This month, Peter and Jeff unpack the new Trump Accounts, dig into what the latest Social Security report means for future retirees, and explain why so many asset classes have suddenly been moving in lockstep. Plus, you won’t want to miss their tips of the month.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Today’s episode will have something for everyone. For the young, we’ll talk about Trump Accounts, which go live here in about a week. And for the more mature, we’ll talk about the state of Social Security. And for everyone, we’ll of course talk about the market. So let’s dive in.
Peter, much like you, I closely associate the Fourth of July with three things: the Nathan’s hot dog eating contest, fireworks and, of course, the launch of new types of investment accounts. It’s exactly what’s happening this year, but many may not know what that new type of account is. They’re called Trump Accounts, and maybe let’s just start with the primer on what those are.
Peter Mallouk: So this is interesting. We haven’t seen— I can’t recall a new type of account since the 529s or Roth IRAs. Those two really came out of nowhere. We’re getting to a world where the average family is going to have so many accounts, it’s just exhausting. I wish they would just collapse a lot of these laws together. But the way this one works is basically it’s a new type of tax-advantaged account for kids under 18. It’s created in 2025.
Basically think about it like an IRA. It grows tax-free. Anyone can contribute up to a combined $5,000 per child. So you don’t have to be the parent of the child to contribute. And the contributions are after-tax dollars, meaning you don’t get a tax deduction for contributing to them. Even employers are allowed to contribute up to $2,500, but that would count against the $5,000 limit.
Now, the part that’s gotten the headlines is the free $1,000, right? This really — I mean, the Dells came out, made an announcement they were going to partially fund this, and a lot of hype has come up around this. This is basically a one-time $1,000 contribution from the government for children born between January 1, 2025, and December 31, 2028. You’ve got to be a U.S citizen, valid Social Security number. Kids born outside that window can have an account, they just don’t get the $1,000.
The interesting part is it’s not really dramatically tax-advantaged. It requires you invest in a diversified index fund, which I think is great because it gets people learning about investing in a way that makes sense and is digestible — and probably going to create the best outcome at the best price — and also avoids people speculating and buying internet rocks and things like that, having the account go to zero and having the kid have that be their first lesson. But that’s extremely tax-efficient already. There’s very, very little taxes that come with that. And the way the Trump Account works is it’s growing tax-free, but when you do take out the money, you will pay income taxes.
Jeff: Yeah. So more of a tax-deferred thing, kind of like an IRA or something like that. When you look at this and you think about the landscape of all of the various accounts that are available now for a kid, you do have UTMAs or UTMAs, you’ve got 529s. How should somebody think about this fitting into their whole picture?
Peter: I think if you’re focused on education, the 529 plan is the way to go. It’s growing tax-free. You might get a state income tax deduction, depending on where you live. All of it comes out tax-free. Whereas if you look at the Trump Accounts, the earnings are fully taxable on the withdrawal the same way as a traditional IRA, and only the money that was seeded by the government or employer is tax-exempt. And so other than the free money component, the 529 is the superior option.
Jeff: I think about also, let’s say you’re contributing to this account when the kid is one, two or three, and they’re not going to take it out until they’re 59 1/2 or older, which is when I think some penalties go away. You still have to track the basis that entire time. My goodness, I mean, that is a long time to keep track of whatever the contributions were. I’m afraid it would get lost along the way too.
Peter: The main thing for me is I would look at it not in comparison to a traditional IRA, a Roth IRA, a 529, but, “Hey, can I get the free $1,000?” If you can, you should be getting the free contributions. Or if in addition, if you’ve done other things and in addition you still have money left to do things, then you evaluate this on that basis.
Jeff: Great. Well, happy 4th of July, everyone. Enjoy your new investment account type. Next, let’s talk about Social Security and the future of it. So, annually, the Social Security Board of Trustees releases an annual report about the financial health of the Social Security Trust Funds. That report came out within the last couple weeks. The conclusion, in short, was the trust fund could be depleted sooner than expected. Peter, what does that actually mean?
Peter: So I think it’s an interesting piece about Social Security is when it first came out, it paid out at age 62 and the average American’s life expectancy was 62 years, and they tended to retire at age 62. So basically, statistically, the average American retired at 62, became eligible for Social Security, and immediately died, right? So it didn’t — it worked out. You know, the government could cover what was coming in. Well, now we’re all living longer. So people are living well into their 70s, 80s, 90s, no problems. You’ve got people on Social Security for decades, right? Decades of payouts.
And on top of that, just Republicans and Democrats totally incompetent at anything related to balancing a budget of any kind for any reason on a federal level, where a balanced budget’s not required, and you put those two things together and of course we’re in a crisis. If you really looked at the Social Security Trust Fund, the way it’s described as, “Hey, we collect taxes and put it in this fund and then we pay it out to people.” If we were looking at it in that vacuum, which is the way you’ve laid it out, it’s bankrupt. We know it’s going to run out of money in a couple years and no one would be able to get Social Security.
Now that’s not going to happen, because the people that are running it would never get reelected, right? The biggest voting block is people over 50. The people that care most about Social Security are people that are getting it or on the brink of getting it. And so no one’s going to say Social Security’s going to stop. What’s going to happen? There’s an extremely high probability that what happens is a multi-pronged approach. One, they’re going to tell younger people, hey, you’re not going to get it at 66 or 67. Your life expectancies are higher. So if you’re under 35, you’ll pick some age like that where people aren’t voting, or don’t care about this issue so much because they don’t think they’re going to get it anyway.
They’ll say something like, “If you’re under 35, you’ll become eligible at age 70 or 72 and only under these requirements.” They’ll say, “If you make more money than this, your Social Security be taxed in a different way, or you’re not going to be eligible for Social Security.” And then they will probably lift the limit. Right now, only a certain percentage of earned income goes into the Social Security. Once you hit a certain salary, they no longer collect taxes from you for Social Security and they will likely lift that limit too. So you’re going to see a combination of tax on people that have high incomes, higher contributions imposed on people, and almost certainly a pushing out of the age limit, and then it will appear to be balanced under that actuarial table when all of those rules are passed.
The people that passed that will say, “Hey, I’m a hero because I saved Social Security,” right? And in a democracy, you need to get the bus as close to the edge of the cliff as possible before a politician will switch. Now no one — there’s nothing to gain by taking anything away from a single person. All you have to do is lose a vote, but if enough people believe it’s actually not going to happen, then you can say, “Hey, I saved it.” And so it’s going to require that the front wheels of the bus off the cliff and then they will save it, and that’s probably the path with which they’ll do it. Then it will be balanced for a brief period of time until that is mismanaged, and then we’ll have the crisis. We’ll just be able to go another five, or 10, or 20 years before we have the same exact issue all over again.
Jeff: So for somebody who’s in their 30s, maybe early 40s, to think about Social Security in the context of their financial plan, how should they think about that?
Peter: I mean, I think if you’re under 30, I would not be relying on this. I think it will still be there, but I wouldn’t be relying on it. I think if you’re over 60, the odds your Social Security is going to be compromised unless you are enormously wealthy or have an enormously high income, it’s whatever number is closest to zero. It’s hard to imagine a world where any politician has any incentive to have as part of the solution upsetting the largest generation in the United States and the largest voting block in the United States, who are going to be the angriest about it, right?
And so the solution is not going to involve people that are getting it or near getting it or even if you’re, I think, if you’re even over 45, you can really, really rely on this. And if you’re under it, you should be doing what we always do with our clients is trying to make yourself independent of all of this stuff.
Jeff: All comes back to having a plan, no doubt. Not that I’m biased leading planning at the firm by any means. Lastly, let’s talk a little bit. We had something unusual over the last couple of weeks where tech stocks were down, oil was down, gold was down, so all have in sync moved lower, which is pretty unusual. What’s driving these moves?
Peter: You look at the two big asset classes, you’re either an owner of things — gold, real estate, stocks, international investments, private equity — or you’re a lender, right? You’re lending money to the federal government, the state government, a corporation, friend, whatever. And in the owner column, a lot of things are not overly correlated. So like stocks and real estate are about 83% correlated, meaning stocks may go up $10 and real estate goes up $8. And you see that across a lot of ownership assets. But in a world where there’s a big correction or things may be overbought or you see a big interest rate move or anticipation of a big interest rate move, correlation can move to one very, very fast.
So example would be in a crisis, COVID, 2008, correlation was extremely high. I mean, whether it was international stocks, emerging market stocks, U.S. stocks, small, large, private equity, public equity, all of these, real estate, they’re all collapsing together. And in a very hot market, they all go up together. Well, right now we’re looking at a world where we’re expecting higher interest rates. Higher interest rates, if you’re a corporation and you’re borrowing money to run your company, well, the cost is higher so you have less earnings. That’s negative for stocks.
If you’re in the real estate business and you’re paying 7% on interest instead of 5% interest, well, you have less profit coming out of that rental property, and so it’s bad for real estate. And so a big upswing in interest rates can be negative for all of these things together. I also think that we had a very, very speculative run here. The government flooded the system with all kinds of stimulus and excess money and deficit spending. Combined with a lot of optimism around the markets, all of these asset classes are at the very peak of their historical valuation levels. And so it wouldn’t be surprising if psychology and sentiment is just a part of all of these potentially taking a breather together.
Jeff: Should be fascinating to see where we go from here, no doubt. Peter, let’s move on to our tips of the month. What do you have for us?
Peter: I’ve done a couple tips of the month around cybersecurity, and one of our clients who’s a specialist in this area was telling me about how sophisticated many of these cyber criminals have gotten. And we always talk about check the URL and confirm the link is coming from the right sender and so on. This client was explaining to me that in recent months, what we’re seeing is people actually creating mirror websites that look exactly the same with similar links and they can hack someone else’s emails so it looks like it’s coming directly from somebody or make it mimic so much that it’s not obvious.
And he said best practices, and then it’s been hard for me to adopt this, but I’m starting to do it, is anytime you get an email, even if you think it’s from a trusted source that says, “Hey, here’s the link to your investment account or here’s the link to your bank account,” still don’t click on that link. Go to that site directly the way you normally would, whether it’s through the app on your phone or by typing in the URL yourself rather than clicking on the one that came to you. And he’s saying in the world of AI and how advanced all these things are getting, that needs to become the norm. I’ve really worked hard to get that into my life. I’m like 80%, 90% of the way there. I’m quickly working my way to doing it all the time.
Jeff: I actually experienced this within the last two weeks. I received an email. The link was fraudulent. I thankfully did exactly what this tip is indicating. I independently went to the thing, but the phone number was valid. So they had in the email the actual phone number for the bank, but then the link was the one that was separate. So if I would’ve just Googled the phone number, it would’ve seemed valid, but the link was not.
Peter: Wow.
Jeff: So yeah, it’s a good tip. Mine, you know, we talk in our podcast here so much about investing, and staying diligent, and staying committed to your plan, but I’m going to put it very succinctly. My tip this month is don’t let the headlines change your investment strategy. I thought I’d relate this to soccer just a tiny bit in honor of the World Cup. A soccer team, they don’t abandon their game plan because they’re down a goal early and successful investors shouldn’t abandon theirs because of a rough week, month, or year in the market. Championships, long-term investors, success is built on discipline, sticking to the plan. So make sure you’re a winner and stay according to plan.
Peter: I like it. Thanks, Jeff.
Jeff: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: 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.
