On this week’s episode, John walks you through the primary aspects you need to know about the newly signed Inflation Reduction Act and how long-term odds of success improve during bear markets. Plus, John talks with David Kuenzi, a CERTIFIED FINANCIAL PLANNER™ professional at Creative Planning, about the complexities of retiring abroad.
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!
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John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. On today’s show I will be discussing with you the financial nuances of living abroad. How your long-term odds of success actually improve during bear markets. As well as the newly sign inflation reeducation act. Join me, John Hagensen, as I help you Rethink Your Money.
Well, thank you for making me a part of your day. It is August. The NFL preseason is now upon us. The government is spending another half trillion dollars. We’ve got the market rallying back like the ’04 Red Sox did when they came back from ’03 to their hated Yankees ending the curse of the Bambino. And ahead on a jam packed show, do you dollar cost average or invest all at once?
Vince Scully, the late, great announcer said it best as he almost did with everything he said over his 66 years announcing the Brooklyn and then Los Angeles Dodgers. When he cited that, “Statistics are used much like a drunk uses a lamp post. For support not illumination.”
Now, I certainly don’t want to be a person who is questioning the one whom I believe to be the best to ever do it on a microphone. But I am going to try to illuminate you using my wife’s least favorite class of all time, statistics. And simply put, if you are debating between stock trading or gambling, stick to blackjack. The odds of winning at blackjack can be as high as 42.22%.
You’ll be thinking to yourself, “Well, John, that doesn’t sound very good. 42%? However, this does not mean the house wins 57.78% of the time. And that’s because of course there’s a third possibility and that result would be a push. An average of 8.48% of blackjack games and in a push, leaving the probability of a loss at 49.1%. Think about that for a moment. There are giant hotels and casinos all down the Vegas strip that cost nine figures or more.
And they’re doing that winning a game that you actually can win 49.1% of the time? Now this assumes that you play strategically to maximize the odds, which we all know many after a cocktail or two at three in the morning, aren’t playing the game right. But you might be surprised to know that the odds aren’t stacked against you quite as much as you may think. But even that slight edge means that the house will win every time given enough hands.
By contrast, 85% of professional money managers lose to the broad markets, according to multiple studies. And while most of us clearly understand that putting our entire life savings on the line at a blackjack table, well, that would be unwise. Well then why do we stock pick when even professionals have a 15% chance of outperforming broad markets? Well, maybe you’re thinking, “Well, that’s pretty depressing, John. Well, how do I stack the odds in my favor?”
The short answer is you flip the odds by becoming the house. Investing in broad markets over long periods of time is the greatest wealth creation tool in the history of our country. But you want to be on the right end of the game. Since 1926, the broad markets are up 91% of every rolling five year period. Imagine back to our casino analogy, walking into the casino with a game that provided a 91% chance of winning.
You and I both know that game wouldn’t be on the floor very long. And if there were, the wait for that game would be a line out the Flamingo onto the sidewalk, because whoever first got on the broad stock market slot machine, well, they’re hooked up to a catheter and they aren’t moving. They’re never leaving that game. They’re pulling down the handle as fast as they can, as many times as they can.
Now, if you’re near or in retirement and you’re thinking to yourself, “Well, that sounds great over long periods of time, but I’m in a retirement. I don’t have a long period of time.” Well then you’ll need to create enough of a buffer with low risk assets to give yourself those 91% odds so that, that can play out over long periods of time.
In fact, let me take this a step further. We know that the stock market is one of the only stores on earth where when things go on sale, everyone trips over each other, trying to sprint out of the store. And when thinking through from a probability, from a statistic standpoint, why would we do that when we know that our odds increase once in a bear market? Meaning if the market’s already dropped 20% or more, the likelihood that it’s up five years later from that depressed value is increased.
It’s more likely. We should be running into the store when everything’s on sale, not out of it. Do you remember the story of the MIT students that had the blackjack team? There was a book written about it. They were card counters. And the entire reason that near decade run worked was because they simply tilted the odds about 3% in their favor. And they knew as long as we never go broke when we get unlucky, when we have a bad streak, as long as we never blow the entire bank role and always have more money to play, we’ll essentially guarantee that we beat the house, because now we’ve got the slightly better odds.
They didn’t need a 91% chance like you have in the stock market over five years. They needed 51 or 52% to be notorious and have books written about them. And by the end of their run, get kicked out of every Vegas and Atlantic City casino they stepped into. And that’s why a good wealth manager builds a plan that stacks the odds in your favor.
Here at Creative Planning, that’s what we’re doing for our clients. Even in managing or advising on 225 billion for families, we don’t have an ability to control the markets. We’re not fortune tellers. We don’t have a stock picking guru to beat the market, because my belief is that person doesn’t exist. But here’s the beautiful encouragement for you. You don’t need that to be successful.
If you simply understand how to control the things that you can in fact control to provide yourself with the highest probability of success, then you win over long periods of time. What are some of those things? Tax planning with CPA coordination, estate planning with an attorney involved, strategic rebalancing, harvesting losses, Roth converting, and allowing for long term economic expansion and broadly owning long term a basket of the largest stocks across the world.
As I spoke of last week, 98% of the time of rolling 10 year periods, you end up with more money than you started with 10 years earlier, by simply riding the wave that the world will not end and that seven billion people will continue to want to buy goods and services. And therefore you alone, the companies producing those.
Oh, and lastly, you stack the odds in your favor by having a truly defined financial plan that accounts for all of these things that you are engaged with, that you’re a part of, that you understand, that you’re committed to.
Now I know what objection you have right now. “John, I know people who are really good at picking stocks. They’ve done really well. I’m not sure I can agree with that statistic.” I’ll let Mr. Allen Greenspan reply to that when he said, and I quote, “The probability of 10 consecutive heads is 0.1%. Thus, when you have millions of coin tossers or investors, in the end, there will be thousands of very successful practitioners of coin tossing or stock picking.” End quote.
Put another way, it’s simply the law of large numbers. If you have 330 million Americans and seven billion plus people on the planet, some are going to be outliers and outperform the markets. And that’s why I said earlier that 85% of professional money managers lose to the broad markets.
Well, the other truth there is that 15% will win. But as the late great Vanguard founder, Jack Bogel said, “Why look for the needle in the haystack when you can simply own the haystack?” Taking this concept of tilting the odds in your favor a little different direction. One of the most common questions I receive is around someone inheriting money, retiring, selling a business, and receiving a lump sum. And the question revolves around, “Do I invest all of this at once? Or do I dollar cost average this into the market slowly?”
And dollar cost averaging, if you’re not aware is simply an approach to purchasing an investment, in which the buyer spreads out their purchases so that the total price paid is less affected by current market values. And if you’ve listened to this show for any amount of time, you know that I like to challenge conventional wisdom, because often it’s just plain wrong.
And this is one of those cases where many contend that it’d be safer to slowly invest that lump sum over six, 12, 18, maybe 24 months to essentially accept the average price over that time period, rather than being subjected to whatever the price is the day you put everything to work all at the beginning. However, let’s rethink our money here. If we know that statistically the market’s up eight out of 10 times over 24 month periods. And since the name of the game is trying to tilt the odds in our favor, you wouldn’t want to hold a bunch in cash losing seven to 9% currently to inflation, while you slowly drip money in over a 24 month period.
Now, again, if you’re near or in retirement, there’s a caveat. If you need the money in the next two years or three years or six months or four years, it’s pretty risky to invest all of it in the stock market, even if the odds most of the time work out, you don’t want to end up being the MIT students who have the odds tilted in their favor, but push all their chips in one night and hope that the 52% plays out in their favor. It’s too risky.
Well, coming up next, have you ever wanted to move to the Amalfi coast? You seen those pictures on Facebook and Instagram? Beautiful. Maybe new Zealand’s your thing, Costa Rica. Well, what happens to your investment accounts, or your taxes, your estate plan if you choose to live abroad? Well, all those answers are coming up after the break.
Announcer: At Creative Planning we provide custom tailored solutions for all your money management needs. Why not give your wealth a second look and learn how the team at Creative Planning cpvers all areas of your financial life. Visit Creative Planning dot com.
Now, back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: Do you ever go on vacation? And then while you’re there, you dream about what it would be like to live there. My family and I, we lived in Maui and the moment we would meet a tourist and they found out that we lived there, it would immediately be all sorts of questions about, “What’s it like to live here? Which neighborhood are you in? How much does a half gallon of milk cost? Are there good schools? How close is the hospital?” You know what I’m talking about? People, the final three days of vacation are sitting on Redfin and Zillow trying to figure out what it would look like to live there. How much the houses cost.
I remember early in our marriage, my wife, Britney and I went to a Catalent region just west of Barcelona and went to this kava distillery. It’s Spain’s answer to champagne. And we’re in the Spanish countryside of exactly, probably how you’re picturing this right now. And we’re thinking to ourselves, “How could a couple of broke newlyweds, how could we live here?” I’m picturing swaying and a hammock taking my siesta, sangria at noon. Man, this just seems like the life.
Now, of course, if you actually move there, we all know that’s not how life would be, because you’re not on vacation anymore. But I’m going to venture to guess that you’ve considered what it would look like to live abroad. In fact, American citizens live all across the world. In fact, many in retirement choose to venture outside the borders of our great nation. And so with that said, my guest today is David Kuenzi. He’s a certified financial planner, a wealth manager here at Creative Planning who specializes in helping American citizens manage their wealth while living abroad. So welcome to the show, David.
David Kuenzi: Great to be here, John.
John: I think the listeners are going to really enjoy this topic. I think most of us at some point in our lives have thought it’d be really fun to retire tropical. What are some of the most popular destinations?
David: Right. Well, we work with clients in over 65 countries. So we’re dealing with people in many, many different countries. But when we talk specifically about retiring abroad, we’re talking about after a life of work here, and you’re thinking about spending your retirement years abroad. There are a number of countries that are really popular.
So France is very popular with Americans and there’s a lot of specific tax implications that make it very attractive. Probably the hottest locale in the last couple of years has been Portugal. Portugal has attracted a lot of interest. It created a special tax regime that makes it attractive for a lot of Europeans, as well as Americans, because they can effectively not pay taxes in Portugal. And that just adds to the beauty of going to a country that’s got great wine and beautiful cities and wonderful coastline. And so Portugal’s very, very popular. But we’ll have clients who will retire in countries for family reasons.
A lot of clients, have a lot of strong connections between the US and Germany, for example. So we get a lot of people who are retiring back to Germany or they’re retiring in Germany to be with their spouse’s family. We have a lot of clients coming from places like California, who have spent 20 or 30 years in the United States working and have become US citizens perhaps or green card holders in the interim. But they’re really from India, or Australia, or Japan and they return to those places in retirement.
So those are some of the most common places. And then I would finally just add Mexico. Mexico’s a perennial place for Americans looking to move abroad and have a bit of an exotic retirement locale that’s not too far from home. Along those lines, costa Rica in recent years has also become extremely popular.
John: Really interesting. I like to surf and I know also Portugal, the largest waves on record, they’re over in Portugal. If you’ve ever seen those, they’re dangerously big. And I’m sure a lot of people aren’t surfing those in retirement, but just another fun fact. So it can be confusing and complicated when people say, “All right, I want to move to Portugal or France or Mexico or India.” Can a person maintain their US financial accounts and investments if they move abroad?
David: Right. That is a big problem, but it is an absolutely solvable problem. If you’re dealing with a lot of US financial institutions, just to give you a list of some of the most high profile firms, such as Wells Fargo, who have completely cut off working with anyone outside the United States. But also true of Morgan Stanley and Merrill Lynch in different degrees, depending upon what country you’re going to, depending upon how much assets you have. All of these financial institutions and many, many more.
Most US financial institutions, if they determine that you are residing outside of the United States, they will terminate or eliminate the services they’re providing you either completely or restrict it massively. Now the way we work with our clients around the world and as I said, we have clients in over 65 countries. So we have a system that allows us to maintain accounts with our custodian institutions, Charles Schwab and Fidelity primarily are the ones that we work with.
And because of arrangements that we have with those institutions, we can open and maintain accounts for clients in virtually every country around the world. It is true though, that if you, for example, call Schwab or Fidelity yourself, you will get a different story. And that is because the rules are different when you’re working directly with the firm or working with an independent wealth manager, like Creative Planning, who works with those institutions on what we would call custodial basis.
John: So there are a couple things going on there. The first is, can I even have the accounts and maintain them. And obviously if you’re listening to this and you are thinking of traveling abroad, living abroad, feel free to visit us at creativeplanning.com.
The second part of it is let’s suppose I actually can get the accounts open and I’m working with say a Creative Planning and my accounts are held at Charles Schwab or Fidelity or somewhere like that. What are some of those other common financial complexities once you get through that hurdle of actually maintaining the accounts that Americans face when they move abroad?
David: Right. Initially people are very focused on being able to maintain accounts and having been told by their brokers that their accounts are going to be closed if they move abroad. And they see that as the overwhelming complexity. The fact is we can solve that complexity relatively simply. Where you are really going to have to focus, in terms of a mini year’s time in retirement, is dealing with the complexity of multi jurisdiction taxation.
So the starting point for any American retiring outside of the United States is to understand that uniquely in the world, the United States is the only country that taxes on the base of citizenship. Which means that as an American, let’s take Portugal for example, but you could say this of any country. Say you move to Portugal and you become a resident there. You are going to have to continue and file paying taxes in the United States every year. But you will also have to file and pay taxes in Portugal.
And you now enter into a very complex interaction between your US tax obligation and your Portuguese tax obligation. And that is unique for Americans because many, many Germans, for example, will retire in Portugal as well, or Brits, or people from lots of countries around the world, which do not practice citizenship based taxation. And when a German retires in Portugal, they don’t continue filing and paying taxes in Germany. That’s over for them now. They are a tax resident of Portugal only.
Americans again, in this respect are very unique because they remain permanently taxable in the US. And that creates a much more complex scenario, because you have to understand how the tax liability in Portugal will be offset against the US tax liability and vice versa. And this is mediated by treaties that the US maintains with most of these countries, including Portugal about double taxation and the rules that the US has with respect to taking credits for foreign taxes paid to offset US tax obligations and so forth. And so we spend a lot of time working with our clients with respect to financial planning and investing, to make sure that complex multi jurisdiction tax regime that you’re going to have to manage does not upend the finances of your retirement.
John: Well, just listening to you, I’m sure people’s heads are spinning and thinking, “Whoa, I really wanted to go to Portugal, but now this sounds way too complicated.” And I think the lesson here is, this isn’t something you want to go about alone. The complexity increases so much when you want to live abroad. And this is why David’s a certified financial planner and has a master’s degree from Columbia, and has a team of experienced professionals that have been working and helping people on the tax side of things, the estate side, financial planning side for a long time.
You don’t want to go about this incorrectly. Or I could see people forgetting to file one of these returns that they’re required to do in a certain country, because they’re just not aware of it at even a basic level. So this is a fantastic conversation that we’re having. I really appreciate you sharing your wisdom with us.
I think that this will be interesting to a lot of people living in a place like Wisconsin and maybe they’re listening and it’s really snowy in March and they’re going, “Man, how do I move to the beach? How do I get somewhere tropical? How do I get somewhere warm, David? And how do I do it without getting clobbered on taxes? What do I need to know?”
So my last question for you as we wrap this up and I hate to talk about it, but we’re all going to die at some point in life. So what happens if somebody is laying on a beach in Costa Rica and they pass away as an American? How is there estate going to be handled?
David: Right. This is really one of those questions that you have to anticipate. And you have to handle ahead of time, as is the case, whether you’re in the US or not. But it’s especially true if you are living abroad. And we have seen many, many cases of families coming to us where this was not planned for ahead of time.
And the big mistake that is made is it is assumed that whatever arrangements you have made in the United States, you have a US will, you have a US trust. You expect an executor in the United States to be able to handle your estate resolution. It will not work as you anticipate, if that is your plan. To just use the plan that your local estate planning lawyer in California, or New York, or Wisconsin, or Arizona prepared for you, because other countries will have their own rules. And those rules will apply to all of your assets generally around the world.
And what you’re going to have to reckon with is what we would call the probate process in that country. The laws of succession, which are the rules that determine who has a right to your stuff when you die. And those laws that will apply if you die in a place like Portugal, or France, or Italy, or Australia, or Japan will be those local laws in that country. And your assets, even if they are US financial accounts will be held up until that process has been executed locally in those countries.
So it takes a lot of planning. It takes a lot of knowledge of the local situation and the local rules, and then working with the client to get it set up so it’s going to be done. But we do it all the time and it can be managed effectively. And with a little foresight and little planning, it works out just fine.
John: Well, David, I sure appreciate your expertise on this. I’m sure everyone listening does as well. And if you are listening and you’re someone who’s considering what it might look like to retire abroad, maybe you know someone who’s already done this and you’re thinking, “I don’t know if they did these sorts of things. I’m not sure if they had this type of planning. They’re probably missing some of these things.”
If you have any questions like this, you can request a second opinion and get the answers to the questions that you have by going to creative planning.com. Do not go about this alone. There’s far too many complexities. Lean on our expertise and the experience that we have helping people in 65 countries all over the world. Thanks again so much for joining us, David.
David: It’s been my pleasure. Thanks for having me on your show.
Announcer: Retiring in a foreign country has it’s complexities. At Creative Planning, their team can help you work through them so you can enjoy your retirement wherever you might be. Learn more at Creative Planning dot com
Now back to Rethink Your Money, presented by Creative Planning, with your host John Hagensen.
John: Well, this week, the federal government spent a whole bunch of money. And if you are wondering, “John, is this a rerun? Give me some new content.” No, this is not a rerun. This is another $485 billion bill. It’s called the € Reduction Act and it was signed into law by President Biden earlier this week. And it’s rather interesting because the nonpartisan Congressional Budget Office which scored this bill also determined that the bill will have a negligible effect on inflation this year and next at a minimum. And so, this is akin to me going to my wife and saying, “Brittany, this next weekend, I am going to do Wife Appreciation Day all day Saturday.”
And you can see this playing out, my wife going, “Oh my word, am I getting a massage, or am I going on a lunch date with friends, or what is this amazing Wife Appreciation Day going to consist of?” And I said, “Oh, no, I’m going to play 36 holes of golf and watch some sports and I’ll probably be home long after the kids have been put in bed.” That might be confusing to her, right? But imagine, I could just name stuff whatever I wanted, whether it applied or not, the Inflation Reduction Act. Interesting. Now, I’m not saying whether it’s good or bad, you can go to Fox News and hear that it’s terrible, or you can go to MSNBC and hear why it’s amazing. This isn’t a political commentary show. But the reality is, no one really thinks this is reducing inflation anytime soon.
But with that said, there are four primary aspects that you need to know about in terms of how it might impact your planning. Number one, marketplace health insurance subsidies are extended through 2025. And so, these are the scenarios where if you stay underneath an income threshold, you receive money back off of your premiums. Number two, and this is a huge portion, $369 billion is related to renewable energy. There are huge rebates and credits. If you put solar panels for example on your house, let’s say you spend 25 grand on solar, you’ll receive a 30% tax credit. So, you’d get seven to eight grand back because remember, credits are dollar for dollar unlike deductions. They’re more valuable.
Another aspect of the renewable energy component, new electric vehicles, you can get up to $7,500 in a tax credit. And that’s assuming if you are married, you make under 300,000, or if you’re single under 150,000. If you make more than that, you can’t get the credit. If the car’s also over $80,000, you’re not eligible. If it’s a truck, van, or SUV, or if it’s over 55 grand for a car, you’re not eligible. So, you can’t go out and buy the Porsche Taycan, I think that’s the name of it, for a couple hundred grand and expect to get a tax credit. Like, look, if you’re buying the electric Porsche, you don’t need the credit.
Another new concept within this renewable energy component is you’ll receive up to a $4,000 credit for used electric vehicles. Now, there’s some provisions that needs to be two years old or more and it can’t be over $25,000. So again, if you’re wondering, the vast majority of this Inflation Reduction Act was directed toward renewable energy initiatives. The third aspect that’s important for you to know about is that for Medicare Part D, that’s the drug coverage beneficiaries, the bill’s going to limit insulin payments to $35 a month starting in 2023 and it’s going to then cap out of pocket drug costs at about 4,000 annually in 2024 and lower that cap further to 2,000 in 2025. And never before have there been negotiations between Medicare and the pharma companies, and now there will be.
The fourth and final headline in terms of the Inflation Reduction Act implications is that the IRS plans to hire 87,000 new employees. Now, keep in mind, there are about 79,000 in total right now. So, they’re basically going to more than double. And not all $80 billion of this will just go toward increased audits, although that’s part of it, and it’s going to take a while for them to ramp up. But the goal for the government is to get closer to receiving the actual amount of legal tax owed by Americans, who right now, in many cases, are just playing the odds. “I don’t think I’ll get audited. They don’t have the manpower.” And so, we’ll be able to see in the numbers over the next couple of years, how much audits jump from previous years prior to the hiring surge.
So the question is, how are we going to be paying for this? The government is going to be imposing a 15% minimum tax on corporations, making over $1 billion, and through a new excise tax on corporate stock buybacks. So, I guess the question will just be, how many corporations end up offshoring due to the increased taxes? Only time will tell and there’s still a lot of uncertainty in terms of how this will impact you and I. But one thing that isn’t uncertain is that our federal government’s answer to basically everything is to just spend money. Isn’t it? And this is bipartisan, by the way. This becomes political. President Trump spent a lot of money, President Obama spend a ton of money President Biden spending a lot of money, President Bush spend a lot of money.
I mean, sometimes you’re wondering, if it’s high unemployment, we need to spend money. If it’s low unemployment, we better spend money. If it’s partly cloudy with a chance of rain, we spend money. If it’s really sunny, well, then we should for sure spend money. If it’s a full moon, we spend money. But if a crescent moon, for sure we spend money if there’s a crescent moon. But there’s a lesson we can learn in a page out of the federal government’s playbook that believe it or not, we can actually learn from, and that is a lot of retirees or savers that are really well-funded for retirement, they need to spend more money. Our president and CEO here at Creative Planning, Peter Mallouk, had an incredible talk last year at our annual client conference in Kansas City.
And I’m paraphrasing, obviously, but he essentially said that retirees, who’ve done a really good job saving, let’s just say someone’s going to die with $750,000, they just don’t spend enough money. I mean, they debate whether they should take a vacation. And if they do, they’ll probably die with 695,000 instead of 750,000. Their kids don’t care, it’s not changing their lives. “Take the vacation. Buy the car.” But this is a real challenge. And I think it’s intuitive when you step back and really reflect, those that exhibit the highest aptitude to save, those that are the most disciplined and are retirement well-funded or vastly overfunded relative to their spending needs, and they got there because they were great savers.
Well, as a financial advisor, I’ve sat with many families and shown them, “You’re not going to run out of money. You can spend a little more.” But how does that person, who’s been frugal, who’s lived with a certain mindset and condition themselves to refrain for a later date all of a sudden push down the gas pedal in their new Corvette? It’s really tough. But we’re all dying and none of us are taking this money with us. And you don’t have to take my word for it or our CEO, Peter Mallouk’s word for it. There’s some recent research by the Employee Benefit Research Institute, and they found that people with 500,000 or more in savings at retirement spent down less than 12% of their assets over 20 years.
Michael Finke, a professor of retirement at The American College of Financial Services, says research he conducted found that 80%, four out of five retirees are uncomfortable watching their nest egg get smaller. “And to an economist, that’s a mystery,” he says, “because why did you save this in the first place? While you’re working, you’re saving so that you can enjoy it in retirement, then you get to retirement and you don’t want to see it get smaller.” Oh, and by the way, you don’t even like Susie and Johnny. I mean, I’ve heard so many times, “They don’t need the money, John, they’re fine, they’re doing better than us.” “What about charities?” “Eh, a couple I like, nothing too important to me.” “Well then, why don’t you spend some money?” “Well, I don’t want to run out.” “You’re not going to run out.”
These are the sorts of conversations and challenges we have with our money. It’s not always stocks, and bonds, and dollars, and cents. A lot of times, it’s human emotion versus pragmatism and the two primary contributing factors that I have personally seen. Number one, you have longstanding beliefs about money that are rooted from the time you are very young, and number two, losses hurt far more than gains. Let’s unpack each of those individually. Number one, you have what behavioral economists call money scripts. We all do. It’s simply referencing the experiences that you had growing up around money and the impact that it had on your thinking.
I do an exercise with our clients where I will ask a couple of questions and I’m going to ask you those now. This will be kind of fun. I want you to play along with me as if you’re a client. What are some early lessons that you remember learning about money as a kid? I mean, do you recall any quotes that your parents maybe shared with you? How about, “A penny saved is a penny earned”? How about, “Money doesn’t grow on trees”? I remember hearing that one. Here’s another thought about money lessons that might hit home. I want you to finish this sentence for me. Not what your parents said, I just want you to finish the sentence related to how you think. Rich people are blank. Rich people are… What’s the word that you would fill in there? I’ll give you a moment to think about that. And just so you know, your answer is driven mostly by your childhood.
If you grow up lower middle class and all you hear is that rich people are selfish, and greedy, and ruthless, you probably don’t think very fondly of rich people. In fact, you may be even consciously or subconsciously have tried not to be rich. You would feel bad about it. I know it sounds crazy to not want to be rich, but sometimes there’s a real negative connotation. Maybe someone else that grew up, I don’t know, maybe also middle class or lower middle class, maybe they weren’t wealthy but they grew up with parents that said, “Oh man, that rich person that we know, you know the parent on that soccer team that you play on, they’re so smart. They’re just so innovative. They’re really hard working. I mean, that’s probably a big reason why they have that money. They just really work hard and are smart,” well then it’s maybe something with a very positive correlation to wealth.
But you can see where that would really shape you as you become an adolescent and then into adulthood just based on what you’re picking up hearing within your home. And if what you saw in your home was a family who overspent and then fought about money and was very stressed out and maybe had parents who divorced over this would make sense that when you’re an adult and you’re near your retirement or even in retirement, you’ve got a financial planner telling you, “You’re never going to run out of money, why don’t you spend more?” And you’re like, “I am not doing that. I’m going to make sure that this money that I see as a safety net, it can never be too big, it can never be too strong, I can always have more.” And that person sometimes dies having never experienced things that they would’ve enjoyed in the pursuit of security.
It’s not right or wrong, personal finance is more personal than finance. But it’s important to reflect on. And the second challenge in us spending money is that losses hurt a whole lot more than gains. Let’s play a little trivia. I like trivia, I’ve always loved game shows. So, we’re going to do a little mini game show. If you’ve got $100,000 and you lose 50%, how much of a gain do you need to get back to even? What do you think is it, 50% or 100%? What did you come up with? Well, the answer is 100%. Because if you have let’s say $200,000 and you lose 50%, it’s at a hundred grand. For that a hundred grand, to get back to 200,000, you don’t need a 50% gain. You’d only be at 150. You need a 100% gain to get you back to 200,000. That’s just one small example of why losses hurt more than gains.
I’m from Seattle. I went to Seattle Christian High School, had the joy of winning the state championship in basketball my junior year. It was quite the run. All my best friends packed out Tacoma Dome, ah, man, it was so fun. And then my senior year, we were trying to repeat ranked number one in the state all year. We lost the state championship to our arch rival who ended up being my roommate, freshman year of college, was their point guard, the opposing point guard, that beat us in double overtime for my final prep high school game ever. Oh, and by the way, I shot two for 15 from the floor, easily my worst game of the entire season. Do you think I felt more joy junior year when we won it or more pain as I sobbed in the locker room with my 10 other teammates? Yeah, you guessed it. It wasn’t close.
And the reason I bring this up is because I have people in my office on a regular basis who are completely out of the stock market due to this fact because they got burned in ’08 and sold at the bottom, or they owned Enron or AOL in ’01, or Bank of America in ’08. They just have these open wounds that have never healed. And it doesn’t matter to that person that the markets made 10% per year since 1926. The pain of those losses hurt so much worse than any sort of joy that will be obtained than getting stock market returns. And so, I want to encourage you to remind yourself of what you know to be true. We can’t write our emotions. We see the DALBAR study every year that shows the S&P 500 made about 10% a year the last 30 years and the average Americans made five. We have this enormous behavior gap due to us simply being human beings.
So, why pay an advisor in addition to the tedious things and taking it off your plate that they do that are worth paying for? A good advisor helps you avoid mistakes caused because you’re emotional, because we’re humans.
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Now, back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.
John: Well, the other day, I walked out of my home office. And I told my wife, Brittany, “Hey, it’s time for our meeting with our financial advisor.” We were doing it on Zoom from our home with our Creative Planning wealth manager who’s located in Overland Park, Kansas. One of our kids overheard me saying this and asked, “Dad, aren’t you a financial advisor? Why are you talking to another financial advisor?” And the question’s logical. It made me think of a similar question that I often get from do-it-yourself investors who just don’t want to pay an advisor.
And as a side note, if the team around you, and I’m biased, but we have a Creative Planning where you have a certified financial planner, and a state attorney, and you’ve got tax attorneys, and certified public accountants, and Medicare specialists, and property and casualty insurance agents, as well as many other specialists to help with unique situations, it really shouldn’t be a cost because you’d hope that whatever fee you’re paying is made up for in all of the services, and guidance, and advice, and management that your wealth management team is providing. But that’s not the point of this. The point is, why would I, as a certified financial planner with my Master’s Degree in Finance, who has helped thousands of families walk through this exact same system, why would I pay someone else? And I do pay by the way, why would I pay someone else to help me with my finances?
Well, my wealth manager at Creative Planning is fantastic. He’s a CPA as well as a CFP. And number one, he helps offer a perspective that I may not have, and number two, he holds me accountable so that I’m not the cobbler with holes in my shoes. But I think there’s another practical way to look at this. Doctors go to other doctors when they have medical issues. Well, that’s weird. They’re doctors, why would they talk to a different doctor? Well, there are a couple reasons. Number one, they don’t prescribe medication for themselves. And oftentimes, they’re thinking out of context, they’re not looking at the whole picture, they’re too close to their own health situation. But the most obvious reason that doctors go to other doctors is they can’t perform a surgery on themselves. The best cardiologist in the world can’t provide open heart surgery on themselves. They can’t do it.
And so, while I understand that I’m potentially bordering on sounding a little bit preachy or presumptuous, it’s not my intention. It’s simply to say that if certified financial planners go to other certified financial planners to ensure that their plans are done correctly, why would someone who’s not an attorney CPA and or CFP that doesn’t have the perspective and experience of working with hundreds or thousands of clients presume that it would be in their best interest to do everything on their own? And now, I admit I’m painting with a broad brush. I mean, I’m sure there’s some outliers, like everything in life where you’ve got somebody who has the knowledge, has the time, has the desire, and most importantly has the behavioral disposition and discipline to do it.
But it’s very rare. And I found that some of the most fulfilling and meaningful discussions that have taken place in my professional career have come from someone who’d previously been doing all of their own financial planning, sometimes really well, sometimes really poorly, a lot of times somewhere in the middle, but uncovering with that person together, areas that just weren’t aware of. And so, if you’ve got questions or just think there’d be value in having a second opinion, having a different set of eyes review your entire life savings, someone with tremendous experience who’s a fiduciary, independent, my colleagues and I are happy to help in any way we can to provide more clarity for you. Go to creativeplanning.com to meet with one of our experienced financial advisors.
Well, I want to transition an end to today’s show circling back to something that was discussed last week. And I shared with you that over the years, our clients have, on National Pay It Forward Day, provided unexpected blessings, random acts of kindness, if you will, to those in need. And I challenged those of you listening last week to pay it forward. Do something to bless others. And the premise was not just because you’re doing good in the world and because it’s going to help someone, but because this is a show about personal finance and the number one link in correlation to you having satisfaction with your money is not a higher dollar amount in your IRA.
I’ve worked with plenty of folks who have a lot of money and are not happy, in fact, they’re miserable. I’ve helped a lot of other clients who are not some of our wealthier clients and just radiate joy. And the most common link to happiness when it comes to our money as generosity. And I’ve found that as a parent to seven children. I learn as much from them as they do from me. You know this as a parent, you think that you’re going to impart all this wisdom. Yet, so often, the innocence and the purity of my young children, their love for others inspires me. Our 11-year old Cruz, I just have to take a moment to brag on him, it’s a proud dad moment. Well, Cruz started a little business. He named it Adopted Blooms and he went around to thrift stores and bought old coffee mugs.
And then, he planted succulents inside of the mugs and he did a really good job and had a great business plan and the product was really neat. And at his booth, he just sold through these. I mean, the only thing he was thinking is, “I should have had more.” I think he had like 60 or 70 and just sold right through them in a couple of hours. But that wasn’t what I was most proud of, not even close. His mission was to take a portion of the proceeds and give that money back to the adoption agency that he was adopted through by Brit and I 11 years ago so that he could help other children have forever homes. The donation amount, it wasn’t $10,000, wasn’t even $1,000, it was a lot of money for an 11-year-old.
But that wasn’t the point. The point and the lesson for all of us is that we can use our money in a way that blesses others. We can pay it forward. And just as I encouraged you last week, I’ll say it again. In the end, nothing will provide you more joy and more peace around your money than when you show great generosity. I hope that that story encourages and inspires you in the same way that it did me. And if you have any more questions around your financial plan, your investments, your taxes, estate plan, visit us at creativeplanning.com and remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter.
Disclosure: The preceding program is furnished by Creative Planning, an SCC registered investment advisory firm that manages or advises on 225 billion dollars 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 could 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 a wealth path analysis by going to CreativePlanning.com/radio. Creative Planning tax and legal are separate entities that must be engaged independently.