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The Untold Advantages of Giving Your Money Purpose

Published on March 13, 2023

John Hagensen

We often find it’s easier to save for short-term goals than long-term goals. But it’s the long-term goals that can make the biggest impact on your financial success. This week John shares how one of his favorite techniques, zero-sum budgeting, can supercharge your ability to reach your retirement goals (3:37). He also outlines considerations for deciding whether to invest in a Roth IRA or 401k (42:14). And don’t miss Creative Planning Wealth Manager Kim Riewerts, who joins the show to explore the behavioral differences between women and men investors and what we can all do to be more successful (14:32).

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 a head on today’s show, what to look for in a financial advisor, the differences in men and women when it comes to investing, as well as whether or not it’s a good idea to mix family and money. Now, join me as I help you rethink your money. I want to start with a story. I asked my second grade daughter Zaya at the conclusion of a road trip to clean out her area of our Nissan NV 12 passenger van. Yes, you heard me right? We have one of those church vans, but it’s just for our family. I asked her to remove the hundreds of pieces of popcorn, and I know you’re thinking John, rookie move. You gave her popcorn in a car. I know, dumb. But I asked her to pick it up.

And when she came inside and tossed it in the garbage, I said, did you clean everything? Oh yeah, dad, it’s good. Well, let’s go look at it together. I know how this thing goes. So I walk out there, there’s popcorn everywhere. There’s colonels all over the place. And I said, Zaya, what going on here? This isn’t clean. She said, I didn’t know you meant get all of it. I just got the big stuff. And it’s a great reminder that you better be very specific with your kids if you want the job done correct and in its entirety. And along those same lines, when I think about my least favorite job I ever had, it was a summer job in college where I pressure washed houses for a painting company. Yeah, you heard me correctly. I was such a bad painter. I’ve always been like the worst artist of all time.

They didn’t give me a paintbrush. They’re like, all right, hey, temporary summer guy, go in front of our jobs on like 30 foot high extension ladders and pressure wash all the dirt and spiderwebs off. But the reason I didn’t like the job was because I never had any direction on what exactly I was supposed to be doing, how long it should take. I would show up at a job and just be waiting for a couple of hours. This tells you how important I was, right? And I never liked that job because I never knew whether I had ultimately completed the task, what the actual job was, what was the timeframe, what is the purpose of this? And I see us just as lost as me, sitting there wondering when the extension ladder would finally show up when it comes to our money, when we don’t have any context, when we haven’t given every dollar a job, a purpose and an expiration date.

And the expiration date’s key, because if you’re like most people, when you think this through shorter term goals are easier to identify and then subsequently link specific dollars to that job. One of our directors of marketing, Lauren, was telling me that when her husband and her were saving for a pool in their backyard, it was extremely motivating and they knew exactly what they were carving out every single month for that pool, because they wanted to build it before summer, there was a very finite amount of time that they needed to accumulate a very specific amount of money. That’s pretty typical. Conversely when it comes to retirement, which can often feel so far out in the distance, we have a hard time assigning a specific job to those dollars.

But if we want to optimize our hard-earned dollars, it’s essential. And the technical term for this idea is zero-sum budgeting. Now, you don’t need to use cash and envelopes because frankly that can be pretty impractical, but it is the Dave Ramsey Financial Peace University budgeting envelope system. And so the idea of zero-sum budgeting is simple, income minus everything that goes out has to equal zero. And you say, well, John, but if I make 8,000 and I only spend 5,000, I’m going to have 3000 left over, assuming that that’s net of taxes. But what zero-sum budgeting would say is, no, even within that $3,000 cushion, every single dollar needs to be assigned. And so for example, if you bring home $8,000 a month, you want everything you spend, save, give, and invest to equal $8,000.

So here’s how you do this. List all of your income sources, this should include paychecks, business income, side jobs, residual income, child support, rental income, literally anything that comes into your bank account should be factored into this calculation. Next, you look at the other side of the ledger, every single expense that you have each month, rent or a mortgage, food, streaming services, cell phone, pet expenses, kids expenses, right? So if you got a lot of kids like me, you just put down everything else and your expenses are going to vary from month to month. And this is why if you want to do this right, you do want to adjust the budget on a monthly basis. You may like giving a lot more around Christmas time or at the end of the year, and that’s an example of variable expenses or your car budget will spike when you pay your insurance or after renew your tags. So focus on this one month at a time.

And ideally when you subtract those expenses from your income, the number is zero. Now, you won’t get this right generally at first, but that’s the goal that you’re shooting towards. And here’s the fun part about this, you give every single category a name, meaning it has a designated job to do. And so if when you finish you have $100 left over, you’re not done, when it comes to zero-sum budgeting. You name that $100 and assign it a location with a specific job and purpose. Because you and I both know if you don’t, you’ll end up blowing it and then wondering after the fact where it went or why you haven’t been able to give or save as much as you’d like to be doing. Now, if you think this sounds like a great idea, but you’re somewhat overwhelmed at the thought of budgeting and having a detailed plan, well that’s why you hire a great financial advisor. They can help construct this plan, not for you, but with you.

And if you’re not sure where to turn, here at Creative Planning, we are helping families in all 50 states, in 85 countries around the world. We are fiduciaries not looking to sell you something, but rather give you clarity around what you’ve worked so hard to save. To meet with a local advisor for your complimentary no obligation, second opinion, visit creativeplanning.com/radio. Well, how about these headlines? By the way, this is just over the last two weeks from one website. The ISM service sector index held at a robust 55.1% in February, a positive sign. US stocks end sharply higher Friday to cap winning week. US Stock Index is plumb new 2023 lows on March’s opening day. The S&P 500 is at a critical level. Ultimately we think this rally is a bull trap.

The housing markets crumbling. Ready for an eight week stock rally? This strategist lists six reasons it’ll happen. Dow is up over 400 points in final half hour of session. I’m just sharing with you a few from one site over a couple of weeks. If you are occasionally confused when it comes to what’s going to happen next, whether it be with the markets or the economy, join the club. You’re a normal human being. There are literally thousands of headlines every single day, and unfortunately most of the headlines are specifically engineered to create anxiety in you. And while it’s never been easier to receive information, you could argue it’s never been harder to find truth. But if you don’t feel peace around your finances, you almost certainly don’t have a good financial plan. And as I was just discussing, a good advisor can help you determine where every dollar should go within the context of that financial plan.

I remember in particular one specific scenario where great guidance from an experienced professional was a complete game changer for me. We were in the process of an international adoption of our now 21-year old who is active duty in the army. My wife Brittany, and I couldn’t be more proud of our son, but it was a long road to having him come here to America. And I tell you what, I was confused. I had read every article possible. I had talked with multiple friends who had previously gone through the adoption process. I was clueless. So what I chose to do was research the adoption attorneys and adoption agencies to find the best of those who could help me. And I made really good choices. And our adoptions relative to international adoptions went pretty darn smooth.

But it wasn’t because of my knowledge, it was because I found the right people who could set the right expectations and outline the timeline and expected costs and potential delays that made a world of difference in us bringing home eventually, both Beck, our 21-year-old and Shay, our now 19-year-old when they were 11 and nine years old. But can’t it be confusing? Hundreds of thousands of financial advisors in America, most of which seem the same at surface, don’t they? Well, as a reformed broker myself, turned fiduciary, let me share with you specifically what you should be looking for in an advisor. And if you have questions about this, I’ll post an article to the radio page of our website at creativeplanning.com/radio, that will dive in a bit deeper into each of these bullet points that I’ll quickly go through for us today.

Number one, you should be looking for a team that serves as a financial fiduciary. That’s right. There’s that word fiduciary, but here’s the key. 100% of the time. A fiduciary by definition is someone legally required to act in your best interests. Other fiduciaries, attorneys, CPAs, and because of that you might think logically, well, if I’m asking for guidance on my entire life savings, I would assume that that person is legally required to act in my best interests. Well, if you assumed that you would be wrong. So the way you solve this, find an advisor at a registered investment advisory firm, not one with a broker dealer. Second thing you should look for in an advisor, an independent team. The financial services industry is rife with conflicts of interest. Advisors are getting sent on fancy vacations by selling enough of certain products.

Many of the big broker dealers manufacture their own proprietary funds where of course they make way more money if you purchase that versus some other investment that may be lower in cost and may be better. But again, they’re not required to act as a fiduciary, as a broker. Now, they don’t call themselves brokers, they call themselves financial advisors. When they steer you toward their product, it’s so predictable. When I’m talking with a prospective client and they tell me where their current advisor works, I don’t even need to look at their statement. I’ve done this long enough now, I know exactly what investments they’re going to have inside their portfolio. I know exactly what type of insurance that big company is going to recommend because it’s their insurance company. By the way, it’s not named the same thing. They don’t want to make it that obvious to you.

Number three, your advisor should be a team that focuses on low cost, tax efficient investing. Your costs and your fees have the potential to quickly erode your returns. Every one 10th of 1% that isn’t charged to you, stays inside your portfolio and compounds. And so you need an advisor who is looking for ways to minimize not only your costs but also your taxes. Well, if they’re not a CPA and they’re not a tax practice like us here at Creative Planning with a hundred CPAs, what’s the expectation that they have the knowledge and experience to truly identify how to minimize your taxes? One of the few things you can fully control as an investor. A really good question to ask yourself when it comes to this, when’s the last time your financial advisor reviewed your tax return?

Number four, a team that creates a customized and comprehensive financial plan. This one’s pretty simple. Do you have a written documented financial plan, not a pie chart that shows your asset allocation, not a Word document that lists some of your accounts? Yes, I still see that from time to time. I am talking about a detailed financial plan that you have constructed with your financial planner over the course of multiple meetings, and then continually are reviewing and updating that as laws and your life change. And the fifth and final attribute on my list today, certainly this isn’t comprehensive of everything you should be looking for, but here’s the final one for today, is a team that bases its philosophy on rational evidence based academic research, not what John Hagensen thinks might happen tomorrow because it’s partly cloudy. And I read this from one economist and I’ve got a hunch. That’s a really bad way to invest your life savings.

There’s far too much misleading data out there. Your team should have knowledge, background, and experience to get all the facts and develop strategies based upon those living in reality. And the biggest part of that reality is that you and I and whoever your advisor currently is, have no ability to forecast the future. Forecasting or trying to time the market or stock pick is a loser’s game. To recap the five essential non-negotiable qualities you should be looking for in a financial advisor, that they’re a fiduciary 100% of the time, that they’re independent, that they coordinate your taxes, that they are planning led and value a true, real written documented financial plan. And lastly that I just shared, that they build strategies rooted in reality.

If you don’t have an advisor, maybe you’ve never thought you’d get enough value out of one. Maybe you’ve had a bad experience with an advisor or maybe you feel like you’re okay but are interested in what you might be missing, why not give your wealth a second look by meeting with one of our local fiduciaries. Request your meeting today at creativeplanning.com/radio. My special guest today is fellow Creative Planning managing director Kim Riewerts. Kim’s a certified financial planner and works directly with clients to help design, implement and maintain strategies that fit their unique needs. She’s joining us today from our office in Chicago. Kim Riewerts, welcome to Rethink Your Money.

Kim Riewerts: Thank you for having me, John. I’m thrilled to be here.

John: Let’s just start with, are women really any different than men, specifically when it comes to investing?

Kim: Well, from a real life example here this morning, my husband would tell you that we are very, very different, as I was outside in our backyard at 7:00 AM burying the family goldfish, crying profusely.

John: How long did you have the goldfish?

Kim: A year and a half.

John: Hey, we have two goldfish right now, and I can tell you my kids would be devastated if either of those goldfish didn’t make it.

Kim: So what are you’re trying to do and where does this tie in? All kidding aside, women do a really good job I think of applying emotions where it’s applicable, meaning our families, our kids, and we have this ability to separate where emotions don’t need to be, and that’s in the investment world. And so from an investment professional, the key differences that I’ll see within women is their patience. And so that translates to how they stay with a strategy and when they’re working with a professional, how they’re able to be more successful over the long run.

John: When working with female clients, I know you have a lot of them, have you experienced or noticed any differences in behavior in terms of how you work with them?

Kim: I have a client who’s been with me for about nine years now. She was widowed. And one of the things that she’s dealt with over these past nine years are some volatile markets. Last year was no exception. And she’s withdrawing living off of these assets. The plan worked. When I look back at what we’ve done over these past nine years, it’s worked. She has just as much money as when she started. She’s been able to help her kids adopt two children specifically. She’s been on trips, she’s lived and I’ve encouraged her all along the way to keep good cash reserves so that she could sleep every single night and not have to worry about these things when we go through rough markets. And I don’t think the success is me, it’s her. She sought out a plan and she stuck with it.

And so she wasn’t one that called me in the midst of 2020 as we’re going through the first COVID crash. She didn’t call me last year, but we were communicating because I know how she feels that you have this proactive dialogue and it led to her confidence over this period of time and sticking with that plan. So just a more balanced investor, not impulsive. Those would be some key things I’ve noticed over the years.

John: That’s a great story and I love that she was able to build in there some of those things that actually really matter. And I know as a pair to four adopted kids, adoptions can be expensive. And so that’s really cool that she was able to help them with that. Let’s transition over to men and women who self-direct. What are the differences in terms of how they manage the day-to-day?

Kim: The broad majority don’t day trade. And this could be someone that just instilled from a family member to buy what you know. So they’ve bought things that they understand and they can conceptualize or maybe even they’ve held on to some legacy assets that a family member built. But most of them aren’t day traders. They’re not trying to outpace. They do their research, they’re willing to take input from others and tend to be more consultative. So on the self-directed side, when they are doing those things, they’re removing that day-to-day nuance that many men are influenced by. The famous neurologist out there, William J. Bernstein, who turned to his attention to investments some years ago.

He wrote the book, The Investor’s Manifesto. And one of his quotes, “Testosterone doesn’t do well in the investment world.” And his quote goes on to say, “The hormone causes three problems for investors. It decreases fear, increases greed and very much contributes to overconfidence. It does wonderful things for muscle mass and reflex time, but little for judgment.” And so not to pick on men here, sorry, but I’ve seen that firsthand, back to that emotion and that impulse, it’s removed. And so I tend to see less day trading amongst those that are self-directed than in the male population.

John: We know that generally less trading leads to better outcomes and by all the data we see that women trade less than men as a whole. And maybe that goes back to your comment. Women tend to be a bit more patient and maybe a little less reactionary. So those attributes serve them well, have historically anyways. So Kim, when it comes to investment performance, what repeatable actions have you seen your female clients take to get where they want to get financially that maybe both men and women listening can say, all right, that’s something that I can latch onto and that I can apply when it comes to my money?

Kim: I think it’s checking in and not getting too assertive as to what their process is. The most successful I think self-reflect, what have I done over this past year? Where am I going? And that aligns with our process here at Creative Planning. But I have one family and both husband and wife are actively involved. They had some sizable salary increases in the past few years. And one of the things that she came to me and said is I’ve noticed friends as their incomes have gone up that they start matching their spending to the income and they’re not really reflecting on where they should be saving. So first I commended them, I was so proud, congrats on those salary increases, but they’re looking for that affirmation of, what do we do? What’s the next step?

And while they wanted to do some life things, there was some trips and some fun to be had. It was stepping back and going, how can we continue to have our wealth grow? What does this look like in short and long-term goals? I think we always maybe put this misnomer around investment professionals, that’s going to be the long-term, don’t touch it. But that’s where having an active conversation and that consult is what they were looking for. And so for male or female, back to what they do on a repeatable process and what this family was doing was regularly checking in and reassessing where they’re at and where they’re going. And so the takeaway that story is women tend to verify what their plans are and not necessarily go it alone.

John: That’s fantastic. There’s a lot that we all can learn from that, and it really comes down to having a balance between spending now and not dying with a pile of money that you never enjoyed, but also being responsible. And regular communication is helpful when trying to determine how to strike that balance. I’ve got one final question for you here, Kim. This is a very male dominated industry. I was an airline pilot prior to being in wealth management, two of the most male dominated industries and I’ve always admired the female pilots that I flew with and all of you female advisors here at Creative Planning. My sister’s a financial advisor. I have talked with her about this and many of the attributes that apply to good investing make for really awesome financial advisors. And I think some of the best that we have here are female advisors.

So talk with me a little bit about why’d you even get into this? What led you to wealth management as a woman in a male dominated industry and why you like helping women?

Kim: This is a little longer story than you may care to hear. But I think it’s important.

John: Give it to us.

Kim: And this is when families come to me and say, will you talk with my children? I am excited because it took somebody else that did that years ago of why I am here today.

John: Really?

Kim: And so part of it was I had an uncle and my dad who sat there and looked at the paper when we’d go to visit my uncle out in Arizona, he’d sit down, I’d hear him in his office talking to his broker back in the day. But he sat down and would explain it to me and was willing. So he didn’t just shun my questions or my interests and why he had CNBC on or why the ticker tape or my dad, this maybe dates me, but it’s not that long ago, would pull out the Tribune here in Chicago and be highlighting his stocks in his portfolio. And I was fortunate they had a small portfolio that they sat me down and explained what they had bought and then it was for my college education and this was the purpose.

And so I think from a very young age, seeing that firsthand, and I don’t think that was necessarily just because I was a female, right? I’m their child. They want to see me be successful and I think that applies to all of us with their children and getting an understanding of finance very, very early. I realized I enjoyed it. I was starting to understand it. I wanted to know more and then was there a way that I could have a seat at the table to help more families, to help more women? And that’s where I am here today.

John: Well, thanks so much for sharing that with us. That’s a cool story and it sounds like you had some really involved and invested parents and other people in your life who really cared about you and wanted to see you succeed.

Kim: That’s why it’s so important, is anyone here at Creative Planning is willing to share or refer that you take the time because you don’t know how you’re going to influence somebody some years down the road.

John: Absolutely. Well, thank you so much for spending some time with us here on Rethink Your Money, Kim.

Kim: Thank you, John.

John: I’ve been speaking with certified financial planner Kim Riewerts, and I am truly blessed to work with some incredible professionals and more importantly incredible people here at Creative Planning. Kim is no doubt one of those people. And if you have questions and aren’t sure where to turn, we’ve been helping families just like you since 1983, gain clarity around their money, go to creativeplanning.com/radio now to meet with one of our advisors. Again, that’s creativeplanning.com/radio.

Let’s start with a game of rethink or reaffirm where each week I break down common wisdom or a hot take from the financial headlines and together we’ll decide whether we should rethink it or reaffirm it. Our first topic, don’t mix family and money. I want to share with you a story of an extended family member of mine and unfortunately this isn’t uncommon. They had a net worth of about $10 million, mostly in rental properties that they had built up over five or six decades of their lives. They only had one child and that child had two children, so they had two grandchildren. About half of their estate, $5 million or so was going to the grandchildren, with the other $5 million going to their son and spouse.

Well, one of their grandchildren had a business idea coming out of college and the grandparents said, well, you’re going to get 5 million of this anyways, we’re up in age, almost in our 80s. Sure, we’ll lend you $250,000 as a business loan. We’re not going to make it a gift, but we’ll put a minimal interest rate on it and if the business is successful you can pay us back. Well, this business started in 2007 and by 2009, even though my family members worked their tail off with the business, they were putting in 60, 70, 80 hours. It just didn’t work. It didn’t succeed. Well, fast-forward to 2011. I’m sitting at a table with a bunch of my other family members at a wedding for their other grandchild. Remember they had two grandchildren. One of them is getting married, not the one that they loaned money to.

And no longer than about five minutes following the bride and groom’s first dance, the grandparents are over at our table demanding that they better pay them back their $250,000 with interest. One, it was bizarre. It’s one of those situations that I still remember so vividly. I’m sitting at the table amid drink of my glass of wine and it’s one of those where you spit your wine back in as you’re seeing it happening, big eye meme like looking around going, what was this happening? This is not good at a wedding. What is going on here? I couldn’t believe it. And you might be thinking to yourself, well, why did they do this? Their real estate holdings were over leveraged and got absolutely clobbered during the great financial crisis. They never talked to them again before they passed. That’s the sad part of that story. Never, ever again spoke to them, all over $250,000, all because of money.

And so while I’m not suggesting you can’t help family members or you shouldn’t help family members, because ultimately it’s a very personal decision and every family dynamic is very different. Here are a couple things I would ask you to consider before mixing family and money. Number one, is your financial plan still going to hold up even if the money that you are gifting or loaning to a family member is never repaid? Now, we talked about women earlier on the show and that they’re more emotional and they’re empathetic and that is incredible. But I’ve seen many instances where a mother or a grandmother feels deep emotion to help a family member. Maybe it’s just because us men are too pragmatic sometimes and frankly not nice enough and caring enough, but it’s to the plan’s detriment. I have to tell my client, if you continue to help this child who doesn’t have a job and hasn’t had one for two years, you yourselves are going to run out of money.

So that’s the first thing. Is your plan going to work? Because it’s almost like putting your oxygen mask on first before assisting small children. You’re no good to helping someone in your family if you now aren’t financially independent. The second question that I would ask yourself is this, if the whole thing blows up and I never see one penny back of this business or loan, will I resent them or will I be completely okay with this? Before mixing family and money, within your financial plan and mentally and emotionally, probably more importantly, be okay with making that a gift. Because it’s not worth losing children, siblings, parents over money. But if you’ll be financially and emotionally content and satisfied regardless of whether it’s repaid and you’re inclined to do so, then by all means mix family and money.

My verdict on this one is generally speaking or reaffirm, try to avoid mixing family with money, but as I mentioned, there’s some caveats to this. Our next topic to rethink or reaffirm is investment performance will most determine my financial success. And your prospects and outlook on your financial future, ebb and flow with the markets, if so, that’s a difficult world to live in, because the variance of returns are all over the map. If you’re in a diversified stock portfolio, historically speaking you could be up about 50% 12 months from now or down 40. You’re up a little over 50% of all days and you’re down just under 50% of all days if you’re looking at it on a daily basis. Now, fortunately, if you look at it every five years going all the way back to the Great Depression, you’re up about 90% of the time. And over 10 years you’re up about 98% of the time.

And so we know that the market has earned about 10% a year for a century, but the order in which it gets there is highly unpredictable. It’s not investment performance because generally that will take care of itself within the context of a great financial plan. But instead, let me share with you a list of five factors that I feel are far larger and most of which are in your control, thankfully, that will in fact determine your financial success or failure. The first is simply controlling fear and emotions. While the market’s made about 10% a year for the last 30 years, the average American has earned about 5% per year. We don’t have portfolio problems, we have people problems. And as humans it’s completely natural to retreat from things that we’re fearful of, meaning down markets. They make us feel bad. We want to get out of those investments, which is exactly the opposite of how you make money. You buy low and you sell high. And this is where having a great financial plan is so critical.

You need a rules-based approach to guide all of your investing and spending decisions because if we’re left to our own emotions and there isn’t that plan and there isn’t accountability, it’s really hard to not be the person who ends up earning 5% a year over 30 years instead of tracking with the indexes and making 10% a year. If you don’t have a written detailed, documented financial plan that guides what you’re going to do in both good and bad markets, I would really encourage you to do so. And if you’re not sure how to get that or where to turn, we’ve been helping people just like you since 1983 here at Creative Planning. We have over 300 certified financial planners across our team. And to meet with one of our local wealth managers, go to creativeplanning.com/radio now to schedule your visit. All right, so fear and emotions I think are a bigger driver than investment performance.

The second factor is your savings rate, how much you spend and how much you save, essentially what is your budget, is fully within your control and ultimately makes a huge impact on how much you have or how much you don’t have down the road. Less than one third of Americans have household budgets. Number three, not understanding your time horizons. The only way you earn those great historical rates of return in the stock market is if you don’t need to sell them at the wrong time. And so understanding which dollars you don’t need to touch for seven or 10 or 15 or 20 years, and even if you’re in retirement and you’re 65 years old and you’re saying, John, I don’t have 20 years, you probably do with some of the money, because you’re not looking to be broken out of money and have the entire portfolio depleted at age 85.

So you’re going to need to have some monies in long-term growth vehicles. But if you’re also in retirement and needing portfolio withdrawals to support your lifestyle, which in many cases is why you saved it in the first place to enjoy it, and I encourage you to do so, those monies that are needed over the next five to seven years need to be in safer, less volatile vehicles to allow your stocks time to work back to their averages in the midst of a lot of uncertainty and volatility. So you have to understand your time horizons, and again, as I talked about at it the top of the show, giving every dollar a job and an expiration date. Number four, not being tax efficient. Most of you had not had your tax return reviewed by your financial advisor in the last year. Even less of you have had a CPA review with your financial advisor and with you.

And I’m not talking about this time of year when you file your taxes, I’m talking about tax planning, looking out in the future and making decisions today that impact your taxes three years from now, five years from now, 10 years from now. And my fifth and final determinant toward your financial success is not being properly insured. No, I’m not slinging a bunch of permanent life insurance. Not being properly insured may mean being over-insured or underinsured. Neither one is where you want to be. But rather you want to properly and adequately ensure for the risks that could derail your financial plan. So the verdict regarding whether investment performance will most determine your financial success is a rethink.

And to recap the five that I believe are more important, your ability to control your behavior, your savings rate, understanding your investment time horizons within the context of your financial plan, being tax efficient and being properly insured, will go a lot further than whether the market’s up 10% this year or down 10%. Remember, we see what we look at. And so focus on the things that you in fact can control. My third and final topic for rethink or reaffirm, variable annuities are a retirement income unicorn. Now, I know you’re laughing right now thinking I already know what John’s verdict is on this. I already know they’re not retirement income unicorns. Well, here’s why I phrased it that way. I meet with people on probably at least a monthly basis, prospective clients who own variable annuities. Of course, they’re never bought, they were always sold to them with crazy promises that essentially they are a unicorn.

This is the pot of gold at the end of a rainbow. You get to invest in the stock market in these sub-accounts, which are essentially mutual funds, oftentimes overpriced mutual funds. And if they do well, you get to capture the upside of the market. But if they do poorly, your income is guaranteed by the insurance company. This is how they’re positioned. Now, if you just stop there, what retiree wouldn’t like that? You’re telling me I get to have my cake and eat it too? Man, thank goodness for this giant insurance company paying enormous commissions to the sales staff. So let me tell you the biggest issues with variable annuities that are rarely understood. First is the commission, which ultimately is baked into the contract costs and the surrender schedule. The reason you can’t get out of this variable annuity three years after you realize you should have never bought it, without paying a huge penalty, is because there were big commissions paid to the insurance agent, and they don’t go back to that agent and say, we’d like our seven or our 10% back in commissions.

If you put $500,000 into one of these variable annuities, shortly thereafter, the agent’s getting a check for 35 to $50,000. By the way, variable annuities are not sold by fiduciaries. They’re sold by brokers and insurance agents for commissions. Who do you think is ultimately writing that check? They’re too smart to make you pull out your checkbook and write a $35,000 check, because no one would buy the thing. They bake it into the huge internal costs ongoing within the contract. The average fees on a variable annuity are around 2.5%. And once you tack on income or withdrawal benefit writers, you’ll hear them referred to as GMIBS or GWBS, guaranteed withdrawal benefits or guaranteed minimum income benefits. Maybe you have an enhanced death benefit feature on there as well. I’ve seen fees in total be over 4% per year.

And so in addition to siphoning off huge fees on an annual basis that are internal and you never see, some of the other issues are that they won’t allow you to invest aggressively because they understand that if you have this backstop of income, you may as well shoot for the moon and allocate 100% to stocks so that you can try to achieve the most growth possible, because if the account runs out of money they still have to pay you. Well, the insurance company knows this, so in almost all contracts they make you be more balanced and have a big bond allocation to ensure that there aren’t big losses within the account, which puts the insurance company at risk. Secondly, they only allow you to take usually about a 4% withdrawal rate, which is what you’d probably be taking from your funds if they weren’t inside of a variable annuity anyhow.

And you’re taking your 4% withdrawal if you pass away, and there’s even $1 left in your account, all you’ve done is paid two and a half, three and a half, four and a half percent in fees to an insurance company to take withdrawals from your own investments just like you would have in any other type of an account. So the only time you, quote unquote, win, is if you live a really long time, your account goes to zero and the insurance company has to continue to pay you this non inflation adjusted annual income stream. Here’s the big aha with variable annuities. It was a self-fulfilling prophecy. Normally the only reason that it went to zero is because you are paying three or 4% a year in fees to the insurance company. So effectively when you go to them at 91 years old and say, well, my account ran out of money, you still have to send me 30 grand this year in my income. This is why I own this thing. I’m so excited.

The insurance company scoots in their chair across their office, opens up a drawer with $100 bills spilling out all over the floor from the fees they’ve charged you for the last 30 years you’ve been in the contract. And they go, how much do you need from these millions of dollars that we’ve been investing after we’ve crushed you on fees? And you go 30 grand. And they lick their index finger and they count out $30,000 and they hand it to you and they go, come back next year at 92 if you’re still alive and we’ll give you another 30 grand. You don’t need to be subjected to illiquidity, huge commissions, crazy high costs, some of the highest of any financial vehicle so that you can have peace of mind. Instead get a good advisor, build a good plan, and you should have clarity and peace of mind without helping some agent get sent on a trip to the Bahamas because they sold enough insurance.

So the verdict on variable annuities are a retirement income unicorn. Obviously that is a rethink. And if you’re someone who has an annuity of any kind, don’t go to the person who made huge commissions to sell it to you for an evaluation. Talk to an independent credentialed fiduciary who isn’t looking to sell you something for an evaluation. Talk to one of our local fiduciary financial advisors by visiting creativeplanning.com/radio.

It’s time for listener questions and my answers. Remember, you can email your questions to radio@creativeplanning.com just as these listeners today did so. Our first comes from Jim L in North County San Diego. That is one of my favorite places in the entire country. That area is beautiful, although I will say, one of my worst family experiences was taking my children, including a three-month old at the time, to Legoland. Now, in theory, this was going to be really fun, but it was bumper to bumper on a holiday weekend with strollers waiting one to two hours minimum in every single line while kids are melting down. All right, I know, you don’t feel sorry for me, but you actually should. It was awful. I’m sure Legoland is great, but go on a rainy Tuesday on a non Kid’s school break. That’s my advice for you.

Okay, so now that I’ve gotten that out of the way, here we go. Back to Jim’s question, which is, I have assets and trust, expect sizable taxes on death. I’ve been recommended to get a large insurance policy to generate on death large sum to counterbalance large estate taxes, seek evaluation on this concept and applicability in our situation. So while I don’t have all the information, first off, congrats Jim, because if you’re going to have sizable estate taxes, that means that his estate, if he’s married, is probably over 26 million, if not married, somewhere north of 13 million. So obviously doing really well. So let me share just a little background. My assumption is that Jim is being recommended. It’s called an ILIT, an irrevocable life insurance trust. You buy life insurance and you gift that policy to the trust and that death benefit then pays out to the beneficiary to cover estate taxes.

There are really two different components at work in this evaluation. The main one, and the first one isn’t the legal component of the trust, but rather the tax implications. And you can essentially execute the tax benefits without the use of life insurance. So Jim, make sure you separate those two things out. If the bulk of your net worth and what the children or grandchildren or whoever is inheriting is an illiquid investment, farmland, properties, a business, something that you wouldn’t want to be liquidated to cover these high taxes, then life insurance is often the best option, even though generally I’m not a big fan of permanent life insurance, this is in fact where it works. Now, if the bulk of your net worth is in liquid investments and ETFs and stocks and mutual funds, then you may want to execute the trust work. But rather than buying a life insurance policy, they can just sell certain investments that they’re able to cherry-pick at the time of death to cover any estate taxes due.

Because remember, your trust can be structured in a way that will limit taxes anyway. So you’re really looking for the best investment vehicle or in this case insurance vehicle potentially to fit those other individual needs. And one other final note is how healthy you are when you apply for that life insurance. Because if you get rated up or are uninsurable, then it doesn’t work anyway. Or it may be cost prohibited because they’ll give you the policy, but at really poor leverage. What you’re looking for is that internal rate of return column on the insurance illustration and not the proposed one, but the guaranteed column. And in most cases, unless you die fairly quickly, you’re better off just investing the money more efficiently within whatever trust you create. But again, congrats, Jim. You’ve obviously done a great job amassing some wealth to have these estate tax considerations.

Let’s move it over to Erica, contacting us from the Volunteer State out in Tennessee. By the way, why is Tennessee known as the Volunteer State? Its militia was instrumental during the war of 1812, and newspapers at the time praised the military spirit of the men of Tennessee. And so there’s your history lesson for the day. Now let’s get into Erica’s financial question. What is the difference between a Roth IRA and a Roth 401(k)? This is a good question. From a tax standpoint, they’re the same. You contribute to these with after tax dollars, meaning you don’t get any deduction or benefit by funding either the Roth IRA or Roth 401(k). The money then grows tax deferred and comes out tax-exempt, assuming that you follow a few basic rules. So essentially you put money in there and then it’s a ghost from your tax return moving forward. Doesn’t even affect social security taxation. Medicare means testing. A Roth really is the golden goose.

The biggest differences between a Roth IRA and a Roth 401(k), is the 401(k) is obviously within an employer plan. So it’s an ERISA plan. It has certain creditor protections that your IRA may or may not, depending upon your state also provide. So that’s a positive for the Roth 401(k). Another positive for the Roth 401(k) is that you can contribute significantly more. This year you can put $22,500 into your Roth 401(k), and if you’re 50 or older and you have that ketchup, you can add another $7,500, allowing you to contribute a maximum of $30,000 per year to a Roth. By contrast, a Roth IRA only allows for $6,500 to be contributed. And if you’re 50 or older, a $1,000 ketchup contribution. Meaning instead of 30,000, the max you could put in even if you were near retirement is $7,500.

Another negative to the Roth IRA is that it’s income restricted. If you’re married firmly and jointly and make over $228,000, you’re not allowed to contribute to a Roth IRA. Where by contrast you can make $10 million a year and still max out your Roth 401(k). Now, you may or may not want to because your tax bracket would be higher, but that would be a conversation that you’d want to coordinate with your accountant and financial planner. So in short, they have similar tax benefits, but the Roth 401(k) is more flexible on who can contribute and offers much higher limits on how much can be contributed. If you have any questions about your retirement or maybe a retirement plan, similar to what we’ve been discussing, do you have a lot of money saved in deferred accounts like your 401(k) or an IRA? Well, none of those monies have ever been taxed. Do you have questions around how to most efficiently take withdrawals from those accounts?

Remember, we presently are in one of the lowest tax environments we’ve seen in the last 50 years. The current low rates are set to expire at the end of 2025. Do you have a plan for this? If not, here at Creative Planning we’re not only a wealth management firm with over 300 certified financial planners, we have over 100 CPAs and are a tax practice doing thousands of tax returns for our clients and helping more importantly provide tax planning for our clients. If you’d like to meet with a local advisor and have a complimentary visit to discuss how your tax situation might be able to be improved within the context of your financial plan, visit creativeplanning.com/radio now to meet with a local advisor. I want to conclude today talking about a nugget from Warren Buffett’s annual letter to his investors.

These letters possess so much wisdom and I enjoy looking back on the letters he wrote 10 years ago or 20 years ago with the benefit that hindsight is 2020, and how often his principles, maybe not his exact timing, but foundationally how right on he is with the way he thinks about investing. In this case I’d like to highlight his thoughts around generational wealth and that it’s not really what it used to be. You could say, well, Warren Buffett’s worth nearly $100 billion or whatever it’s at today. So of course he’s thinking about this. But maybe you are a multimillionaire next door like a lot of our clients here at Creative Planning, and you probably won’t spend all of your money. And you do think even if it’s $200,000 or a million dollars or $400,000 or $25,000 that you’ll pass to someone that you love, how is that going to impact them?

And pertaining to Warren Buffett’s letter, in the past he had written that the conventional wisdom was people saved money in order to maintain their living standards after retirement, right? Like that’s the baseline. And then any extra money that was left over would go to friends and family. But in this shareholder letter, Buffett claimed that a new trend has emerged. And he put Berkshire Hathaway investors at the forefront of this, in short, that he’s just proud of how philanthropic he and his investors have become. And he was patting himself on the back, but for good reason. Because in 2010, Buffet started the Giving Pledge with Microsoft Co-founder Bill Gates, promising to donate 99% of his wealth sometime during his life and at death. And his goal, which I think is commendable, was to persuade and encourage other billionaires to follow suit. And so far more than 120 have agreed to that cause, which is pretty cool.

While we might not be billionaires, I contend that one of the greatest values for you having a detailed, documented, written, dialed in financial plan is that it will allow you to give more generously. And maybe just as important, give with a warm hand rather than a cold hand. If you’re not confident in your financial situation, it’s very difficult to be generous while you’re alive. It’s easier to just say, I need to hold on tightly to everything, and then when I’m gone, whatever’s left over, because now, ironically, I know I was okay, even though now you’re dead, it’ll go to my family members. An estimated $84 trillion will pass from baby boomers to Gen Xers and millennials over the next 10 years alone. An estimated 12 trillion of that is already headed to philanthropic efforts. And only about a third of wealthy US adults have a plan in place to transfer the bulk of their wealth to family members, meaning most plan to pass a significant portion onto charitable organizations which they care about.

And so I encourage you, the impact of you building a great financial plan isn’t just merely on yourself, but the ripple effect of that intentionality can have a wide sweeping and significant impact on causes that you care about and that are making such a positive impact on those in need. 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 podcast.

Disclaimer: The preceding program is furnished by Creative Planning, an SEC 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 Hagensen’s guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of 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.

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