In this jam-packed show, John covers the biggest financial story of 2023 so far: the SVB collapse and its fallout (3:19). Learn what happened, how the Fed and markets responded, and – most importantly – what you can do to minimize risk when it comes to your money. Plus, enjoy a lightning round of helpful tax tips to help you keep more of what you’ve earned ahead of the April 18 filing deadline (15:30).
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show, how Silicon Valley Bank’s Failure Impacts Your Money, as well as the four ways you can proactively tax plan as we near the tax filing deadline. And finally, what has historically been the best investment for you to combat inflation? And the answer just might surprise you. Now, join me as I help you Rethink Your Money.
Let’s begin though with the topic of risk. Risks are all around us. Some risks are completely out of our control. I mean, you look back on them even with the benefit of hindsight and you think to yourself, “There was absolutely no way that I could have possibly known that or seen that coming.” Think about COVID as this type of black swan event. No one in 2019 was worried about this. In fact, I recall a specific client of mine who owns a business and does very well, but the entire business is around live events, staging and production, huge concerts and fashion shows. It’s not like that person at the end of 2020 is sitting around saying, “God, I’m such an idiot. I completely mismanaged my business.” No, you go, “Wow. It was pretty unfortunate that the entire in-person global economy shut down.” As a former airline pilot, I think about 9/11. A lot of my colleagues were furloughed for a couple of years if they weren’t senior enough with the airlines after that terrorist attack and there really wasn’t anything they did wrong.
Now conversely, there are certain risks that are right in front of us, and generally we try to acknowledge those risks and then attempt as best we can to mitigate them. Or if you choose to roll the dice, you sort of know what you’re getting yourself into. Perfect example of this is in our neighborhood we have about four or five different parks and they range in sizes. So the smallest neighborhood playground is great for toddlers. It’s not fun at all for older kids, right? And since I have a huge age gap with these kids, they never can all agree on the park that we’re going to. #Bigfamilyproblems. But if I take Luna, our one-year-old to the biggest playground that has areas that are fully open, 20 feet high, and I sort of just hang out with a friend talking and let Luna go wherever she wants, I am not only a really bad dad, but a very dumb person when it comes to risk management.
While we can’t forecast every single possible risk because some of which are completely unknown, we can, in fact, do our best to minimize the risks that are right in front of us. And if you want to have sustained success with your money, a foundational component will be your ability to manage risk. Sure, you can get lucky over short periods of time. Maybe for a while it works, but to be a lifelong successful investor, you can’t have major losses. And I bring this up for somewhat obvious reasons. The financial story of the year so far here in 2023 broke about a week ago with Silicon Valley Bank going under. What actually happened at the bank and what the Fed did in response, how in the world did this even happen in the first place? And lastly, and probably most importantly, what are the practical actions that you can take with your money to minimize these risks?
And if you have any questions about your personal finances, visit us right now at creativeplanning.com/radio to request a complimentary visit with a local fiduciary not looking to sell you something. Here at Creative Planning, we’ve been helping families since 1983 and have clients in all 50 states and 85 countries around the world. Why not give your wealth a second look? So why am I leading the show discussing a bank run in Northern California? Well, in short, it’s because I know this is what you’re interested in. When I have multiple friends and family members who have no interest in personal finance whatsoever asking me the very same questions, “Is my money at the bank safe? What should I be doing to protect myself? How the heck did this happen? Could this happen again? Are other banks going under as well?,” then I know it’s something that’s top of mind for you as well.
So let’s summarize first what happened. Silicon Valley Bank is the 16th largest bank in the United States as far as deposits go, and this is the second-largest banking failure in the history of our country. So as this run on the bank was occurring and the bank was failing, the Federal Deposit Insurance Corporation did step in in a way that will fully protect all depositors, both insured and uninsured. The regulators explained that a systemic risk exception was being invoked for SVB, Silicon Valley Bank and another lender that failed over the weekend as well, new York based Signature Bank, so that again, all depositors would be made whole. And here’s the key, without any losses to taxpayers. The actions to protect the bank’s depositors are not going to extend to shareholders that own that stock or certain unsecured debt holders, while senior management has all been removed as well.
And the way that this won’t impact you as a taxpayer is that any losses to the Federal Deposit Insurance Fund, which is going to pay out the uninsured depositors will be recovered by a special assessment on banks. The decision came after last weekend where there was a debate about whether in fact the FDIC would extend beyond the $250,000 insurance limit for deposits to help make some of these bank customers whole at a bank collapse only smaller than Washington Mutuals with $220 billion in assets being uninsured. Another important aspect of note is that the Central Bank also announced that it will make more funding available to other banks to help assure that they can meet needs of all their depositors as the fear of contagion has really been swirling around, especially for large regional banks similar to SVB. So it potentially eliminates the need to quickly sell securities as SVB was forced to do shortly before its demise.
So that’s what happened. Now let’s look at how this happened. Well, the primary way banks generate profits is by taking your cash deposits, paying you a very small amount of interest, and then lending that money out to other customers for higher rates. Banks keep very little of the cash you deposit actually on hand. Most of it’s loaned out and the amount of cash that’s held is known as the reserve requirement and that’s set by the government. And this is a double-edged sword because while this multiplication factor helps stimulate the economy, it also creates cross-contamination of credit for customers at a certain bank. The customers of any single bank are all tied together, right? And the ability to meet withdrawal requests that you might be making at the teller window is ultimately dependent on other customers at the bank’s ability to repay their debt. And the genesis of the FDIC was to help guard against this interdependency by guaranteeing at least a minimum amount that you had in the bank for every customer.
So you had confidence that you could put money at the bank and it wouldn’t all of a sudden evaporate because your neighbor lost their job and can no longer pay their mortgage. But just like with your personal finances, this interdependency also makes customer based diversification important for the bank’s risk. You don’t want all of your customers who are depending upon each other to all be exposed to the exact same risks with regard to their personal and business finances because if they’re all in the same industry and difficult times occur in that industry, like we just recently saw with tech, it can cause a bank to fail. Barron’s top 100 independent advisor, JBB, one of our fantastic wealth managers here at Creative Planning wrote an article entitled, March Madness, Banks verse Brokerages. I will post that article to the radio page of our website if you’d like to read it in its entirety.
So to really understand how this bank failed, you do have to understand the bank’s customer base. SVB grew tremendously almost faster than any other bank during 2020 and 2021 by catering to tech companies, tech company founders, as well as their early investors. And it’s worth noting that this group is a very tight-knit community. Many of these companies share a lot of the same early investors and employees migrate from one opportunity to the next. What really made Silicon Valley Bank unique though, is that it would allow these company founders and the employees to borrow against their company stock once a quote “value was established” in the initial investor rounds, which is often well before there are any profits whatsoever with the company. Now, I want you to just imagine this for a moment. If you worked at a tech startup company and all of a sudden your stock, even though the company wasn’t profitable at all was valued at $20 million, SVB would give you a line of credit and provide you with cash so that you could for instance, go buy a Ferrari.
This practice worked well until tech company funding and valuations plummeted in 2022, and at that point, a company that we used to think was worth $20 million was worth, in many cases, far less than the line of credit. Well, once these types of issues along with others started to become apparent in the tech community, word started spreading like a frat party kegger around a college campus. Everybody was talking and they were all tweeting this and Twitter probably accelerated this even more until there were mass cash withdrawal requests, which forced the bank to sell $21 billion of securities to meet demand. By the way, unfortunately most of those securities were in long-term treasuries with rates having gone up so much, their long-term treasuries went down, which by the way was a horrible mismatch of time horizons with those obligations and liquidity needs by the bank executives who are no longer there and they realized a loss of $1.8 billion as a result.
Their books showed they had an estimated 80 billion more in long-term securities, but if they sold all of those to meet this run on the bank, they would’ve suffered approximately a $15 billion loss because those long-term bonds had gotten clobbered, again, with some of the fastest rising interest rates that we’ve seen in decades. But thankfully, as I previously mentioned, the Federal Reserve and Treasury stepped in backstopped depositors and allowed the bank to resume operations. So really the important part of this is what does it mean for you? I’m going to share with you three tips. Number one, no matter what bank you’re at, make sure you’re at an FDIC insured bank. You can look this up online. Second tip, make sure that your accounts have less than $250,000 because that is that FDIC insurance limit and that $250,000 number is accurate unless you have an account that has even greater protection.
Examples of that, if you had a revocable living trust that makes you the grantor, meaning you’re the one that put the money in the trust and you have three beneficiaries of that trust, then your F DIC insurance on that type of account is not 250 grand. It’s $1 million. So the limit may be higher depending upon the type of account, but regardless be under the FDIC limit. Now if you’re an individual, you say, “All right, that’s fine.” But if you’re a business owner listening and you have 50 employees and payrolls $250,000 every two weeks, you might be thinking to yourself, “Well, that’s great, but what am I supposed to do? Run my business out of 27 different banks? That’s not practical.” No, it’s not. But keep the significant portions of excess cash in brokerage accounts not at the bank because brokerage firms are structured differently.
Their primary business is buying and selling securities and holding them in a segregated account on your behalf. You don’t have that cross-contamination of credit between customers like at the banks and your ability to access your funds isn’t dependent upon the performance of others. Brokerage firms also don’t have the ability to use your assets to pay their creditors in the event of their failure unless you’ve borrowed from the firm. An example of this would be you have margin on the account. But this segregation makes brokerages the preferred holding place for cash reserves that are not needed in the normal operations of your company. One thought you might have though is, “But John, in cash to the bank, it’s safe. And if I put it in a brokerage account, isn’t it invested in risky stuff? I don’t want my business assets that I need for operations invested in volatile assets.”
Well, just because it’s in a brokerage account doesn’t mean that it has to be invested in stocks. Right now within a brokerage account, you could be invested in a money market that owns only US government issued debt, which is yielding around 4.25% at the moment, and that fund can be sold and cash proceeds can be transferred back into your bank account within two days if you need it. And for larger business accounts here at Creative Planning, we’ll use a similar strategy, might also produce maybe some short term individual treasury bonds, currently yielding almost 5% that, again, can be swept right back into your bank account as you need it with only a couple day lag. With those yields in mind, why would you want over what you absolutely need at your bank earning maybe 1% or 2% or 0.1% while also needing to be concerned about the fact that you’re over potentially the FDIC insurance limits?
So number one, make sure the bank is FDIC insured. Number two, stay underneath those FDIC insurance limits and put the remainder in brokerage accounts. And my final tip, which is evergreen, be diversified. No big bets in any one spot. I mean when you look at your portfolio as a long-term investor, things like this happen all the time. This is not the first bank failure and it’s not going to be the last. There are all sorts of periods of uncertainty, hyperinflation, deflation, stagflation, global pandemics, terrorist attacks, tech bubbles, and on and on. As a discipline mature investor, this isn’t something you need to be spending time on, assuming that you have a great financial plan and aren’t sitting on a bunch of excess cash at your bank. Set aside the next five to seven years of what you’ll need in less volatile assets and diversify your equities in low cost investments that have time to work through the uncertainty. I encourage you. Make sure your investments match your goals so that you don’t need to worry about these things.
If you’d like a review of your financial plan, maybe you don’t even have a written documented measurable financial plan, we here at Creative Planning have been helping families all across this great nation and the world construct and monitor customized financial plans that fit their needs. We are fiduciaries acting in our client’s best interests. If you’d like to sit down with one of our local wealth managers, visit us now at creativeplanning.com/radio.
My special guest today is Chicago based wealth manager here at Creative Planning, one of my favorites, Kim Riewerts, welcome back to Rethink Your Money.
Kim Riewerts: Thank you again for having me, John. I appreciate it.
John: We’re talking tax and this is going to be a lightning round managing director to managing director. Let’s start with what three steps can someone take to minimize the amount they owe to the government each year?
Kim: Review your situation throughout the year, not just when it’s time to take our pile of forms over to the CPA.
John: The shoebox.
Kim: The shoebox, exactly. Familiarize yourself with your tax withholdings, whether that’s from payroll and pensions and social security and know where those are at before 12/31 each year. This helps ensure no surprises come April, and I think that’s where a lot of families often are caught off guard because they think they were doing enough withholding. Many families when they first start with us want to explore why they were owing so much and I talked through tax brackets and how they work and provide education, and that really does help minimize those impacts because now we can refresh on how are they maximizing 401k contributions, utilizing HSAs and hopefully able to defer more income to future years.
A second one would be maximize deductions where you can. So our standard deduction was increased a few years ago, so there’s a lot of families that might not be itemizing any longer. So keeping track of major items that can be deductible. And my third favorite is, review investment portfolios throughout the year. Look for tax harvesting opportunities. We do that really well here with the families that partner with us as trying to help to offset and/or reduce potential capital gains exposure. And I know you said a few. I’ve got another one if I can throw one out there.
John: Oh, you’re giving us a bonus. All right, go for it.
Kim: I think the Roth conversion is just an amazing tool that families can evaluate. Taxes are favorable for considering this strategy today. They’re set to sunset in 2025. They could change earlier, but it’s attractive to think not necessarily minimizing the tax I owe right now, but what is it going to look like long term? So consider depending on your bracket, pulling forward income, paying the tax you’ll be falling on these lower brackets and have a basket that potentially is growing tax free over the rest of your life.
John: Those are great. I’m glad you mentioned the bonus one, even though I didn’t ask you for it, but I’m glad you threw in that fourth one. The Roth conversion was good.
Kim: I’m a huge fan.
John: Let’s move to our next one. What will be counted as reportable income?
Kim: It surely feels like everything, right?
John: Yes, it does.
Kim: Reality is on a federal level it’s going to be your earned income, W-2 wages, 1099 income, withdrawals from pre-tax retirement accounts such as the 401k, your 403(b) and IRA investment income, non-qualified dividends, earnings, interest on your bank account.
John: So outside of maybe potentially municipal bond interest or things of that nature, it does encompass most things. Okay, let’s move to our next one, which is better. This is one of those softballs. We’re playing slow pitch softball. I’m just grooving it right in there for you to knock one over the fence. Which is better, a tax credit or a tax deduction?
Kim: You have to love a credit. A credit is a dollar for dollar reduction in your liability or otherwise known as the amount you owe. So credit for sure. A deduction reduces the amount of income before you calculate the tax that you owe. So if you think out there today, there’s a whole handful of credits you might have even heard about solar and electric vehicle credits, adoption credits, dependent care, and of course there’s thresholds that you have to qualify as far as total income to receive those, but there’s quite a few out there that families can qualify for.
John: Good point. It’s worth noting that a deduction’s going to be more valuable for someone in a higher bracket than someone in a lower bracket where credits are helpful for everyone.
John: All right. Next question. What might someone want to ask for a tax filing extension?
Kim: Many times it might be something as simple as you invest in a vehicle where an item, known as a K-1 is issued, and sometimes those just don’t come before the April tax filing deadline. You might also be part of an estate, a loss of a loved one, just need more time to organize, pull documents together. In the past many years ago when we didn’t have the same ease or comfort around electronic filing, people snowbird a lot. They went away and they weren’t home to collect their documents and get ready and so many at that point in time, snowbirds would extend their filing.
It also could be as simple as you might have gotten a 1089, then the custodian issues a corrected one and you just don’t have all those things on time. So the key though, John, with an extension is that it’s an extension for the paperwork only. You still must pay any applicable tax owed by the tax filing deadline and you also want to be careful not to underestimate what you send them. And then all of the formality of the document itself and what gets sent to the IRS can be extended to that future date.
John: I’m glad you mentioned that because in the past people would say, “Well, who really cares? I’ll have a little bit of interest and maybe penalties,” but now it can be a lot more punitive with rates being higher in terms of what that penalty and interest accrued on that penalty ultimately is. And I’m also glad you mentioned the corrected 1099 because some people are so eager to get filed because they want to check either that box mentally and/or they want to get their refund, but you may not want to jump the gun if you have brokerage accounts that oftentimes come back with that corrected 1099.
Kim: Oh, I couldn’t agree more. My own father, and if he’s listening, he’ll chuckle. I remind him every February because we used to get our documents much sooner. The custodians now extend these dates and he’s always ready February 1st to start and sure enough, multiple times he’s gotten that corrected 1099 and he is frustrated because he has to go amend or go back to his CPA. And so I say-
John: That’s great. So that is great advice.
Kim: Real life. And one other thing I might throw in there is in past years if we thought that tax code might change and be retroactive, that might be another one that someone might postpone.
John: Good point. So itemize or take the standard deduction?
Kim: A little background on the standard deduction. Standard deduction numbers are much larger than they used to be. So for 2022, the married couple is $25,900. For single, it’s $12,950. And now in 2023, that’s index for inflation, it’s $27,700 and $13,850 and a little bit more if you’re over the age of 65. If you’re going to exceed those numbers, that would be where you would have a benefit above taking the standard. So when would you itemize? If you have the ability to exceed that number with local income tax, state tax, mortgage interests, real estate taxes, medical expenses, charitable giving. Those would be things that would go on your Schedule A. You’d itemize and then a total exceeded that standard you would be able to take a larger deduction.
John: So low-hanging fruit on this one that I see is folks that are giving say $5,000 a year and it doesn’t get them over the standard deduction limits and so they’re not able to itemize and take advantage of that. Real simple thing is, bunch those deductions, give five years all at once, itemize and then give systematically if it’s a donor advised fund in the same exact sequence.
Kim: Right. I had a family here in the Midwest where he sold his business some time ago and in this past fall we were evaluating exactly that. His income is going to drop. He’s retiring next year and so we bundled multiple years, nearly 10 years of his charitable giving because he won’t be able to benefit as much as this present tax year. So it was a huge advantage for his family. They’re philanthropic to begin with and so that idea resonated well and take that a step further. For those that are over the age of 70 1/2 where they might not be itemizing, but in future years they’re taking in the required distributions, they’re also charitably inclined. You can actually make those charitable withdrawals from your IRA starting at 70 and a half before the required minimum age now and have that go directly to your charity and not have that be taxable income. So not a standard deduction or an itemization, but being able to reduce future taxable income. So taking that one a step further.
John: Those QCDs, Qualified Charitable Distributions you’re referencing are a no-brainer, but I do see them miss sometimes simply because people are not aware that they have that opportunity. Thanks Kim, and good talking with you, as always.
Kim: Great to talk with you, John. Thanks for having me here today.
John: If your financial advisor hasn’t reviewed your tax return recently, request to meet with one of our local advisors here at Creative Planning or a tax practice. We have over 100 CPAs and can offer tailored suggestions around how you might be able to optimize your overall tax situation. Go to CreativePlanning.com/radio now to schedule your visit.
You ever find yourself focusing attention on things you can’t control? I know I do that from time to time. Maybe on things that don’t really matter. Even worse, things you can’t control and things that don’t matter. There’s a Venn diagram that illustrates this point perfectly. Two circles, one that says “things you can control.” The other circle says “things that matter” and the overlapping portion of the diagram that oval in the middle says “what you should focus on,” right? Like things you can control and things that really matter. As a big sports fan, this is what makes cheering for your team really emotional. If you’re like me in your mind, it really does matter. No matter what my wife tells me. She’s like these guys on TV running around, they don’t care about you. They probably care less if they win or lose then you do and you can’t control any part of it.
And when my team loses, she reminds me that my kids still love me and we’re not living under a bridge because of the outcome of the sporting event. But if you’re a sports fan like me, you don’t believe one single word of it. It matters, but I’ll agree with her, it’s out of my control. Then there are those other things in life that are in our control, but who cares because it’s regarding things that don’t matter. I’m good at Pop-A-Shot. It’s kind of my party trick. I win a lot of tickets for my kids so that they can go get an extra Jolly Rancher in the prize area that all of those arcade places just rip you off with. Greatest business model ever. Spend $100 on arcade games and we’ll get your kids psyched about spending their tickets on a Pez and an inflatable sword.
But as investors, we tend to spend a lot of time on things we can’t control. I want to spend the next few minutes talking about something you can control and something within your financial life that absolutely matters and that is, regarding your taxes. Now I get it. You hear me say taxes, you’re like, this is on par in terms of my excitement and interest level of waking up the morning, I have to go to the dentist. I don’t want to talk about taxes. They’re boring. Well, investing and financial success generally is boring and taxes are no different. Sorry to our 100+ CPAs here at Creative Planning if you’re listening. We do love you and with the April 18th deadline fast approaching, we’re inside a one-month now.
I want to share with you four important reasons to proactively manage your taxes, and I will post a great article at creativeplanning.com/radio written by John Wheeler here at Creative Planning. He is a certified financial planner and certified public accountant. Number one, tax planning can save you money. Who doesn’t want to save money? Well, all of us do. The most important step is having an income tax projection completed while there is still time to make changes. It doesn’t help you to show up April 18th and simply accurately report what you’ve already done. Let me share with you some examples of tax efficient, low-cost strategies. You can use index funds that are typically lower in cost than actively managed funds, potentially utilizing municipal bonds can provide tax-free income to help diversify your portfolio from maybe an investment standpoint, a risk standpoint, but also from a tax perspective.
Paying attention in advance to where your income’s going to fall may allow you to consider a backdoor Roth strategy or an after-tax contribution to your 401k, if those make sense based upon your situation. You may be listening to that saying, “I’m not sure what a backdoor Roth is or an after-tax contribution, or you might be familiar with those, but you’re wondering, “I don’t know if I qualify or if my plan provides for that.” That’s what I’m talking about. Planning in advance can help you save money. And so if you’re someone who desires to save every penny possible, tax planning can help with that.
Number two, tax planning can enhance your investment returns. There are strategies that impact your long-term investments like asset location, meaning, if you have high dividend oriented positions, don’t place those within your after tax accounts where you’re getting hit on an annual basis with taxation. Maybe put those as well as taxable bonds inside of retirement accounts where those dividends and interest don’t show up on your tax return while placing low turnover, high growth oriented vehicles inside of those after-tax accounts. If you have the same allocation in your Roth IRA and your IRA and your after-tax brokerage accounts, you’re probably doing it wrong. You’re almost certainly not proactively tax planning. Another strategy that impacts your long-term investments is tax loss harvesting. In a year like 2022 where stocks and bonds are both down, you should be booking those losses, buying a similar type of investment so that you are in fact staying invested and not selling out at the bottom, and then use those capital losses to offset either current or future capital gains.
Third important reason to proactively manage your taxes is that it can boost your wealth accumulation potential. This is quite simple. The less money you pay in taxes, the more money you have to save and invest in the future. It stays with you and ultimately compounds. And number four, tax planning allows you to provide for the people and causes that matter most to you. And this may be the most important thing. If you have more money because you’re not paying out excess in taxes, you’re able to pass more along to your loved ones and charities that you care about that are doing good in the world. Did you know that you can give up to 17,000 in cash or assets here in 2023? So stocks, bonds, mutual funds, land, a new boat, whatever you want to give in a single year to any one person without any tax implications.
If you’re married, double that, 34,000. If you’re giving it to a child who’s also married, you can then give it to their spouse as well. We’re talking $68,000 that you and your spouse if you’re married, can essentially get to a child assuming that they’re married as well. Here’s the tip for you. If you intend to pass some of your money to children or grandchildren and some money to charities and right now you may have a mix of pre-tax and post-tax assets going to the charity, consider opening a separate IRA and naming the charity as the only beneficiary because again, if that goes to your children at your passing, they’ll have to pay ordinary income tax.
Pass assets to them like real estate, like non-qualified accounts that will receive a step-up in basis, pass the retirement accounts onto charities as they will be able to bypass income tax and essentially you have disinherited the IRS. If you’re unsure whether your beneficiaries are named in this manner or if you’ve done this sort of intentionality regarding which assets go where, make sure you have a credentialed fiduciary evaluate that for you. And so to recap the four important reasons to proactively manage your taxes, it can help you save money, it can enhance your investment returns, it can boost your wealth accumulation, and it allows you to provide for the people and causes that matter most to you.
If you have any questions regarding this, go to creativeplanning.com/radio to speak with one of our local advisors. We have over 300 certified financial planners as well as over 100 CPAs. And here at Creative Planning, we believe your money works harder when it works together. Schedule a meeting today at creativeplanning.com/radio.
Well, it’s time for a game of rethink or reaffirm where I break down common wisdom or a hot take from the financial headlines and we’ll decide together if we should rethink it or reaffirm it. Our piece of common wisdom for today is that real estate is the best game in town to beat inflation. Well, it seems logical. Hasn’t real estate done well during inflationary environments? Sort of. It’s done okay. If you go back to 1953, residential real estate has outperformed inflation only 40% of the time over 10 year periods. Now over 20 year periods, it’s outperformed about 60% of the time. Well maybe then gold. Is gold the best game in town to beat inflation? No. If you’ve listened to me at all, wear gold, don’t invest in it. Gold is awful, and I know every gold bug that has bars in their safe doesn’t like me right now. I’m sorry, but it’s terrible. More volatility than stocks, less returns than treasuries. That’s what you get with gold along with no compound interest. And if you thought it was a good inflation hedge, think again.
That’s one of the great lies of investing from a historical perspective. It barely outperforms 20% of the time since 1953, over 10 year periods and is dead last over 20 year periods at outperforming inflation of every major asset category. It’s essentially neck and neck with long-term government bonds relative to how it’s done at beating inflation since 1953. It’s atrocious. It’s awful. So what then is number one? The best asset category outperforming inflation by far are stocks. Equities have outperformed inflation 100% of the time since 1953 over all 20 year periods and even over 10 year periods, stocks have outperformed inflation 75% of the time, even over two year periods. Equities have outperformed 70% of the time and the reasons logical and intuitive. When you own a stock, you’re a shareholder or part owner of that company. And if you own a company and inflation increases, you price your goods and services to reflect your costs so that you can continue to earn a profit.
I mean, Chipotle’s a perfect example of this. Their burrito costs have skyrocketed in the last two years, and the reason is because their cost to do business has massively increased. The cost of all their ingredients have gone up. So they don’t just say, “Well, let’s keep selling burritos at $7 and lose money.” They say, “All right, well, let’s make them 10, 11 bucks depending on which market we’re in, maybe even 12 or 13 if we’re in New York.” And that allows them to maintain their profits. And so if you want to combat inflation within your financial plan and you don’t need to sell these investments for the next five plus years, then from a probability standpoint you’re most likely to win by owning stock. The price, of course, you will pay for that expected return premium above other asset categories is volatility.
The verdict on whether real estate is the best game in town to beat inflation is a rethink. Nope, it’s stocks that are the best game in town. If you don’t have 100% conviction that every one of your hard-earned dollars is invested with intentionality and within the context of a written documented financial plan, I encourage you to get a second opinion. And if you’re not sure where to turn and you’d like our help, visit us at creativeplanning.com/radio to speak with one of our local fiduciary advisors who isn’t looking to sell you something, but rather give you a clear and an understandable breakdown of exactly where you stand with your money.
Our first question comes from William in Fargo, North Dakota, “Should I invest in long-term care insurance or is it more beneficial to save the premiums and invest my money and then let it grow to cover any future long-term care expenses?” And if you have questions similarly, you can submit those to firstname.lastname@example.org. Long-term care is expensive. According to Genworth assisted living annually, $54,000 a year, a semi-private room, $94,000 a year if you’d like to get home healthcare and have an aid that averages $61,000 per year. And those are national averages. If you’re in California or New York, it’s a lot more expensive than Oklahoma or Iowa. In answering this question for William, let’s start by unpacking the pros of obtaining long-term care insurance. You receive federal tax deductions as a qualified medical expense and defer some of that cost.
About one in every five people need long-term care for more than five years. So long-term care, potentially depending upon your policy can help if your stay is extended. It can certainly protect the rest of your portfolio, all of your additional assets that are not now being depleted. And if you’re married and you look at those other assets as what will be needed to support your spouse, it can help protect the financial independence of a surviving spouse. Depending on the size of the policy, it’s still the best way to fully fund an expensive long-term care situation. And if you care about the “niceness” of where you’ll be staying, you’re not at the whim of only being within a Medicaid approved facility when you have long-term care insurance because it’s helping cover a portion or potentially all of your long-term care needs. Choosing to forego long-term care insurance and instead, self-fund, has its own pros. You have far more control. You’re just paying out of pocket and you’re not subjected to the specific nuances and provisions that apply to your insurance policy.
Some might not let you have a certain type of in-home care or maybe only have that for a certain period of time before you have to go into a long-term care facility. When you go into a long-term care facility, it will generally only pay a certain maximum amount per month. So you can’t use up the policy quicker if you’d like to stay in a nicer place. Self-funding gives you more flexibility. Number two, you’re getting the money out at full deductions. So you’re getting rid of taxable incomes on money that had to be spent anyway potentially, and you don’t have to come up with the money until it’s actually needed. The average person in America who goes into long-term care is there for 28 months. And so if you’re trying to sort these pros and cons, here’s what I advise you do to assess which is more appropriate for you.
First off, do you have a lot of assets? If you do and your plan works, even if one or both of you needs to pay out of pocket for long-term care expenses for eight or 10 years, then you probably don’t need insurance. It doesn’t mean you can’t get it, but you don’t run out of money even in a worse case scenario. That would be one consideration. Number two, do you care about how bougie your place is? Because William in North Dakota, I have intimate knowledge of family members who are in a Medicaid approved long-term care facility at the end of their lives in the Bismarck area, and it was a really nice place. Other states like Arizona for example, you don’t get near the quality of facility if you need Medicaid to cover it. So that matters. Do you care about moving? Because as I mentioned, if you live in a place like Arizona, but you have family in North Dakota and you don’t mind being in a facility in North Dakota, you could move there and established residency prior to needing Medicaid.
Now, there are rules and provisions around qualifying for that, but I’m speaking in generalities. Another consideration. Do you have a spouse who is open to caring for you if something happens and maybe as important, capable of caring for you if you were to need long-term care down the road? Do you have children who are involved, who have space to even house you in the event that you needed care? Is leaving a legacy really important to you and you’d like to buy insurance to preserve even if you go into long-term care that you can have confidence that there will be something left over for your kids and or grandchildren? And that’s why personal finance is so much more personal than finance because if you don’t care if there’s anything left over when you pass away that goes to friends and family and you have no problem when you’re in your likely 80s or 90s being in a Medicaid approved facility, then you probably don’t need to pay what have become extraordinarily expensive long-term care premiums.
If you answer those questions differently, you might see it as a value. And if I’m painting with a broad brush, my general rule of thumb is to try to avoid long-term care insurance, if possible. And the reason for that is unlike term life insurance, when you’re 30, you get a 15-year term policy, you pay very little, it’s highly unlikely you’ll need it. You pull your risk with millions of other 30 year olds, and in the really unfortunate event that something happens to you and you pass away before age 45, your return on investment is through the roof for your family and it protects your family from a catastrophic financial event. Long-term care, your premiums aren’t minuscule, they’re really, really high, and there’s a very good chance even if you go into long-term care, you’re only going to need the policy for two or three years.
So yeah, it saves you money for a couple of years, but when you subtract the savings from all the premiums you made over the previous decades, I found that most wish they had just self-funded. And the one final consideration is they’re very inflexible because if you paid premiums for 10 years and now you’re 75 and you sort of wish that you weren’t cash flowing this huge premium every year, you’re stuck between a rock and a hard place because you’ve already paid in it for 10 years and you don’t want those premiums to just be burned by surrendering the policy. So it’s a great question. There is no right or wrong, but the big thing I would do is look at this, William, within the context of your financial plan, I hope that you have a written, documented financial plan and evaluate what your plan projects out at with paying insurance premiums, and then having some help in a long-term care event verse self-funding and not buying insurance.
We have an office right there in West Fargo if you’d like to meet with us, William, and if you have a similar question and you’d like to meet with one of our local advisors, go to creativeplanning.com/radio now to schedule your meeting. Well, I’d like to transition over to a discussion that I had with a client this past week. He came into our office and said, “John, I got to get something straight here. I listen to the radio show most weeks and I hear you regularly talk about that Creative Planning is a family office for all. In fact, on the wall, I see that quote when I’m walking down the hallway of your office, “What is a family office?” And it’s a good question. It got me thinking, “I use that term a lot. And my guess is a lot of you listening may also not know what the definition of a family office is, which would be helpful since I keep alluding to it.
Well, a family office is a private wealth management firm that generally works with one family or if it’s a multi-family office, they may work with a few ultra-high net worth families. And these family offices will provide a broad spectrum of wealth management services that extends far beyond just investment management. Things like financial planning, estate planning, and other legal work and legal document preparation, tax planning, tax preparation, philanthropic investing, concierge services, insurance services, in addition to a wide range of other very specific personalized services. An important responsibility of family offices also is to educate next generations in the handling and management of this family wealth. And so as you might assume, family offices generally are for families with over $100 million of net worth, maybe even over a billion. And that is why Barrons called us here at Creative Planning a family office for all.
We are providing these types of services to not only our ultra affluent families, but also to our tens of thousands of private wealth clients who often resemble the millionaire next door. They have tens of millions of dollars. Maybe they’ve squirreled away 1.2 million or 2.6 million or $600,000, still done a phenomenal job with their money, but have not historically expected to have a CPA involved in their plan in filing their taxes, talking with their certified financial planner, in addition to their wealth manager, having a financial planner on the team, having an estate planning attorney helping with the legal needs regarding their estate plan, a Medicare specialist, property and casualty specialist, all of whom are working together on your behalf. And of course, I’m biased, but what I think is so incredible about this is that while this has been expected by ultra affluent families for decades, it hasn’t been available to those who benefit greatly from this type of team approach.
Let me share with you a real world example from one of my clients on how they benefited from this family office dynamic. This gentleman married in his 60s, small business owner was looking to retire, and as part of that, sell his business to one of his key employees. And here’s what we were able to help with, value the business through our business valuations team, draft the business sale contracts, execute those contracts. With that information in mind, reworked his spouse and his estate plan built out a financial plan, which of course we did in advance of the sale to ensure that once it was complete that they would have plenty of income.
We also assess the tax implications of the sale of the business, and we’re able to structure that with a coordinated approach between the attorneys and the CPAs to make sure that he wouldn’t pay more in taxes than legally required, revisited his need or potentially no longer a need for buy/sell insurance, disability insurance, outlined their social security strategies, helped them look at their Medicare plan as they are now approaching 65 years old and put this entire documented, written, measurable tax, estate, insurance, and financial plan all within the client binder so that they could have peace of mind as they entered into this incredible and exciting new chapter of life with the confidence that they had experienced fiduciaries working together.
That’s what it means to be a family office for all, like we are here at Creative Planning, and if you’re just getting model portfolio investment management without any proactive tax planning, without any estate planning coordinated, then you’re only receiving one piece of the comprehensive wealth management pie. And in my opinion, the greatest value of improving your financial situation isn’t that you are Scrooge McDuck swimming around in your money bank counting your coins, but rather the opposite, that you’re able to simplify your life because you are financially secure, that you are able to not think more about financial matters, but less so that you can get back to the relationships that are far more important than any balance in a bank or investment account.
And if you have questions about what might be missing in your current plan or relationship, don’t wait any longer because this is your life savings. Request to meet with a local advisor and get that second opinion by visiting createplanning.com/radio. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
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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