If you’re in your 40s or 50s, you’re part of the ever-growing sandwich generation — which means you may find yourself facing significant financial challenges, such as saving for retirement, paying for your children’s college educations and helping to cover the medical and/or senior living expenses of aging parents. This week, John discusses how to juggle these priorities and take steps toward a more secure financial future.
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. How to Talk with Your Kids about Money, How to talk with your Aging Parents About money? As we gather together this holiday season, we’ll also examine the biggest factor in whether you’ll have financial success as well as listener questions and answers. Now, join me as I help you rethink your money.
I don’t want to start by talking NFL here for a minute. There are games all weekend. My wife Brittany, she couldn’t believe, “Wait, they have NFL games on Christmas Day? What’s up with that?” But as I watched the NFL’s regular season come to a close, I can’t help but see a striking similarity between three of this year’s most disappointing teams, certainly relative to their expectations, they’ve got expensive declining quarterbacks who eat up their team salary cap and it makes it very difficult to win. Every single team is restricted to a salary cap and this year that’s $208.2 million and three of the seven most expensive quarterbacks when you look at average salary are the packers, Aaron Rodgers, who clocks in number one at $50.3 million. The Cardinals quarterback, Kyler Murray, who just tore his ACL at $46.1 million. Number seven on the list is the Rams quarterback, Matthew Stafford at $40 million per year. There are 53 players on the Packers active roster and one quarterback is gobbling up 25% of the entire budget.
That individual decision has a huge impact on the rest of the organization. Everyone suffers as a result of that contract. While you and I are not NFL quarterbacks, the same principle applies in our lives. Our personal decisions have a ripple effect on our family. If you’re a parent, you realize this quickly, your choices are no longer solely impacting you. It’s the reason why once you’re married and you have a bunch of kids, you don’t accept the invitation to every guy’s golfing weekend in Las Vegas. It sounds fun, but it affects other people. I’m going to pass. I asked my wife the other day if she’d go snowboarding when I took the kids up to ski and she said, “Absolutely not.” I said, “Wait, what are you talking about? That’d be fun.” My wife’s like, “No, absolutely not.” She said, “Because if I get hurt, there are way too many people depending upon me.”
Once again, my wife has the good perspective. I was just looking to snuggle up with her kid list on the chairlift and she was thinking big picture in the decisions that you make with your money are no different. Your personal financial choices impact your entire family. You see, financial planning is really family planning. If you’re married, think about when you first met your spouse. You talk about past relationships and family dynamics and hobbies and hopes and dreams and you start getting more serious and you’re talking about how many kids you want. In fact, in my relationship with my wife Brittany, this is actually where adoption came up. I remember specifically we went through our financial situations, personal balance sheets, what do we have for debt? What do we have in the bank? What do we have in investments?
We were in our young twenties. I was a brand new airline pilot and she was a senior at Arizona State University. I’ll just tell you this, neither one of us was marrying the other person for our money. I’m very confident that she loved me for me because there was certainly nothing there money-wise that would’ve helped me land her. But with that said, here are some other questions that you may or may not have asked or even thought of, if you’re like most people. Are we going to budget for private school, or would we prefer our kids go to public school? I grew up going to private school. My wife went to public school. We felt differently about that and eventually we got on the same page. But that was something that we assumed would be one way.
How much, if any, college costs are you going to pay for your kids? Are young children going to go to daycare while both spouses work? Or is one spouse going to give up their career or put their career on hold while there are young children? Here’s one that my wife and I have discussed. How about post-college? Can a kid come back and live with us, if so, for how long? Are we going to have them pay rent? Are we going to buy our kids a car? Are they going to pay for it themselves or are we going to have them pay for part of it? How about when your kid finishes college? Are you going to continue to pay for their cell phone bill? Are they on some sort of family plan or do you kick them off and say, “Hey, go down there to the AT&T store, Verizon, wherever and go figure it out.”
Health insurance, auto insurance? Who’s paying for it once they’re in college or out of college? What if they don’t want to go to college but they’re still 20? Do we pay for it? Are we willing to lend our children money for a business venture? What? If they have a great idea and they’re willing to pay us interest but they need a loan, are we going to do that? By the way, my suggestion to all clients is if you’re lending your child money, assume that it’s a gift. Now, what I don’t mean is that you shouldn’t hold them to paying you back and expect them to pay you back. But I hope that you would never sever a relationship with one of your children over money. I have seen that sadly before. So my suggestion always is assume that it’s gone. If they pay you back, which would be amazing, and you make some money and they pay your interest, that’s gravy.
But per your financial plan, assume that it’s a gift. How about with estate planning? If you’re a grandparent, do you want your assets to skip your kids and go to the grandchildren? You say, “Wow, my kids are doing well. I’d rather help out the grandchildren.” Well, if so, have you discussed that with your kids? Are they aware of that? Are they comfortable with that? Because maybe your children’s estate plan says they don’t want their kids to get money until they’re 40 and if you passed away in the grandchildren were 30, your kids might not want the grandkids to receive a lump sum per their estate plan. What about if you have aging parents? Have you and your spouse talked about whether you would let them move in with you? Would you be willing to move homes to accommodate that? If you needed a different setup, would you be willing to pay for some of their long-term care costs if their assets were depleted so they didn’t have to move facilities, for example?
These are all real world examples and questions that I see regularly as a wealth manager and frankly, another complication to this, 50% of marriages end in divorce. So in many cases you have two families blending together trying to find unity on these types of questions that they felt differently about in some cases for many years or decades. I love the Ron Blue quote where he said, “Love your kids equally by treating them uniquely.” There is no one size fits all. That’s why personal finance is much more personal than it is finance and money’s intergenerational and the decisions that you make impact many. Let me provide you with three tips for successful family financial planning. Number one, take care of yourself first. As a former airline pilot, I heard it often and if you’ve flown much at all, you know this part of the safety briefing just as well. In the result of a loss of cabin pressure put on your own mask before assisting others.
It doesn’t mean your safety’s more important than your children that are flying with you. It just means that if you pass out first, you certainly aren’t going to be able to help them put their mask on. The same is true with your money. It may feel unnatural, it may feel even selfish as a parent to put yourself ahead of your children, but I’ve seen it far too often when it comes to financial planning. It’s actually better for everyone, including your kids that you make yourself and your financial independence the number one priority. It’s normal and appropriate to want to help your children pay for college and succeed financially. But if doing so means that you are living in their guest room someday, nobody wins.
My second tip for successful family financial planning, identify your values. Notice I didn’t say goals. Goals shift, goals change, goals are circumstantial. Values tend to be more evergreen. The reason I encourage you to do this is because it will help inform the answers to so many of the questions that I shared above. Because although you may want to do it, it doesn’t mean you can for your plan to work. Just because you can do it, doesn’t mean you should. Number three, build a plan for execution. Rather than trying to make all of these things work, how about planning in advance for them? Because a great financial plan that takes into account all of these factors is the building block. It’s the foundation for successful family financial planning. If you have questions, go to creativeplanning.com/radio to request a second opinion and then get back to enjoying your family. I know it’s Christmas, but maybe this is the best gift you can give your family.
Speaking of family financial planning, I have six questions to ask your aging parents about their finances and their legacy goals. I know, you just recoiled when you heard that. You’re like, “Wait, John, you want me to talk to my aging parents here at Christmas time about their finances? How about sex and politics while I’m at it? I mean, what other uncomfortable topics can I talk about?” I get it. I have parents too. I know it can be awkward, but it’s vital that you do have these conversations because as I just mentioned, money is intergenerational and as long as they know you’re coming from a place of care and love, it doesn’t need to ruin Christmas dinner. Okay? Number one, ask them what they’d like to have happen after they pass away. While this might be one of the most difficult conversations you ever have with your parents, it can actually be easier to have while they’re still in good health. You can even add a little levity. “Hey, I don’t expect you to leave anytime soon, but I know we’ve never talked about this.”
Number two, “Are there any causes or charities you wish to support with your legacy?” Some of these, I’m sure if you’re close with your parents, you’ll already know the answers, but you’re just reaffirming. Number three, “Do you have an estate plan in place and does it reflect your current situation?” Basically you’re just asking them, “Have you knocked this out? Is it up to date?” Oh, and another follow up to this. “Where are the documents? If someone needed to access them, where are they?” Next, “Where are your assets located? Where do you bank? Do you have a financial advisor?” I just had the conversation of consolidation this week with a prospective client. They had fragmented accounts all over the place. It would have been a nightmare for anyone in their life to handle had something happen to them.
So if your parents have multiple banks and different brokerage houses holding their assets and different insurance companies, encourage them to consolidate, find a firm like us here at Creative Planning that can help them with their legal needs and estate planning, their tax planning and their tax preparation, their investments, their financial planning, their insurance, because not only theoretically does that help from a strategic and monetary standpoint, but it should simplify their lives and certainly make things much easier to administer. Number five, ask them what their current income sources are and their outgoing expenses. Again, you want to set this up with the understanding that you care about them and you’d like to understand exactly where they’re coming from to ensure that should anything happen to them, their wishes are honored. Lastly, ask your parents how they’ve planned for long-term care and what their wishes are? You may not know that 47% of men and 58% of women over the age of 65 will require some type of long-term care support.
Please understand this list of questions isn’t meant to be completed all over Christmas. You don’t need to just dump all of this on them, but instead, this should be a work in progress type of conversation where you are respecting their privacy, respecting them in terms of their comfort level with what they’re willing to share. Most importantly, you start by asking the question, “How can we help? How can we support you in this season of life? We love you. We care about you. We have your best interest in mind and we don’t want you to have to go about this alone.” If you have any other questions regarding family financial planning, whether it be taxes, estate or investment planning specifically, maybe all three, we here at Creative Planning are happy to help in any way we can to improve the lives of you and your family. When we come back, I’ll share with you 10 simple ways to teach your children about money as well as my conversation with estate planning attorney, Annie Rogers. That more ahead on the show.
Announcer: You’ve worked hard for decades to build your wealth, but if you’re like many of us, it’s not enough to simply grow your assets. You also want to ensure that when you leave this world, your money goes to your loved ones and the cause is most important to you. That’s why estate planning is a vital part of any financial plan. At Creative Planning our wealth managers work with in-house attorneys to integrate your long-term wishes with your financial plan, maximizing your legacy through tax smart investing and distribution strategies. If you don’t have an estate plan or haven’t had yours reviewed in the last year, go to creativeplanning.com/radionow to schedule a free review meeting with the team of credentialed specialists on your side. You can help ensure your wishes are carried out swiftly and privately without the messiness of a probate process that could cause undue burden on your loved ones. Don’t leave your legacy to chance. Go to creativeplanning.com/radionow to meet with our team. That’s creativeplanning.com/radio.
Now, back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: Well, I am being joined by Annie Rogers here on this special Christmas show. She’s an estate planning attorney here at Creative Planning and one of my go-to’s when it comes to family financial planning. So thank you for joining us today, Annie and Merry Christmas.
Annie Rogers: Nice to be here.
John: We’re going to talk about the sandwich generation here today. So Annie, who are we referencing?
Annie: So the sandwich generation includes individuals that are usually in their forties and fifties that still have families of their own that they’re caring for, but also have aging parents or grandparents that they’re helping financially or emotionally or physically in they’re daily life. So they’re kind of stretched thin because they got to go in both ways.
John: I’m part of the sandwich generation. Seven kids at home and caring for an aging parent.
Annie: Me too.
John: That now needs some care. So I’m interested to hear your thoughts on today’s topic.
Annie: Especially as baby boomers are aging. There’s a huge population that are in that category.
John: There are a lot of others out there just like us. Right?
Annie: Right. I read an article recently that said one in eight Americans are raising a child and caring for an elderly parent, which is pretty profound. That’s a lot of people that this affects.
John: Yeah, absolutely it is. What advice do you have for those trying to balance the responsibilities of caring for a generation above and below?
Annie: This is twofold. So for your kids, I do a lot of healthcare and financial powers of attorney when kids turn 18 and they go off to college. Because once your children become 18, you’re no longer the person who gets to make their healthcare decisions.
John: Clients are always surprised by that.
Annie: Yeah. They’re like, “He’s still living at home.” I’m like, “Right. But he is 18, so unless you have a HIPAA release that says that they can talk to you or you have a financial power of attorney that allows you to access their bank accounts or help them with something financial or help them file their taxes, if they have a job, you’re unable to do that.”
John: So how about for parents, Annie?
Annie: So for parents it’s the same. As your parents get older, maybe having health issues and things like that. They need to make sure they have medical and financial powers of attorney in place. If they’re incapacitated for the financial power of attorney, they can make that immediate. Maybe they still have mental capacity but they’re not getting around very well or they just need a little assistance or have lost a spouse. I mean, I’ve lost my mom. I’m my dad’s immediate power of attorney. He’s 75 and still a practicing pharmacist. He does not need my help. But he had a heart attack in Colorado a couple summers ago and the only time I’ve ever used it was to sign a contract with an air ambulance to help him get home afterwards. He had capacity, but he was in the cardiac ICU. So it just allowed me to facilitate that.
I joke with my clients, I use my family a lot as examples when I’m trying to explain these things. He got a lot of miles on his American Express for that flight, but I was able to set it up and he knew I was doing it, but it made life easier for him. But also he had capacity to tell the hospital that I would make healthcare decisions when he was in surgery, but I was calling my paralegal to send me copies of his estate planning documents to make sure I had the right documents in place if he wasn’t able to do that. So obviously, this is what I do, so make sure my family have their stuff in order. But you should do that too. Everybody should make sure that their family members have the right documents in place. The other thing is a will or a trust, do they have beneficiaries on assets? Do they have a will or trust in place that directs what happens to their assets when they pass away, and who is the person who’s going to take care of administering that for them?
Annie: I mean those are sometimes hard conversations to have with your parents. I have clients every day, they’re like, “I don’t think my parents have documents in place.” I said, “Well, this is a really good time to talk to them about it. Because you can say, I just got set up my own documents. Do you guys have these in place?” Kind of start that conversation. Sometimes older people are hesitant to do it, but if you don’t have, especially at incapacity, if you don’t have power of attorney documents in place, you have to go drag your parents into the court to have the court determine them incapacitated and have a guardian or conservator named, which is a lot more difficult and embarrassing and a harbor thing to happen instead of being proactive about it.
John: Well, I can tell you firsthand, I have had clients in the past that are so frugal you probably would’ve given them another heart attack, Annie, when they found out how much you spent on that medical flight.
Annie: Oh, my dad is very frugal and I was like, “Dad, you can afford this. This is why you’ve been saving all these years. We’re doing this.”
John: That’s hilarious. Well, it sounds like you have a lot of both professional and personal experience regarding the sandwich generation conversation. So what other tips do you have regarding caring for aging parents?
Annie: For parents? I think it’s also good even if they’re very private and don’t want to share it with you, them making a list of where they hold all their assets, where do they bang, they bank, do they have life insurance, do they have retirement accounts?
John: Annie, they need our creative planning binder. That’s why we do it. If you’re listening and you’re unaware, our binder has every aspect of your life organized in one place. Tax return, personal balance sheet, financial plan, retirement projections, estate planning documents, insurance documents. For those that don’t work with us. Yeah, I agree.
Annie: Yes, yes. I mean I tell clients this, it’s like an Easter egg hunt. The other thing, and this is something that is always recommended to Creative Planning clients, is to make sure they’ve designated a representative payee with the Social Security Administration because the financial power of attorney doesn’t work for that. So they need to designate a special person who can act on their behalf with Social Security and the event they can’t do that themselves.
John: I’m speaking with estate planning attorney, Annie Rogers. Well, we’ve been talking financial, but how about from an emotional standpoint? The sandwich generation is balancing a lot. There’s no question about that. I mean, aging parents, kids in high school or college may be even younger children. We’re certainly seeing more of that in our clients now that as a society, we’re having kids later in life. Do you have any suggestions for balancing these converging phases of life?
Annie: Setting some boundaries is good when it comes to some of this. If you have siblings trying to spread the love and spread the work.
John: Help one another out a little bit. Maybe divide and conquer.
Annie: Sometimes it falls on one kid. Everybody else is too busy and that one kid is also busy, but they’re the ones who are willing and able to help. So I think making it a family affair and who’s doing what, we all have our strengths and weaknesses. Maybe there’s somebody who’s better to go to doctor’s appointments with the parents and somebody else’s helping with the financial stuff. So I think that’s good. Also taking time for yourself a little bit, if you’re not healthy and taking care of yourself, you can’t take care of anybody else.
John: As I said earlier on the show, financial matters with parents don’t need to be a taboo topic, but rather approach these discussions from a place of care and love and a desire to adhere to their wishes. So my primary tip in all of this would be to have open communication.
Annie: I agree with that. Yeah. The holidays are not a bad time to do that because you’re together as a family. This is a time where I’m doing lots of powers of attorney. There’s probably three main times when that happens with adults, when they hit 18, when they’re getting ready to go off to college or when they’re coming home on Christmas break and their kids have been away for a semester and they’re realizing this would be really helpful. If they have it, they’re going to do this while they’re home.
John: You are speaking my language right now, Annie. I have documents prepped by Creative Planning legal right now for my 21-year-old who’s in the army and is back for Christmas. I have documents that our 19-year-old needs to sign for different things and I’ve had them ready for two months waiting for the holiday when everyone’s back together. So I guess I have to apologize. I’m part of that rush.
John: I’m going to be adding to your team’s workload here at the end of the year, Annie.
Annie: Yeah, because their parents can make sure they have a notary there. They’ll sign all these documents and can ensure they happen.
John: Exactly. I’m not sending legal documents up to Fort Lewis where they’re almost certain to get lost with my 21-year-old and they’re definitely not going to be notarized.
Annie: Right. So that’s very smart. It’s a good time. As a side note, it’s also really important for us to make sure we’re saving so that we don’t burden our own children.
John: Well, great advice, Annie. Merry Christmas, and thank you so much for joining us here today on Rethink Your Money.
Annie: Yeah, thank you.
John: I want to stay on the topic of the sandwich generation. We’ve talked about questions to ask your aging parents. Now let’s transition over to 10 simple ways to teach your children about money. Bob Harris, an attorney here at Creative Planning and a certified financial planner, wrote an article that I’ll post to the radio page of our website where he wrote about how to make learning and saving in investing more fun for your kids. Financial legend and Gopher Hunter in Caddyshack extraordinaire Bill Murray said it best when he said, “The best way to teach your kids about taxes is by eating 30% of their ice cream.” While eating your children’s ice cream may not actually be the best way to teach them about money, it is true that learning financial concepts at a young age can really help your children later in life. I’ve seen many of my clients’ relationship with money influenced by childhood memories.
I mean for you, what are your earliest memories about money? Were your parents arguing about money and financial issues? Do you remember saving your allowance to buy a special toy? Everyone has different experiences when it comes to their money, but few of us were formally taught about financial matters as children. Because of that, the challenge becomes that managing money for a lot of adults was based upon things that you just picked up along the way or failed to pick up along the way, unfortunately, and these are important lessons that overlap with so many other aspects of our lives. We’re not our best selves when we are stressed out and much of our stress can come from aspects of our money. So don’t be afraid to talk to your children about money just as you shouldn’t be with your aging parents. What I found with my kids is keep your explanation simple.
Make them relatable to their everyday lives. Listen and observe your children. Pay attention to how they handle money or behave relative to financial matters. With my seven kids, they all are very different. Some have a natural disposition towards saving. Others have a bias to spend every quarter they get the first time the ice cream truck is playing that dang music rolling around the neighborhood. Also, don’t be afraid to ask your children questions. What have they learned? What questions do they have? Remember that money related discussions don’t have to be boring. Find ways to make it fun, engaging, and interactive with your kids. So with that said, here are 10 simple ways to teach your children about money.
Number one, use a clear jar or piggy bank to help them save. It allows them to see their savings grow over time. Number two, foster opportunities for them to earn their own money by paying them an allowance for doing helpful chores around the house or encouraging them to find odd jobs in the neighborhood. This will teach them how to work for their earnings and provides them with a better appreciation of the value of a dollar. Number three, visit your local bank. Take a tour, introduce your kids to the staff, help them pour their change into a change counter. Show them how to use an ATM. Open a savings account for them. Oh, and by the way, don’t forget to grab a sucker on your way out. Number four, take them shopping next time you want to purchase items at a discount. I’m going to leave this to my wife. She loves a good sale, but showing children that there are times where you can buy things at a lower cost on how to save money is valuable.
Number five, play money. Theme board games like Monopoly. Number six, walk around the grocery store, the toy store or the mall and point out products your child knows. You can even turn this into a guessing game to see how close they come on the actual price. Number seven, show them how to write down their financial goals. No matter how big or small, I know it sounds kind of out there, but it’s important that they define their goals and then you revisit those with them often. This will allow you to discuss successes and challenges that even you’ve had as their parent in achieving different financial goals. You don’t need to be specific, you don’t need to share dollar amounts, but relate to them. Number eight, help them establish a budget or spending plan. Talk to them about wants versus needs so that they can prioritize their spending habits. Maybe explain to them what it means to make an impulse buy. Show them that stuff at the front of the grocery store. Yeah, that’s why they have it here, kind of inexpensive and they know people will just grab it on a whim. Don’t do it.
Number nine, read age appropriate books, blogs, and articles related to money. It’s a great way to spend quality time with your children and also help them better understand how money works. Number 10, teach them how to balance a checkbook or read a bank statement. Nowadays, those skills don’t seem as important and they may not need to use those every day with modern technology, but it’s important that you allow them the opportunity to figure things out by trial and error. As you can see, through these fun and simple ways to help teach your children about money, that financial planning extends far more to the rest of our family than maybe we often realize. It’s our responsibility, certainly as parents or as grandparents to help instill some of these positive messages around money with the next generations. When we come back after the break, we’ll reaffirm or rethink the biggest factor in your future riches. That and more ahead on the show.
Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs as our team is structured to cover all areas of your financial life. Why not give your wealth a second luck? Visit creativeplanning.com. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: A very merry Christmas to you and your family. I hope that this holiday has given you a chance to slow down long enough to appreciate all the blessings in your life. The end of the year provides us this nice bookmark really to assess the previous year. This last one has been wild as far as the financial markets are concerned. We’ve had one of the worst stock and bond performance years in several decades. In these moments we are often reminded to evaluate the strategies and the advice that we’ve been given. As I do each and every week, it is time for us to do that together as we play, rethink or reaffirm where I’ll break breakdown common wisdom or a hot take and we’ll decide together if we should rethink or reaffirm it. Our first common wisdom to evaluate is the simpler the financial plan, the better the financial plan.
Well, I think so often we are drawn by the allure of complicated investments and investment strategies under this guise of sophistication. Like if it’s simple, it can’t be sophisticated. I mean, think about the popularity of hedge funds and day trading and complicated annuity strategies trying to time the market. Although generally we’re aware from the data that such strategies and those types of products mostly just serve to transfer wealth from our pockets into Wall Street’s coffers. By the way, the reason for that most complicated strategies also involve high costs. Let’s take the simplest possible investment strategy that you could have ever done the last 30 years. Buy the SMP 500 and shred your statement. I mean, lose your login. So you invest in the 500 largest US stocks and let it do its thing for three decades. That strategy has earned nearly 10% per year for 30 years.
The average investor, according to many recent studies, has earned about half that and in many cases, making things way more complicated while paying higher costs and earning half the return. So consider that for a moment. The simplest, lowest cost strategy that anyone on the planet could have done would have doubled your money every seven years on average for the last three decades. So if we’re rethinking or reaffirming, the simpler the financial plan, the better the financial plan. That is an absolute reaffirm. In fact, here at Creative Planning, we have what’s called a dashboard in our client’s binders. That dashboard serves, well, exactly like what it sounds like. It’s a dashboard that highlights every major category of your financial plan. It’s a snapshot, a cliff note, an overview, a summary, however you want to put it, of the key ingredients to our client’s financial success, what has already been completed, what still needs to be done, what is going to be done by us, as well as what our clients need to take care of on their end?
Carr Richards, an advisor that I respect has been a big proponent and I think even wrote a book on what he calls the One-Page Financial Plan. It’s a similar concept to our dashboard that basically says, “Why make this 250 page complicated spreadsheet driven financial plan that nobody cares about or really looks at or understands?” Let’s just replace that with a one-page plan that hits on goal setting, budgeting, mitigating risk, building wealth, understanding how taxes affect retirement planning. Let’s highlight what needs to get done in those areas, whether we’re on track and then build an investment plan that is well diversified, that’s consistent with your time horizons and that minimizes costs and risk. So if you are feeling right now, like your plan is fragmented, your accounts are all over the place, it stresses you out even thinking about this. I would encourage you, simplify your financial life.
It’ll likely have a more positive impact on your life than even a little bit higher balance in your accounts. Here’s our second piece of common wisdom that we will rethink or reaffirm. The biggest factor on your future riches is how early you start saving. If someone offered to give you a penny a day and double it every single day for a 31-day month or write you a check for $5 million all at once, which would you take? Well, most of us would say, let’s take the $5 million bucks. But if instead you doubled your penny every day at the end of 31 days, you’d have $20 million. Or maybe it’s a 30-day month. We’re not talking December, we’re in November. Still 10 million. That is the power of compounding. You see, so often as investors, we’re focused on our returns, what we earn this quarter. Does that matter? Of course, it does.
But can you control or can I control how aggressively the Fed raises rates? How much fiscal stimulus is pumped in the economy, what inflation rates are at, and how fast they’re slowing? No, but can you control your savings rate? Can you control how early you’re choosing to save? Yes, you can. Now, let’s go back to my doubling penny example. Now, if you started saving later and effectively only had 25 days to compound that penny instead of all 30, you would’ve less than $1 million. Think about compound interest another way. If there were a pond sitting in your backyard and I told you that every day for a month the algae was going to double in size on the pond and on the 30th day at the end of the month, it would be completely covered in algae. How much of the pond was covered in algae on day 29?
Think about that for a moment. How much of the pond was covered with algae one day before the end of the month? Well, the answer is half the pond because it’s doubling every day. You see, in the final day of the month, the entire second half of the pond went from being clearwater to covered in algae. This is the power on the back end of compound interest, which is why you need the 30th day to cover the pond an algea. You need the 30th day to get to the $10 million in the doubling penny example. And so going back to family financial planning, as we have been discussing throughout today’s show, if there’s one thing you can encourage those in your family who are younger than you, kids, grandkids, nieces, nephews, younger siblings, maybe it’s you. Start saving today because that common wisdom that the biggest factor in your future riches is how early you start saving, how quickly you get the money compounding.
Is a resounding reaffirm? If you have a financial plan, but you’re sitting here at Christmas thinking to yourself, “When’s the last time I had a credentialed fiduciary?” Not looking to sell you something, but rather giving you a clear and an understandable breakdown of exactly where you stand with your money. That’s what we’ve been doing since 1983. Here at Creative Planning, we have clients in all 50 states, 75 countries around the world, we are managing or advising on $225 billion. Why not give your wealth a second look by going to creativeplanning.com/radio. That’s creativeplanning.com/radio.
Well, my third and final common wisdom for today that will rethink or reaffirm is that to earn high returns, we need to take high risks. Well, this is kind of an interesting one. Well, let’s start by evaluating the difference between risk and volatility because they’re not at all the same thing but are often used synonymously. Take gambling for example. It’s very high risk. If you go and drop a thousand dollars on red on the rule at wheel, everyone would tell you, “Well, that’s incredibly risky.” But by no means are you expected to earn higher returns by playing that game? I mean, everyone would think you were nuts if you said, “Well, my long-term investment strategy is that I go to Vegas and I play roulette.” It’s so high risk. That’s that’s the best part because I also know that it’s going to achieve really high returns because it’s high risk. Obviously that’s an extreme example, but that’s idiotic. No, you’re not going to achieve higher returns just because it’s higher risk.
Back to risk and volatility risk equals the loss you can’t recover from. Volatility equals knowing your portfolio can go down with the expectation though that it will recover over the long term. Volatility is up and down movement in a stock market that has earned 10% per year on average for the last a hundred years. Past performance, of course, no guarantee of future results. So generally speaking, to earn high returns, you will need to accept certain levels of volatility, right? That’s a fundamental trade-off. If you want your money liquid and safe, you’re in a savings account at the bank, you do not have the opportunity to earn high returns. But if you’re broadly diversified owning various asset categories that move dissimilarly to one another, and you’re willing to accept that there will be years like 2022 where the stock market doesn’t do very well, but if those are dollars in your account that you don’t need to sell anytime soon, history would tell us that 90% of the time over a five-year period, it’ll be higher.
Over a 10-year period, 98% of the time the markets go up. So I would reframe this common wisdom and get a bit more specific that to earn high returns, you are going to need to accept some level of uncertainty, especially over the short term. But swinging for the fences and taking huge risks with one or two stocks like I see people do, can leave you penniless and unfortunately is expected to leave you with uncompensated risk. That’s just taking a bunch of risk and hoping. So to earn high returns, we need to take high risks. No, no, that’s a rethink. You do not need to take high risks. In fact, in my experience meeting with thousands of investors, most who have taken the highest risk have gotten burned and earned much lower returns than a portfolio that would’ve had significantly lower risk. When we come back, my answers to your questions. That and more ahead on the show.
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John: I have to start with a gentleman, I don’t recall his name, who had emailed us radiocreativeplanning.com, which is what you can do as well if you’d like your questions answered. It was a very important financial question, he wanted answered on the air except no, it wasn’t. He said, “Where can I get the giant Santa picture of John and his wife? I can’t find it on your website.” If you missed, last week, I did post a picture of our near 30-foot Santa Claus blowup on our front lawn that we had to cut partly down a tree to actually get to stand up correctly without popping his head off from tree branches. In honor of the fact that it is Christmas right now, we will leave that up. It’s at creativeplanning.com/radio. So thank you for that question. I apologize for not recalling who you were that said that, but it is still out there at creativeplanning.com/radio if you’re still looking for it.
Let’s go to Jennifer and Arizona who said, “How can I better prepare for financial emergencies?” This is a great question because as Mike Tyson once said, “Everybody has a plan until they get punched in the mouth.” That’s the case with our finances, isn’t it? Everything’s working out swimmingly until we have a medical emergency. Everything looks great with our emergency fund until both of our air conditioners go out. Jennifer lives in Arizona, you don’t want that in July. You have to get them fixed. Well, I wasn’t expecting that. Everything looks great with your financial plan until you need to re-roof your house or buy a new car or get two kids through college in a six-year period, whatever it is for your situation. According to a recent survey, four and 10 Americans were not financially prepared for the COVID-19 pandemic and one in four Americans say that they actually expect to retire later than anticipated because of it.
So I think the first lesson here is that our financial plan has to have wiggle room for the unknown, for the uncertainty because one thing that’s certain is that uncertainty is going to abound. That survey, by the way, doesn’t surprise me. Of course, no one was prepared for COVID-19 because before COVID-19 happened, no one was expecting a global pandemic to shut down the world and see, while your plan can never prepare for specific individual things that are not just unknown, they’re unknowable, they’re totally random, they’re unpredictable. Your plan should account in general for these sort of circumstances. Approximately 40% of Americans have no plan for handling an emergency whatsoever according to that survey. Only 16% of Americans have an emergency preparedness kit. About 55% of Americans worry about an unplanned financial emergency. Six and 10 Americans would be unable to cover an unexpected expense of a thousand dollars.
So here’s what you can do, Jennifer. Number one, build a financial plan. I know it’s boring, I talk about it all the time, but have a plan in place and ensure that there is an emergency fund as well. I have seen folks not want an emergency fund because they … Especially in a high inflationary environment, don’t want to be losing significant dollars to inflation by earning nothing in that emergency fund. But it is vital that you carry around six months of your expenses in an emergency fund. So if you are living on $75,000 a year, you need 30 to 40 grand sitting safely and something. Now it can be earning interest, it can be in a money market that’s readily available, which you could maybe be getting two 3% in today’s interest rate environment. That’s better than zero. But you need to have immediate access to whatever it is, and you need to know that even if things are terrible, its principle is protected, it’s not going to go down in value. That’s the best way that you can protect yourself.
Also, to extend that a bit further, even your invested dollars should have an escape hatch. What I mean is you don’t want the vast majority of your wealth allocated to investments that have contractual lockups or high front end commissions that preclude you from wanting to sell them or high backend costs if you’d like to get out of them. So I would also suggest that the majority of the monies that you have allocated and completely intended for long-term goals, that a lot of that can still be accessed in the event of an emergency if you had to. Next question is from John and Louisiana, “All signs are pointing to a recession, should I make a change to my financial strategy?” Here’s what I would say, John. It kind of depends a little bit on how confident you are in the plan that you already have put together.
If you believe the plan you have in place right now was built in alignment with your long-term goals, that takes into account your concerns, your time horizons, and none of those things have changed other than the fact that the economy’s sputtering and the Fed continues to raise rates to try to cool off inflation, then no, I don’t think you should be changing your financial plan. Now on the flip side, if your plan was done somewhat haphazardly and you’re not that confident that it was structured properly to begin with and in 2022 you didn’t tax loss harvest or consider Roth converting, or you’re not having your tax return reviewed by your financial advisor on a regular basis and they’re not meeting with your CPA and reviewing that together with you on a regular basis as we are doing here at Creative Planning, then maybe you need to have a look at that, whether we’re going into a recession or not.
But I’m just going to assume for now because you’re listening to the show and you’re writing that question and that you’re probably pretty thoughtful about your financial plan. So let’s assume that nothing major has changed up to this point. I’ll remind you that the stock market is a leading indicator, not a lagging indicator, right? It’s a predictor, it’s an efficient marketplace. It’s millions of people coming to a free market and trading securities at a price that’s probably the most accurate indication of that company’s current intrinsic value because it’s what someone is really willing to sell it for and buy it for in an open market. Because remember, in the short term, the market’s a voting machine in the long run, it’s a weighing machine. There are a lot of short-term movements that are really nothing more than noise. But if a recession is in fact coming, which most of the economists that I read are fairly split on that may be coming, but we don’t know. That is currently already priced into the stock market.
That’s very different than a potential surprise recession. Like what happened with COVID, which is why we saw the market try to catch up and we had the fastest bear market we’ve ever seen in the history of the markets and then also the fastest recovery because we had unprecedented monetary and fiscal stimulus. So pretty quickly the forward-looking stock market came screaming back because remember, all the market cares about is expected earnings. That’s it. So John, if your plan is built correctly right now, it should have already accounted for the fact that every three or four years you’re going to have a bear market. Every five years you’re going to have a crash. Every year on average there’s a correction, meaning the market drops 10% or more. The average, by the way, is about 14% every year. None of what’s happening right now should be a surprise or derail your financial plan.
But if you’ve got questions you’re unsure, you just want to review, you’re not feeling a hundred percent confident that the plan is built right? If we were to go into a recession, maybe you’ve got too much risk, maybe your costs are too high, you don’t have enough liquidity. Maybe like Jennifer’s question above, you feel like, “Man, I don’t know if I have a big enough emergency fund. I don’t know where I would go if things got really bad. I don’t know if I have enough diversification where things are moving dissimilarly from one another.” Well, that’s a great reason to get a second opinion from a credentialed fiduciary. If you’re not sure where to turn, John, we have an office there in New Orleans, you can request a visit by going to creativeplanning.com/radio.
Our final question for the day is from William in Wisconsin, “With the international unrest in China and Russia, it seems risky to be invested in anything other than US stocks. Do you agree?” Well, William, there is a lot of international unrest and I think the question that you have is a logical one, and your thinking is similar to many people that I meet with. But remember, every investor is a global investor. Even with some of the recent impact of de-globalization due to COVID and disrupted supply chains and people wanting to produce things closer to home, we are still a very interconnected world. So I would contend, and by the way, the research supports this, that you are less risky by owning international stocks in conjunction with US stocks rather than only United States stocks. Over the last 50 years, the returns of the international markets have been extremely close to the returns of the United States stock market, and you get some of that dissimilar price movement. Now, they’re not negatively correlated. They’re certainly correlated much higher than treasury bills from the stock market because again, we are an interconnected global economy.
But if you simply look at the last four decades, you will see that international and United States stocks have their days in the sun and in the shade. The 1980s, United States stocks were up 14.8%. International stocks, up 21%. By the way, that was a great decade. US up 15. International up over 20. Then you go to the nineties. US stocks, up 13.8%. International, up 4.7. An 8.8% difference to the US. By the way, the eighties, a 6.2% advantage to international for that decade. Then in the two thousands before the great financial crisis, so from March of 01 to December of 07, US was up about 5% international up 11. Go to December of oh seven through February of 2020, we’ll call it the 2010s going through the great financial crisis to kick that 13-year period off. US stocks, up 7.6%. While international was only up one.
So William, you want to diversify actually to reduce risk. Because if international and US stocks produce similar returns over long periods of time, but you have more total holdings, you’re not as beholden to the risk of what if something terrible happens in the United States? Which by the way is sort of like anti-diversification because since you live in America, you’ll probably have a higher shot of losing your job and having more economic unrest here at home. You’d prefer for your portfolio to be somewhat insulated from that risk. Furthermore, China and Russia do not make up the entire or even a large portion of the international stock markets. So I would highly encourage you as I do with everyone, and again, I’m painting with a broad brush. I don’t know the details of the rest of your situation to have global diversification and rebalance regularly that diversified portfolio.
If you have questions just as Jennifer, John, and William did, you can email those to us by visiting firstname.lastname@example.org. Well, as I conclude today’s extra special Christmas show, I want to talk briefly about really the meaning of money. We spend a lot of time on this program looking at financial strategies, talking about asset allocation, legal documents, taxes, all important, not taking anything away from those. But if we’re not ultimately using our money in a way that aligns with the most important aspects of our life to benefit those that we love and care about, we’ve missed the point. I mean, we’ve missed the big picture. We’re dying with a larger dollar amount in our account. Who cares? I think this is particularly important as we cast our mind back these last 12 months. Interest rates were in near lows. Crypto was surging, stocks were hitting new highs day after day, right?
You’re checking and investment account balance glimpses, we’re just providing a dopamine hit for you, right? Oh, what about homeowners? You can’t forget about them. How quickly can we check our zestimate to see how much our house has gone up the last six months? We had Americans calling it quits through this great resignation. 2.6 million more people retiring than expected. The Census Bureau reported that 5.4 million new business applications were filed in 2021 up from the previous years record of 4.4. Now all of that seems such a distant memory. A lot of that’s been flipped on its head. Maybe you are feeling discouraged, and maybe it’s not just about your money. Maybe you’re feeling discouraged because Christmas is a reminder for you of what you’ve lost. Maybe a bad divorce, an estranged family member, the death of a loved one. It hurts more than normal this time of year. It’s a reminder that they’re not with you.
I just want to encourage you, whether it’s financial or even way more important, these bigger, broader aspects of life that most blessings, although hidden blossom from times of difficulty, we don’t wish difficulty on ourselves. We want to avoid pain. We want to draw toward pleasure, but it is ultimately how we grow as investors or in our life, in our relationships, in our faith. I mean, the times in my life where I’ve prayed the most and I’ve been hitting my knees, asking God for help is when times are hard when I feel like I can’t do it on my own, when I need help. That’s when God gets my attention.
Because we’re interconnected beings, these events that happen completely separate from our money, they play a role on our perception about our money. So on this Christmas day where I’ve had the chance to share some financial insights with you, I’d like to acknowledge that as we wrap up 2022, there will be beauty that comes out of the ashes/ while we can’t often see the light at the end of the tunnel, it’s there. This too shall pass. I wish you and your family a very merry Christmas and a happy New Year. Remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter. If you enjoy the podcast, please subscribe, share, and leave us a rating.
Disclaimer: The preceding program is furnished by Creative Planning, an 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 or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA, or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives, and suitability. If you would like our help. Request to speak to an advisor by going to creativeplanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.
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