new. Here’s the key ingredients to an ABLE Account. There are tax advantages, although they’re not when you contribute. You make the contributions with after-tax dollars, unlike a traditional IRA or 401(k) where you receive a tax deduction or even an HSA. There’s no benefit on the way in. However, the earnings on those contributions grow tax-free and withdrawals are also tax-free when used for qualified disability expenses.
From an eligibility standpoint, to open and contribute to an ABLE Account your granddaughter must’ve been diagnosed with a significant disability before the age of 26. From a contribution limit standpoint, it’s 16,000 per year. Some states do have a higher limit. And I should preface everything I’m saying by, speak with a qualified attorney in your state. If you’re not sure where to turn, visit Creativeplanning.com/radio. We have attorneys that can help you there in New York and know the specific limits within New York because every state is different. In fact, total range of allowable savings varies from 235 grand all the way up to 550,000 in aggregate. The primary value of an ABLE Account is that it doesn’t affect eligibility for means tested federal benefits such as Medicaid, SSI, and other public assistance programs. And it’s important to remember that the individual with the disabilities, the account owner, and they or their designated representative have control over the account itself. But again, don’t act upon this until you speak with an attorney there in New York to ensure that you have all the specific facts for your situation. All right, Lauren, who’s next?
Lauren: Joshua in Chandler says, “I’m in my mid-40s and looking for ways to maximize my retirement savings. On my current path, my plan would be to retire in my late 50s. I am married, we make about 160,000 combined, and we have about 650,000 saved in our 401(k). What are your thoughts on a mega backdoor Roth?”
John: Well, Joshua, I appreciate you asking the question. It does sound funny, right, the mega backdoor Roth. It sounds like something fake or made up. It’s a really cool strategy that can potentially allow you to save way more money into a Roth IRA or a Roth 401(k) than you otherwise could have. And it’s a two-step process. The first is making after-tax contributions to your 401(k) or other workplace retirement plan. A lot of people don’t even realize that they possibly can make after-tax contributions. And frankly, the next question usually is why would we want to put after-tax contributions? So we’ll unpack that in a minute.
But the second step is doing a conversion either to a Roth IRA or a Roth 401(k). It’s important to note that not all plans allow you to do this, it’s completely plan-specific. But think of it this way. Let’s say someone’s maxing out their 401(k), which in 2023 if they’re not 50 years or older that’s $22,500. And they’ll either direct that to pre-tax where you receive the deduction and then you pay tax on the way out, or in most plans now there’s a Roth option available. And if they’re in a lower tax bracket, or they just think taxes are going to rise and they have way too much money currently in tax-deferred monies, and they like the Roth option, you may contribute the $22,500 to the Roth side of your 401(k).
In many cases, there’s an employer match that you’re receiving on top of your contribution. And in most cases, you sort of brush your hands together and say, “I did a good job. Between my amount in there and the employer I had almost 30 grand into my 401(k).” Well, the aggregate total, if you’re under the age of 50, that you can contribute here in 2023 to a 401(k), and it’s going up in 2024, is actually $66,000 assuming that your plan allows for after-tax contributions. These are monies that you would have directed out of your paycheck just as you always do with your employer retirement plan, but you still pay tax on that income and then the money grows tax deferred.
But here’s the downside to it. When you eventually make withdrawals, all the growth is taxed at ordinary income. So if you just stop after step one, for most people, it wouldn’t make sense to fund that after-tax contribution. But there is a second step to this, and this is where the backdoor Roth component is applied. You then convert the after-tax contribution, right? So this is called an in-plan Roth conversion. Some plans actually allow you to roll out those after-tax contributions immediately to a Roth IRA so it doesn’t even need to stay inside of the employer plan. Again, that’s very plan-specific.
But the only portion of that that incurs taxes is any of the growth between when you made the contribution and when you converted it which is often almost simultaneously, within a day or two. You probably wouldn’t even invest the money so there’s going to be no growth and it’s already after tax monies. Meaning, even if you make way too much money to fund a Roth IRA, which as of right now those limits are 153,000 as a single taxpayer or 228,000 if you’re married filing jointly. Well, this person just got 30 grand through a backdoor into a Roth IRA or their Roth 401(k).
And I realize I’m probably losing some of you right now, and I’ve gone way too far into the weeds. In short, Joshua, this is a great way to dump a ton of money into a Roth if it’s available through your plan and you’re making enough surplus beyond what you’re spending to have this sort of extra money to invest. I personally work here out of Arizona and would be happy to look at your specific situation a little bit closer as well as your company plan to offer guidance for you. Of course, you can request that at creativeplanning.com/radio.
I was reflecting this last week on the reality that you don’t need to do anything extraordinary, anything over the top for it to be valuable and for it to potentially still be incredibly meaningful to someone else. I’m going to brag on two of my family members here as I wrap up the show because I hope that they inspire you as much as they did me. Now, if you’ve listened to the show for a while you know that we have a lot of children, I have seven kids, three biological children, and four adopted. And over the Thanksgiving holiday, one of our adopted children had an incredible surprise visit from their birth family. Birth mom, siblings all came out across the country to Arizona.
And over that same weekend, her birth mom also had a birthday. And my wife, as she often does, blew my mind with her kindness, and proactiveness, and intentionality. She planned a birthday party. She had balloons blown up, and signs, and presents. And after church we had a bunch of our family come over and sing to her. And she blew out candles of her cake. I was thinking, this is beautiful, this is amazing. We went around and said things that we love about her.
And I could tell that it was really meaningful for her but I didn’t even realize exactly how meaningful it was until she told my wife and I, “I almost forgot to blow out my candles. I was looking around when you guys said, hey, blow out the candles. Because for the first time in my life it was my birthday party.” She told us, “I’ve never once in my whole life had a cake or candles or anyone sing to me.” And I had that moment of realization that nothing my wife planned was over the top, it was a birthday cake, it was balloons, and some presents but it was incredibly meaningful to her.
Later during that weekend my father-in-law, who I’m going to brag on now … I don’t know maybe it runs in the family. He offered to take these boys fly-fishing. They’d never been fly-fishing before. And while they were out fishing wild horses, which we do have here in Arizona, came down to the river and were grazing and walking past them. And when I drove them to the airport, one of the boys told me, “John, that was one of the best days of my entire life.” And I got teary-eyed underneath my sunglasses because I had this realization that our daughter’s birth mom gave me one of the best days of my entire life, the day that I met my daughter, the day that I held my daughter, even though I know that was a really difficult decision for her, an impossible decision for her.
And it’s so neat when that ripple effect of kindness and love comes full circle. And it’s reciprocated in a way where every person that it’s touching feels valuable and loved. That hit me how often I don’t take advantage of opportunities to do things that are impactful for others. I don’t know if it’s laziness or apathy, selfishness, caught up in the busyness of life. I think we all do it. But when you see the impact that others are making right in front of you, and you hear a child’s voice tell you that, I couldn’t help but feel gratitude for my wife and for my father-in-law. And how fitting that was. My wife and I have extreme gratitude, respect, and love for my daughter’s birth mom. She’s an incredible person. She’s raising incredible boys as a single mom and still playing a significant role in the life of the daughter whom we both love.
I was initially terrified of the idea of open adoption, and now I see immense beauty in it. But her positive impact on our entire family cannot be overstated, and it’s probably far beyond what she even realizes. And I think it’s fair to assume there’s probably someone right now in your life that would be greatly impacted by a small act of kindness that you could show them. And it may make a far bigger difference in their life than you would ever think. So I encourage you take that first step. It doesn’t need to be anything over the top but it just might make that day one of the best of their entire life. And remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show go to Creativeplanning.com/radio. And to make sure you never miss an episode you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer: The proceeding program is furnished by Creative Planning an SEC registered Investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1, 2023. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. It should not be construed as investment, tax, or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help request to speak to an advisor by going to CreativePlanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.
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