Every day we hear about world events and other issues we categorize as either good or bad. We tend to overemphasize the negative — but this mindset can be harmful to investors. Join John as he highlights positive signs globally and explains how acknowledging them can benefit your wealth. (4:10) Later he’s joined by Creative Planning Attorney Jerry Bell, who provides essential steps for when your special needs child turns 18. (12:35)
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, the mind-blowing long-term progress that we so often overlook, why the month of November quietly broke records as well as the misguided advice from one of America’s most listened to radio hosts. Now, join me as I help you Rethink Your Money. When the market’s down for a year, it’s headline news.
Let’s face it. If it’s down for a week, you’ll see breaking news, all caps, red letters, scrolling across your screen. In 2022, stocks were down, bonds were down, and I’m not minimizing the pain. It was a really bad year. And I know that you were very aware of this as well because it was in your face everywhere you turned. When the market drops 2% in a day, you’ll see, “S&P logs worst day in four months.”
You know what’s far more relevant and meaningful though? Since 1990, the S&P 500 is up 1150%. Let’s frame this long-term positive news another way. 98% of all 10 year periods have positive returns and no rolling 20 year period on record has been negative. Why isn’t that flashing in red letters all caps? Well, because that’s not exciting, it’s not noteworthy. It’s positive.
It happened over a long period of time and because of that, it’s very easy to discount it or even worse, completely ignore its existence. But for whatever reason in life and with our money, we all tend to focus on the noisy negative minority, don’t we? If we’re not careful, it’s human nature. In fact, I have a somewhat funny story about this. Our nine-year-old daughter has a cat named Maui. This cat is her absolute best friend.
In fact, she told me the other day, “Maui’s my best friend. I tell him everything. He knows all about me.” This is one of those pets sleeps with her on her bed every night. You see, the problem with Maui is he’s an incredibly social cat. So with seven kids, a door is always left open. When it’s left open, he heads outside to roam the neighborhood and tell every neighbor hello.
Even the ones who are allergic to cats, who are extremely type A and have no interest in a cat being anywhere near their house, certainly not in their backyard. And of course we want to be good neighbors and be sensitive to those people, so we try to do our absolute best to keep him inside the house. Well, just this week my wife and I were notified by friends that are on the Facebook group of our neighborhood.
I’m not on Facebook because I do practice to some extent what I preach and I don’t need the negative energy of social media. But they contacted us and said, “Maui’s back on the neighborhood Facebook page.” Like, “Oh no. What did this crazy feline do this time?” He hadn’t done anything. He was just roaming in someone’s backyard and they posted that they want this cat gone. Another person on the thread said that he suggested shooting it with a BB gun, which is what he would do if it gets close to his house.
I get it, maybe he’s more of a dog guy, but pretty awful thing to say, right? But what would be easy to ignore were every other comment and there were a ton of them saying, “That cat is the coolest cat ever. He’s never done anything but roll over on his back and want to get scratched on his belly. We love that cat.” Tons of positive, nice people who were not represented by that negative noisy minority.
But I found myself thinking a little bit that day about, “Man, what is wrong with that guy that wants to shoot our cat?” It’s like that guy doesn’t represent the majority of people, but it’s so easy to get focused on the here and the now and the negative rather than all the good, the amazing people out there that don’t hate animals, are nice people.
That’s way more representative of our neighborhood. But most of the positive things in our life are gradual and they’re compounding and they’re not thrown right in our face in the same way that sudden negative events captivate our attention in the moment. Heart disease, great example of this. We hear all about tragic deaths, but very rarely is it highlighted that among people ages 25 to 84 deaths from heart disease fell from 400,000 deaths in 1990 to about 230,000 in 2022, even while Americans median age increased during that same time from 33 to 38.
I mean, that’s amazing. Over 150,000 people per year are still alive, are not dying from heart disease than 30 years ago. And there are so many examples of this. Look at extreme poverty, those living on less than a dollar 50 per day. In 1966, and this statistic is mind-blowing, half the world was living in extreme poverty. Less than 70 years later, that 50% figure is down to 9%. Stop the show there. I don’t know if there’s anything else that we need to hear to be optimistic about the future and grateful for than that reduction in extreme poverty across the world.
How about human progress from a labor standpoint? The same hours of work that bought one pound of beef in the 16 hundreds now buys you 10 and a half pounds of beef. The price of gasoline certainly since 1980 when it was a dollar 19 has gone up. Average price now is $3 and 37 cents. You look at that in a vacuum, you may think to yourself, “Wow. Well, I mean, gas is three times higher. That’s terrible in the last 43 years.”
But higher wages plus more fuel efficiency equals a reduction by 54% relative to 1980. Another example of human progress, while outdoor air pollution is worsening in some parts of the developing world, household air pollution deaths are in steep decline. Overall, global air pollution deaths have fallen by 40% since 1990. How about US wages relative to inflation? Since 1990, the US consumer price index has increased 142% while US wages and salaries up 353%.
That’s incredible news. A massive outpacing of inflation by our wages and salaries. If you look at that same consumer price index being up 142% since 1990, let’s take the S&P 500 during that same period since 1990, while the consumer price index is up 142%. And this is staggering, the S&P 500 up over 2000%. Put in a more understandable way, from an inflation standpoint, $1 grew to $2.43, so about $2 and 50 cents, that $1 in the S&P 500 grew to $26.
If you look at annual working hours per worker, the average worker in the year 1870, so we’re going back about 150 years, worked 3000 hours per year, average American worker now, less than 2000 hours per year. You see a lot of that data, which should absolutely renew your sense of optimism and for accomplishing your future goals, they’re going back to 1990, 1960, the 1600s, 1870.
Well, those are very long periods of time with progressive progress, albeit incredible progress, but how difficult it is to maintain that long-term positive focus when multiple times per week we are hit with, “Everything’s terrible and we’re going to shoot your cat with a BB gun.” I believe that knowledge is power and the better you can understand the facts, the truth. And more importantly, it’s ill-advised to bet against human progress.
If you have any questions about your personal finances, investments, retirement planning, income, estate planning, taxes, whatever’s on your mind, visit creativeplanning.com/radio now to speak with a local advisor just like myself or you can call 1-800-CREATIVE. Why not give your wealth a second look? We just had a November to remember. And just as I spoke of, you may have even missed it because it was so good and not worthy of a lot of headlines.
But in years to come, make no mistake, we’ll look back at November of 2023 as one of the strongest months for financial markets in history. The S&P 500 advanced 8.9%, which was its 18th biggest monthly gain since 1950. The Bloomberg US aggregate bond index closed 4.5% higher, which was its best month since May of 1985 and the eighth-best return since inception of the entire index in 1976.
Everything moved higher in November with the exception of crude oil, but even the decline in oil prices was not a true negative unless you’re someone specific to that sector because it provided an additional boost to the rally. As oil prices declined, so did inflation fears, interest rates and expectations of any further tightening from the Fed. So these were favorable trends and were the driving forces to one of the best months we as investors have ever seen.
Our Chief Market Strategist, Charlie Bilello, posted some great charts that I will share on the radio page of our website at creativeplanning.com/radio if you’d like to view these in detail. One of the things Charlie talked about was why the 60/40 portfolio is not dead or maybe it’s back from the dead. If you were reading the headlines even from the end of October on MarketWatch, the headline was, “We’re not in Kansas anymore: Why the 60/40 portfolio might be dead, and what to do now.”
Well, thank you MarketWatch for the content. You were right on queue because the US 60/40 portfolio gained 7.3% in November alone, which was get this, it’s second-best month in the past 30 years trailing. By the way, if you’re wondering only April of 2020 as we came screaming off the bottom during the pandemic. And driving that move higher in stocks and bonds was a sharp decline in interest rates.
The current 10-year treasury yield of between four and four and a quarter is about three quarters of a percent below its October closing high where it was just below 5%. Also, two year yields have fallen about two thirds of a percent from 5.19 to around four and a half, and of course this historic stock market rally during November didn’t go unnoticed by market participants.
Bears, those bear market enthusiasts, they went back into hibernation. In the primary poll that measures sentiment, bears moved from over 50% to under 20% during the month of November. So even those negative Nellys, get this cat out of here, even they were like, “Oh yeah, yep, probably a bad bet for this month. November’s crushing us.” This is now the lowest bearish percentage since the first week of January in 2018, which came right after 2017’s record 12 straight-up months.
Well, what turned their negative sentiment? Rising prices. The S&P 500 gained 8.9% in November, which was, as I mentioned, one of its best months ever. And I find this so interesting and counterintuitive that investors seem to get much more positive and excited about the future when prices are rapidly rising, which is the exact opposite of how we think and behave within any other context of shopping.
Prices are way up, I’m enthused to get to the store. But that’s what we do with the market. And in fact, when you look at the Dow, it closed out November at a new total return high including dividends increasing 181% over the last decade, which of course 10.9% annualized. Charlie has a great chart showing all Dow participants, and the top four stocks in the index not surprising are of the technology sector. Salesforce up nearly a hundred percent, Intel over 70, Microsoft nearly 60 and Apple up just under 50%.
2023 has been a phenomenal year for both stocks and bonds with November being a historic month. Good news, heck, even great news can go unnoticed if we’re not careful. Many parents have an estate plan that accounts for minor children. That’s typical, but what happens when your child is no longer a child but rather an adult?
What needs to change? And to add an additional layer, what does that look like if that new adult has special needs? To discuss this further, I’m joined now by Creative Planning attorney Jerry Bell, who has dedicated his career as a lawyer to helping special needs families navigate these unchartered waters. Jerry, thank you so much for returning to Rethink Your Money.
Jerry Bell: Thank you, John. Appreciate it. I look forward to being here again. Enjoy your show.
John: Well, I appreciate that. Let’s kick this off at the top. What important planning transitions occur when a child with special needs turns 18?
Jerry: Well, I guess I’ll take a step back on that because when any child turns 18, the wonderful world of being an adult for most states comes into play, but it’s more complicated in the case of a special needs child because most of the time, not all the time, but most of the time, they need more help than the typical 18-year-old.
John: And even the typical 18-year old, in some cases need a lot of help.
Jerry: They need a lot of help, but they don’t think so. We all have our 18-year-old going on 25.
Jerry: So special needs parents get surprised by it too because they become very comfortable as much as they can be with the situation they have and then all of a sudden just due to the laws, it’s not the same as it used to be. Things like, let’s just start with the basics, decision making that can vary a lot by the child.
If you have a high functioning autistic child, let’s say, or a high functioning down syndrome child, they can probably make some decisions, but a lot of times they have no ability to make decisions, but they still turned 18 and from a legal perspective, we’re faced with the issue of, “Oh, what do we do to deal with that at this point in time?”
John: Let me pause there for a moment. How do you balance that child that you referenced who is capable of making some decisions but has certain special needs that prevent them from effectively making all decisions?
Jerry: Good thought. It’s challenging because the overriding thought, “Oh, I got to get a guardianship,” well, that’s not always true. There are certainly special needs children that become an adult at 18 that need a guardianship to protect them or to make their decisions, but that guardianship also takes away all their freedoms.
A lot of parents are really concerned about that because their child, perhaps a higher functioning child can make decisions. They just might need some level of help, if you will. So at one, least restrictive would be just a simple power of attorney, which whether your child has special needs or not, you should have a power of attorney in place to help them.
Jerry: And at the other extreme would be more of a guardianship. And in between there’s a movement around supported decision-making that tries to play a hybrid role in there. But every family has to make that decision on, “Okay, now that they’re 18, what do I need to do to help my child,” which may be different than your child.
Jerry: “In the decision making and to protect them or do I need to protect them?”
John: There was an entire Netflix documentary around freeing Britney Spears. I’m sure as an estate attorney you were well aware, but [inaudible 00:15:45] basically took over full authority through that conservatorship and then she had to fight it saying, “I can make decisions for myself.” That’s obviously a high profile scenario, but maybe difficult conversations and decisions for not only the family but the courts to decide who ultimately can make those decisions.
Jerry: No doubt about it. And most judges and of course, this goes through the probate court, but most judges always ask us as attorneys, “Does this 18-year-old really need a guardianship?” Because they do have that concern. It’s not a template, we just approve them. They want to make sure that they’re doing the right thing for that now young adult that’s turned 18.
And I haven’t had this happen in my practice, but I imagine there are some situations where you have the overbearing parent that is really trying to overprotect their child perhaps that maybe they could do it different than a guardianship, but they chose not to.
Britney Spears clearly was in that vein, but it’s a fundamental thing for a family where they need to talk to someone who knows their options. And I always make sure the client knows, “It’s your decision.” I get a little concerned when the parent, “Oh, I don’t ever want to take away my child’s freedoms,” but their child clearly needs support in decision making and you get concerned about those situations where the child may be exposed a little bit because, sorry, there are bad people out there too.
John: Yeah, there absolutely are. So they turn 18. You’ve got to figure out from a decision-making standpoint. How about government benefits and coordinating that? What changes when they turn 18?
Jerry: Well, it creates a bunch of confusion for most families and most households, but when they turn 18, prior to that, the child fell under their parents’ assets and their parents’ income. They used the term that they were deemed with their parents’ situation. But at age 18, the government looks at them and the Social Security administration looks at them as their assets and their income. So a child that perhaps could not qualify for let’s say supplemental security income or SSI prior to 18, all of a sudden could qualify for that. and-
Jerry: … a lot of it’s awareness. And sorry, government benefits has never been easy to define and to help people understand sometimes.
John: To be clear, Jerry, you’re referencing a scenario where the parents, their household income is too high, they’re making too much money, but once that child is an adult now, they don’t have that income and can qualify for certain low income or income related, I should say, benefits that they otherwise made too much money for as a family.
Jerry: Absolutely. So you could have happy family, two incomes, plenty of income, plenty of assets. Prior to 18, there’s no way they were going to qualify for social security typically.
Jerry: After 18, that child who’s now an adult, well, they’re not able to work let’s say, they’re not able to produce any income, they are clearly disabled in the eyes of the Social Security Administration, so they could qualify for SSI as an example. Every family has to decide whether they want to file for that, but that happens all the time and most of the time the family does file for that because they end up turning around and using that as a rent structure or some kind of way of helping pay for the food and other things they need for the shelter.
John: Yeah, that makes sense. I’m speaking with Creative Planning attorney Jerry Bell about special needs planning. What happens Jerry with a child’s education programs after they hit age 18?
Jerry: That’s an area that really varies by location because most of the time, my wife is actually a special education teacher, but a lot of public school programs, they have a special education program. At the elementary level.
Jerry: Middle school. And they try to streamline that in with high school as much as they can. But it’s pretty structured and it’s there to help that individual child learn in the way that they can. But they graduate just like any other student graduates. Now, some school systems may have a post high school program that’s built around life skills and things of that nature, but that structured education program that mom and dad were used to becomes a lot less structured as they get older.
Some may end up going to college in some level, highly functioning people could or they may go to a trade school. But the worst scenario is the disabled or special needs child has nowhere to go and then they become the video game junkie or they become someone that has no place to go. And it’s really sad that transition phase from the high school education into the real world because there’s a lot of businesses that probably could hire someone in some capacity and we’ve all seen that, but they’re not usually overflowing with a lot of opportunities for that special needs child.
So those transition years from 18 into the early twenties are very unstructured and it’s kind of a frontier and an unexplored area for most parents. It’s a problem area to be honest with you. I’m going to be upfront that we as society have to learn to deal with for the best interest of that new young adult.
John: Transitioning over to changes with an estate plan. I think oftentimes parents are pretty diligent in building out their estate plan, especially when they have a special needs child while they’re in the home, they hit 18. What do they need to be aware of maybe specifically pertaining to special needs trusts once that child becomes an adult?
Jerry: Well, it’s interesting that you bring that up. I always look at 18 as kind of a wake-up call for that family. Because special needs trust, they start to understand that because perhaps they do file for government benefits for their child, they get those successfully and then it hits them, “Oh, we’re not going to live forever, whatever we’re going to leave to our child with special needs, now an adult with special needs, we need to make sure that doesn’t disqualify him or her from that government benefit we just worked hard to get.” But some parents of special needs trusts don’t make it to when their child turns 18.
Jerry: So, our challenge as advisors is we have to get through to those parents when their child is not even 18 yet.
Jerry: That our day of glory can come before our child reaches 18 as well. And so ideally they build that special needs trust before then, but it seems like at 18 it’s a wake-up call for the typical family. They do have to think about guardianship because you can find a corporate trustee to help with the special needs trust after you’re gone.
John: If you have a special needs situation in your family that you’re uncertain whether it’s set up correctly and you’re not sure where to turn, you can speak with Jerry and his team here at Creative Planning by visiting creativeplanning.com/radio. I have one other question for you, Jerry, before I let you go. You said that your wife is a special education teacher. And I know what you do all day long, I just explained that. Was that something that when you met way back in the day that you were both passionate about?
Jerry: That’s funny. No, we weren’t even in that discipline, John. She evolved into teaching and found that as her calling in particular special education. I always joke with her, I give her plenty of practice at home on that as well. And I wasn’t an attorney, I was an engineer involved into technical sales, but I wanted to help people and that gets overused sometimes, but I truly believe that, and I went back to law school for that.
And now I have found a lot of joy, all kinds of help, but a special needs family, they need it as much as anybody. And one thing I’ll add on to what you said there, we are trying hard and I think others in the industry as well, to increase the education whether it’s webinars, whether it’s your radio show or print material because people are very hungry for education on what they should do with special needs or how they can help their niece or nephew and things of that nature, but we just evolved into it and the good Lord put us in place where we can make a difference.
John: Well, your wife and you are helping a lot of people. You’re an inspiration to me and I think to a lot of others here at Creative Planning in terms of your heart and really wanting to make a difference and you are absolutely doing that. So appreciate you spending a little time with me and have a great day, Jerry.
Jerry: Thank you, John.
John: Well, recently National Radio host Dave Ramsey recommended that retirees invest 100% of their assets in equities, in the stock market, from which they would withdraw 8% of their portfolios starting value every year with each year’s expenditures adjusted for inflation. Let me give you an example here.
If inflation’s at 3%, a retiree with a $1 million portfolio would take $80,000 in withdrawals the first year. The next year because of that inflation rate, it would go to 82,400/ in year three, they’d take $84,872 and so forth. Let me pause here because I have all sorts of problems with this. It’s just wretched terrible advice, but I want to preface that by saying Dave Ramsey’s probably helped more people than anyone else in our country manage a budget and to live within their means and get out of debt.
His Financial Peace course has changed countless lives and I appreciate his contribution to financial progress. He’s done a ton of good. But with that said, I have to dispel this myth. Because if you listen to this, you are putting yourself in harm’s way, no question about it. Significant research has been done by the likes of David Blanchett, Michael Fink and Wade Pfau regarding withdrawal rates.
And they wrote a great response that I’m going to quote, and these are people with PhDs on the subject who have dedicated hundreds or thousands of hours to researching this specific topic. The consensus amongst us certified financial planners is that a safe withdrawal rate is around 4% with the caveat of what are your legacy priorities? Are you willing to lower withdrawals during bad markets? What’s your overall risk tolerance? What’s your longevity?
I mean, do you think you’re going to live to a hundred or are you going to live to 80? And a host of other factors, but certainly it may be 5.1, it may be 3.6, it might be 4.8, but we’re in the ballpark there. No one, and I mean no one that I’m aware of has done research that would validate an 8% withdrawal rate. Here are a few Ramsey notes from his show and I quote, “There’s all these goobers out there that have always put this 4% crap in the market.
It’s too low because it’s not realistic. You don’t need to live on 4% of your money for your nest egg to survive. And what it sets up is this guy doesn’t think he has enough money because stupid people put out low withdrawal rates. You put that out into the dag gun community and then people go, ‘I don’t have enough money. It’s hopeless. I’ll never be able to save enough to retire.’ A million dollars should be able to create an $80,000 income for you boys and girls perpetually forever.
You should be able to pull $80,000 forever. So when you tell people that a million dollars creates $40,000 of income, you go, ‘Oh, I’ve got to have two million and I can’t make that,’ then the system doesn’t work. So what you’re doing with this bogus math is you’re stealing people’s hope. That’s why I’m pissed about it,” end quote. Ramsey’s math is pretty simple as pointed out by an article in ThinkAdvisor.
If you’re making 12% in good mutual funds as he promotes and inflation the last 80 years has averaged 4%, well, you make 12, you need to leave 4% in there for average inflation raises, you’re great. That leaves you 8% to take out, but unfortunately the math is wrong. There clearly is not a grasp here of the difference between a geometric return, which is what you earn in an investment and the arithmetic return, which is the simple average.
Now, I know I’m nerding out a little bit, but stick with me here because it’s important. I don’t want you to run out of money in retirement. He also doesn’t appreciate how a 100% stock portfolio, which is what he is promoting, increases the volatility from year to year, which is referred to as sequence of returns. A retiree who listened to Ramsey and followed this 8% withdrawal rule while holding a four fund stock portfolio in the two thousands would’ve run out of money, get this, in as little as 13 years.
That’s not opinion, that’s a fact. Keep in mind that an average 12% return doesn’t mean that your portfolio will grow by 12% every single year. If a million dollars invested in stocks falls by 20%, well you now have 800 grand. Your million dollars is down to 800,000. If it rises the next year by 25%, you’re back up to one million.
Your average return. Think about this, of negative 20 the first year and positive 25 is a positive two point a half percent. That makes sense, right? You’re up 5% divide it by two years, you’ve made two point a half percent per year. But that’s weird because you still only have exactly $1 million. See, your actual return was zero, and this is the difference between arithmetic returns, the two point a half percent and geometric returns, which totaled zero.
And here’s the key. You can’t spend arithmetic returns. They’re subject to the tyranny of lower geometric returns. And the more volatile your investment, the bigger that gap will be between arithmetic and geometric returns. So back to Dave Ramsey. He’s suggesting that you hold a hundred percent stock portfolio and that’ll safely produce $80,000 a year of spending from your $1 million nest egg. And he says, “Well, you can’t hold bonds because it simply won’t give you a high enough return.”
But as mentioned, that subjects you to significant sequence of returns risk. And let me give you some hard numbers surrounding this. If you divide your savings equally among four American funds that match Dave’s allocation, you’d have the AMCAP fund, The Growth Fund of America, The Investment Company of America, and The New Perspective Fund.
And these funds, by the way, have performed extremely well since their inception. On the aggregate, they provided investors with a 14.3% arithmetic return and a 12.6% geometric return. This is great news. Right? If you’re an investor and you’re wanting to take more money in retirement and not run out of money, this is fantastic.
Look at those returns. Imagine it’s December of 2000. Stocks have had a phenomenal run between 1995 and 2000. That four fund portfolio rose between 16 and 31 percent every single year. 2000 was a slow year, returns only rose by 2.9%. But you figure that the funds will continue to grow by that “Conservative,” and I’m using air quotes, 12% or so in the future just as they have in the past on average.
Well, you were wrong. I mean, let’s look at how long could you have withdrawn $80,000 per year plus inflation. Fortunately, some of these super nerds, as Dave called them, like the PhDs did the research and ran the math. In 2001, your investments slipped by 7.5% and you took out your $80,000. So now your million dollars is down to 850 grand. Second year of the portfolio, it falls by 17.8%.
Now, fortunately, inflation’s modest, but you need to withdraw that year $81,362 to maintain your same standard of living. What’s your balance at the end of 2002? 632,000. In year three, thank you, it rebalanced by 31.4%. So you’re breathing a sigh of relief. You’re like, “Oh man, that got scary there for a while. It was under 700,000 bucks.” And your average return now is positive by 2% a year, but unfortunately you have a lot less capital to grow.
So your ending balance at the end of 2003 is still only $722,000. Next four years are great. Your average annual return is around that 12% you’ve been hoping for, but by 2007, you’re taking out $91,000 per year to account for inflation. You see, when you get a bad sequence of returns early in retirement, even if you get plenty of great returns in subsequent years, you can’t bail yourself out because 12% of a $650,000 balance as Pfau points out is just $78,000 and you’re withdrawing over 90.
You’re on the wrong side of the bell curve. Then of course, what happened in 2008? That four fund portfolio falls by 37.3% and at the end of that year you’re down to $346,000. Even after they recover in 2009, back up 34.6%, you still only have $336,000. And here’s what’s wild, and I could see where it would be confusing, your average return for the first nine years after retirement, it’s lower than expected, but it’s not horrible. It’s a positive 5.4% per year.
But you now need to take out more than a hundred grand a year to maintain that same standard of living. And that means that somewhere in the middle of 2013, your nest egg falls to zero. You’re out of money. What was your average return from 2001 through 2013? A completely normal 8.3%.
But in this suggested strategy by Dave Ramsey, the actual cost of maintaining your standard of living would eventually grow to $3 million by the end of 2022. So in other words, you would’ve needed $3 million to maintain an 8% rule for just 22 years. That’s how wrong this is. That’s how dangerously wrong it is. And I know I’ve spent a lot of time on this, but Dave Ramsey has a big platform. He’s on many radio stations that Rethink Your Money airs on.
You may have just listened to Dave before me. And the number one concern in almost every financial survey for retirees is ensuring that they do not run out of money. This type of 8% withdrawal strategy is one of the easiest ways to run yourself out of money. And so while Ramsey’s advice might be a little less depressing than what I’m sharing with you, it’s not reality.
The idea that an investor would move into retirement with no bonds to help buffer down markets assuming that they can safely take out $80,000 a year for every one million they have saved is something that you must rethink. Dave Ramsey has been quoted as saying, “Change is painful. “And I hope that when it comes to retirement spending and investing, he’s willing to change his mind about the advice he’s been providing.
If you are within five years of retirement or you’re in retirement and you want to better understand exactly how much you can take out in retirement, how that aligns with your investment strategy to ensure that you not only don’t run out of money, but that you minimize taxes to the fullest legal extent possible. We’ve been helping families for 40 years here at Creative Planning.
We are independent fiduciaries acting in your best interest and you’ll be sold nothing when you meet with a wealth manager just like myself. Visit creativeplanning.com/radio now to schedule your meeting or you can call us at 1-800-CREATIVE. Why not give your wealth a second? Look, I have one other piece of common wisdom that I’d like us to rethink together, and that is that your portfolio is safer when you are more defensive and pessimistic about the market.
Frankly, it’s hard to be a pessimistic, long-term investor. The two don’t mesh because to benefit from the stock market, you have to be actively participating in it. Even during down markets which occur about one out of every four years. I mean, the typical correction, which happens every year or two means the market will be down about 14% off of its all-time highs.
You’ll have a bear market every four or five years. You’ll have a crash every five or 10 years. And so to remain invested during countless periods of negative sentiment and negative returns in the markets requires a level of optimism. And when I think about the thousands of investor meetings that I’ve had personally as a wealth manager, it’s easily, and I’m just estimating, but it’s easily 20 to one in terms of investors who have significantly hurt themselves as a result of being too conservative when compared to those who took far too much risk, made some crazy bet in submarine their financial plan.
I think the perception is that being too risky is the biggest threat. No, I would argue that for most retirees who are 65 and may still have a 35 or 40 year time horizon that they need the money to last for, the bigger risk is taking a posture of pessimism and having way too much in cash or trying to time the market.
Creative Planning Chief Market Strategist, Charlie Bilello, posted a chart to his X account that provides a brilliant visual to this concept in the cost of bad timing. And this is posted to the radio page of our website if you’d like to view it for yourself or you can follow him at Charlie Bilello on X. The chart looks at just 2023, this year alone, if you’ve been fully invested in the S&P 500, you’re up around 20%. But if you missed just the five best days of all of 2023, you’re only up 8%.
If you missed the 10 best days, you’re not up around 20%, you are down 1%. If you missed the 20 best days because you were pessimistic and trying to time the market and trying to protect your capital, you’re down 14%. And if you missed the 30 best days, but we’re invested the entire rest of the year, you’re down 23% in 2023 instead of being up nearly 20%. So here’s what you need to do.
I say it almost every week, tune out the media, check your returns far less often, and trust a good fiduciary advisor that will provide you with objective advice. And so while it may seem intuitive that your portfolio is going to be safer, if you’re more pessimistic, that’s conventional wisdom that you need to rethink. It’s time for listener questions. And as always, one of my producers, Lauren is here to read those. Hey Lauren, who do we have up first?
Lauren Newman: Hi, John. This week I’m going to start off with Michael. He’s written in and says, “I’ve accumulated a sizable balance in my HSA, but I’m not clear on exactly what I can use it on or if there’s a penalty if I use it too early. Can you provide some clarity on how this works?”
John: Well, it’s a really good question. Both health savings accounts, HSAs and flexible spending accounts, FSAs, do provide a tax advantaged way to save for those qualified medical expenses. But there are some big differences between the two. And I will post an article to the radio page of our website by Creative Planning Scott McKay, where he addressed the similarities and differences in a lot of detail. But in the meantime, here’s my overview.
The funds from both of these types of accounts can later be withdrawn free of any federal income tax to pay for. The key here is qualified healthcare costs, so medical, vision, dental care, prescription drugs, over the counter medications. Both HSAs and FSAs are typically offered by employers as part of their employee medical benefits. But neither of these, assuming that you’re using them for qualified medical expenses, are going to charge you a penalty for using them too early.
So you don’t need to worry about that. But the HSA is only offered to those with a high deductible health insurance plan as their primary insurance. Where flexible spending accounts are a workplace benefit and it’s offered by your employer and you just have to enroll in it during the open enrollment period. Contribution amounts are different. HSAs are higher, 8,300 per family or $4,150 per individual.
There’s also a thousand dollars catch up contribution for those age 55 and older in 2024. And the limit for FSAs is much lower, 3,200 per individual. When you look at the rollover rules, contributions can be rolled over from one year to the next with HSAs and there’s no deadline to withdraw the assets, which makes them a really good way to save for just long-term healthcare expenses, in particular, those that come up in retirement.
But when it comes to FSAs, consider that any unspent funds exceeding that $640 are going to be forfeited at the end of the year. Another key difference is portability. HSAs are owned by you, take them wherever you want. FSAs are owned by your employer, you leave your employer, you forfeit the leftover funds. So either can be really useful and tax advantage to pay for medical costs. But think of it this way, if you anticipate lower healthcare expenses in the current year and you wish to save for future expenses and HSA can be really valuable, you can invest the money, you can bank it for decades.
On the other hand, if you’re just looking to offset large medical expenses early in a given year and FSA may be just as good of an option. If you don’t have access to both, just pick whichever one your employer offers and save it that way. Thank you for that question, Michael. And if you have questions, submit them just as Michael did by emailing firstname.lastname@example.org. All right, Lauren, who’s next?
Lauren: Well, I’ve got James from Raleigh, North Carolina and he says, “I recently inherited my parents’ estate, but I’m not interested in being the trustee responsible for overseeing sales and management. What are my options in this situation?”
John: Well, James, your situation is not all that uncommon. Trustees resign for personal reasons like health issues or changes in their circumstances. Sometimes there’s conflicts of interest, sometimes they just don’t want to do it. It’s a huge hassle. There’s a lot going on. So I’m not sure exactly your situation, but what you’re looking to do is certainly not unheard of.
As a side note, there’s also involuntary resignation where a court or co-trustees remove the primary trustee due to misconduct or incapacity or other valid reasons. Here’s what I advise. You prepare a formal written resignation letter that includes the effective date of your resignation, the reason you’re resigning, and any other relevant information about the trusts administration.
Submit that resignation letter to the appropriate parties. That would be the trusts beneficiaries, co-trustees and or the trust’s attorney. Then inform all the beneficiaries and co-trustees and if required, which it is in some cases, you will need court approval. But most importantly, speak with an attorney there in North Carolina and they can offer specific advice for your situation. If you’re not sure where to turn, you can request to meet with us at Creative Planning by going to creativeplanning.com/radio or by calling 1-800-CREATIVE. All right, Lauren, next question.
Lauren: Next, let’s hear from Bridget from Tucson, Arizona. She writes, “About five years ago, my husband and I purchased a timeshare and we are not getting enough use on it. What’s the best way to get out of a timeshare?”
John: Oh, the timeshare, the gift that just keeps on giving. And there’s one thing I have learned, and by the way, I know some of you listening, you have a timeshare, you have a few of them, you actually really like them. So I’m definitely over generalizing. I realize that, but the hundreds of people that I have met with as a financial advisor who do not like their timeshare and wish they had never bought it is actually staggering.
So if you learn anything from today, when you’re in that high pressure pitch, really think it through and make sure you understand the fine print. Here are your options in no particular order. You could resell it and there are plenty of resale companies that help with this. Now keep in mind on the secondary market, you’ll probably not get what you initially invested. You may not even be able to get rid of it, and that industry has a ton of bad actors and there are a lot of scams.
So be careful reading the reviews of that resale company to make sure it’s legit. Another consideration would be renting out your timeshare to cover some of the costs. That’s going to be subjected though to the specific terms of your timeshare agreement. Some don’t allow for that. You could also consider donating it. Some charitable organizations accept timeshare donations and then of course they turn around and try to sell it just as I referenced.
But be cautious. Research the organization thoroughly to again, ensure that it’s not a giant scam. You could also transfer or gift the timeshare. “Surprise, look in your stocking. I just gave you a timeshare. Now all you got to do is pay all the ongoing fees of $7,000 a year,” or whatever it is.
“Merry Christmas. All right. We’ll see you Thanksgiving next year.” But before taking any action, I would carefully review your timeshare contract, have an attorney review it that’s specialized in timeshares, and make sure to research the laws in your specific jurisdiction there in Arizona. If you’d like to speak with my team here in Arizona, you can do so by reaching out directly on the website. All right, Lauren, next question.
Lauren: Finally, I’ve got Bruce. “I’m 80 years old young, and I’m writing to figure out if it makes more sense in my plan to sell my current home in Indiana and keep renting out in Arizona, or if it would be better to sell my Indiana home and use those funds towards a mortgage out in Arizona.
John: Well, Bruce, I like the way you put that, “80 years young.” You’re emailing in questions to a radio show, so I can tell you’re still on top of things and that’s great. I’m a fan though for everyone, whether in retirement or 35 years old to use their money in a way to simplify their lives. I’m not sure between 80 and a hundred years old if you’re going to want to be a homeowner, certainly not a landlord. So how about a third option? Consider selling the Indiana home so that you’re not dealing with a renter.
Invest those proceeds in liquid investments that are consistent with your goals and your overall financial plan, your tax strategy, and just continue renting in Arizona. Obviously there are other factors around primary residences. Maybe you want to make improvements to the current house and you don’t really like the rental property layout, et cetera. But assuming you’re neutral on it, really good time to rent relative to buying, especially in your eighties.
In fact, Chief Market Strategist Charlie Bilello posted a chart breaking down that buying a home right now is 52% more expensive than renting, which is the highest premium on record. It’s worth noting the premium peaked at 33% during the last housing bubble in 2006. So in short, the discount you’re receiving by renting relative to what it would cost to buy leads me to think with the limited information that I have from your question, that continuing to rent is probably the answer regardless of whether you choose to sell the house out in Indiana.
Well, thank you for those questions. If you’d like to submit a question for me to answer on the air, fire them over to email@example.com. Well, a lot was written the last couple of weeks about the late great Charlie Munger. And while he was known for being a billionaire and Warren Buffett’s right-hand man for decades, his life was about way more than just money.
In fact, he was a great example of what to do in the midst of difficult times and those moments of adversity and hardship in life that we all encounter. And Munger was no different. In fact, two of his background stories show the extreme adversity that he experienced in his life. In a lot of ways he was a great example of how to respond. Munger had a son who died of leukemia. It was a devastating thing for Charlie, obviously. Munger said, “I can’t imagine any experience in life worse than losing a child inch by inch.”
And the second story about Charlie Munger is that he was blind in one eye and he’s blind in that eye because of a very straightforward procedure that should not have blinded him but went terribly wrong. So you think about this, he’s an incredibly well-read guy. He’s reading all the time, loves to read, and he only has one eye to read from. He didn’t sue the doctor, he didn’t sue the hospital, he didn’t complain about it.
In fact, he talked very little about it. Regarding misery and adversity Munger said, “It’s necessary to accommodate a lot of failure and because no matter how able you are, you’re going to have headwinds and troubles. If a person just keeps going on the theory that life is full of vicissitudes and just does the right-thinking and follows the right values, it should work out well in the end. So I would say don’t be discouraged by a few reverses.”
He continued on that, “You should expect hard times and because of that remain with proper expectations.” Munger said, “It’s much more fun going through life constantly exceeding your expectations instead of being disappointed. So the secret of human felicity is not vast ambition, it’s low expectation.” And as I conclude, here are six more quotes on the secret to a happy life according to the late Charlie Munger.
“You don’t have a lot of envy. You don’t have a lot of resentment. You don’t overspend your income. You stay cheerful in spite of your troubles. You deal with reliable people and you do what you’re supposed to do.” All these simple rules work so well to make your life better. May the spirit and legacy of Charlie Munger be a reminder to you and I as we approach and overcome the inevitable challenges that we’ll face. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
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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 1st, 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, 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’d 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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