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RETHINK YOUR MONEY

When the Obvious Choice Leads You Astray

Published on April 1, 2024

John Hagensen
MSFS, CFP®, CFS, CTS, CIS, CES

We often hear that the obvious answer is usually best. However, in the realm of retirement planning, the most obvious solutions AREN’T always the best choices. Join John as he illustrates common situations where an obvious choice could derail your retirement. (1:50) Plus, discover why we’re still discussing Bitcoin. (8:18)

Episode Notes:

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, why the obvious answer isn’t always as it seems. The three sides of risk, and why being right is far more important than being first. Now, join me as I help you Rethink Your Money.

So often in life, the obvious answer may not always be the best one. With March Madness in full swing, the final four here, it may seem obvious that global women’s basketball icon, Iowa Hawkeye, Caitlin Clark, should leave college and go to the WNBA. She’d probably make more money, her fame would grow because she’d no longer be a college athlete, but she’d be a pro. But while on the surface that may seem logical, she already makes $3.1 million per year through NIL deals, the name, image, and likeness revenue streams. She has 11 of them, Nike, Gatorade, Buick, and State Farm are just a few of them. And while she won’t necessarily lose those, they may even be expanded once she goes to the WNBA, her rookie salary will only be $76,000. So while she did already commit to the WNBA, and is the presumptive number one pick in the draft, unless it expands her footprint, her notoriety, she very well could have made more money staying one more year in college, and being one of the most hyped college athletes of all time.

You see the obvious answer isn’t always the best one. And the same is true when it comes to personal finances and your money. Where should I save? That’s a common question. Well, the obvious answer is into a retirement account where you’ll receive tax deferral. But putting everything into your 401k is one of the bigger mistakes that I frequently see. Now clearly, you should fund up to your company match, which is free money. That’s a no brainer. But while you may have a net worth of one or two or three or $4 million, if almost all of that are in tax deferred accounts, you’ve subjected yourself to a couple of risks. One, being tax legislative risk. We have over $30 trillion of national debt, and the Trump tax reform is rolling off at the end of 2025. If tax rates increase, it directly impacts that net income. It also creates a lack of liquidity and flexibility should you want to retire early, or you need access to money prior to retirement.

Another common question is when should I take Social Security, where the obvious answer is to take it as early as possible. You paid into it. If you pass away early, you’re not going to reap the benefit of what you saved. And we know it’s underfunded, and the solvency is being threatened, why not take it right away, age 62? If you live beyond your early-80s, you’ll collect more in social security by deferring the benefit and waiting, and that’s if you wait all the way out until age 70. If you take social security before your full retirement age of 67, and you earn even a little bit of money, you have to pay it back and cannot keep the income anyhow. By not taking it age 62, it also allows you to voluntarily suppress income, providing opportunities for Roth conversions, or distributing money from other accounts that are taxable, while in a low tax bracket.

If you have a spouse, taking it early can limit their ability to draw a nice survivor benefit should you predecease them. And of course, when you actually take Social Security should be strategized within the context of a written documented financial plan, but the greatest value of social security is longevity insurance. Your financial plan will be most at risk the longer you live. Meaning if you wait on Social Security and you pass away earlier, yes, you won’t have maximized the benefit. You would’ve left something on the table, but you’re dead, and you weren’t at risk of running out of money because you didn’t live long enough to stress your assets. Another common question is, do I need estate planning if I’m not rich? The obvious answer is no, or you probably just need a will. Where in reality, if you even have a few hundred thousand dollars, depending upon your situation, you may want a revocable living trust to avoid probate, to make things simpler for your family, to customize the plan in terms of who and when, and in what manner they receive the distributions from your estate.

Another question is, how do I have financial success? With the obvious answer being follow the crowd, look to others. In reality, the average investor, according to DALBAR, over the last 30 years has earned about half the returns of the S and P 500. The simplest, lowest cost anyone could have done its strategy, buying the 500 largest US stocks, and shredding your statement has earned almost 10%, while the average American has earned around 5% per year. When it comes to investing, you don’t want to follow the crowd. In reality, you’d be better off probably just doing the opposite of the masses, and to some extent, that’s what you’re doing when you rebalance. You’re selling high and buying low, and there’s always someone else on the other side of that transaction. Unfortunately for them, often people following their emotions, selling during 2009, selling during COVID selling while the dotcom bubble is bursting, rather than buying while things are on sale. No one wants to pay more than legally required on their taxes, and that’s a common question, how can I save money on my taxes?

Well, the obvious answer is death and taxes, they’re unavoidable. Not much you can do, no sense in trying. To some extent, you might be right. There’s no sense in trying after the fact. By the time it’s March or April, there’s only so much you can do. But proactive tax planning can save significant dollars. When is the last time your financial advisor reviewed your tax return? When is the last time your advisor sat down with your CPA on your behalf, not to discuss filing your taxes, but evaluating strategies that integrate your investments, your taxes, your estate planning, in a way that optimizes your tax efficiency? Sure, paying some taxes may be unavoidable, but through proper planning, you can ensure that you’re not paying any more than legally required.

Another question often asked is, how do I achieve great investment returns? How do I maximize the growth of my accounts? And the obvious answer, although as we’re discussing, it may not always be the best one, is to concentrate big bets in a few high flyers. The reality is though, that you make great returns by decades of compounding, and never, as the late great Charlie Munger said, “Never interrupt it unnecessarily, either by poor behavior or picking the wrong stock.” And the last question, how do I find a financial advisor? The obvious answer is find someone you know and you trust. Not on the surface, that does sound pretty good, doesn’t it? But the best answer is not the obvious one. You should find the best financial advisor, and that likely isn’t the person from your church, or a friend of yours. It might be, but there are 300,000 financial advisors in America to choose from. What are their services? What is their experience level? How are they paid? What do they charge? What is their process?

If you’re interested in finding out how we are helping over 75,000 clients in all 50 states, and over 75 countries around the world, nearly 500 CFPs, over 200 CPAs, over 50 attorneys, and $300 billion in combined assets under management and advisement, along with our affiliates, you can visit creative planning.com/radio. Now to speak with a local wealth manager just like myself. This may be the first time in your life you’ve sat down with a financial professional who isn’t looking to sell you something, but rather providing clarity around what you’ve worked a lifetime to save. Speak with one of my colleagues, and experience credentialed fiduciary, again at creativeplanning.com/radio.

Well, Bitcoin has rocketed over the last year, topping its previous all-time high, and that’s stirred up people like Elon Musk, making dramatic returns to the front lines of crypto. And Arc founder Kathy Wood, giving Bitcoin a market capitalization of $75 trillion by the end of the decade. That number made my head spend. I had to do a triple take, not even a double take. I had to check it again because I was completely shocked at that number. And if you listen to the show at all, you know I don’t put any stock whatsoever in forecasts or predictions, because they’re almost always wrong, and can be horribly wrong more often than they’re even somewhat correct. Let’s do a quick lay of the land regarding where we sit with Bitcoin. Wall Street giants, BlackRock and Fidelity, have emerged as the two largest of the new Bitcoin ETF issuers. They’ve raked in assets under management of around $15 billion and $9 billion respectively.

I think it’s worth looking at the bull and base cases for Bitcoin, and why, if at all, it matters for you. The bull case is that despite finding a real practical use for cryptocurrencies, they not only haven’t died, but continue to make new highs. And the underlying technology of the blockchain is very legitimate. The bear case is that there’s no practical use. It’s a speculative investment. It doesn’t pay dividends or interest, or have profits. It’s similar to physical gold, in that you’re just hoping you buy it and someone will pay you more for it down the road, just like artwork or baseball cards or collectible cars, or whatever else it might be. The question I’ve received lately, is should this be an allocation within my portfolio? And the short answer is no, but if you’re okay position-sizing it with a very small amount, and having a comfort level that if it goes to zero, your plan will not only be fine, but emotionally, you’ll be okay with that.

Then you could treat it like any other speculative investment, but I think a lot of it comes down to a self-assessment of the type of person you are. Are you the kind of person who would have regret if Bitcoin goes to the moon, as Kathy Wood is suggesting, and you’re on the sidelines. You never invested in it, will you have significant FOMO? Or are you the kind of person that would feel like an idiot if you held Bitcoin and it went to zero, and you never understood how it worked, and you knew there was no use case, and you thought to yourself, “Why did I ever put any of my hard-earned dollars into something that was this speculative?” But is Bitcoin now a foundational piece to any well-built asset allocation? The answer is no.

My special guest today is Creative Planning Chief Market Strategist Charlie Bilello. Charlie, thank you for joining me on Rethink Your Money.

Charlie Bilello: Thanks, John. Great to be back.

John: Inflation was the headline economic topic for nearly two years. It’s thankfully, worked itself down now, but certain aspects are stubbornly holding on. Charlie, what’s your take on inflation, and what do you think investors need to be aware of?

Charlie: Yeah, so we’re flatlining a little bit above 3%. As you said, we were coming down every month at a certain point last year, and that felt awesome. But pretty much since last June, we’ve been flatlined around that 3% area. What is driving that? A few things. Number one would be the economy’s doing pretty well. Fiscal stimulus is pretty enormous. As you know, we’re continuing to borrow and spend about $2 trillion a year, not a small amount of money-

John: Pocket change

Charlie: Being pumped into the economy, so no question that is having an impact as well. And you’re still seeing wages going up, which is a good thing for people getting raises of course. But wages going up over 4% in the past year, that’s driving higher prices. And the concern here, in terms of inflation, is that with the amount of money that we’ve pumped into the system, is it going to be that easy to just go back to that 2% and stay there, which is what the Fed wants, or is it going to be proven to be much more difficult over the months to come?

John: Do you think they budge on that, Charlie?

Charlie: We just had a press conference for the FOMC, and it seemed like Powell was suggesting that they’re going to cut rates before we get to 2%. So what he keeps saying is, “Yes, we want to get there, but we don’t have to get to that exact number. We just want to see substantial progress.” So yes, the Fed wants to fight inflation, but they’re also mindful that higher interest rates are causing some problems in the economy. And their bias is when in doubt, ease. And it seems like they’re targeting June. That could change, right? If we get higher inflation readings in the next few months, that could definitely change, but they’re targeting June as the start of the rate cuts.

John: It does seem silly to potentially put the economy or the markets in jeopardy, to try to be dead set on getting to two as fast as possible. The other thing that can confuse people, is that even when inflation slows down to 3%, the prices that were increased while it was at 8%, are still felt, and so you’re still feeling that the high inflation that we had there for a couple of years.

Charlie: 100%, and that shouldn’t be ignored, and I think the Fed is somewhat ignoring it. Amazingly, no one seems to ask them this question, if you have inflation five, 6% for a few years, and then you go back to 2%, well that’s not 2% inflation. You can’t ignore that jump. The cumulative inflation we’ve had since the start of 2020, is well above that 2% trend. We’re about 11% above that trend, so it would take years of below 2% inflation to get to a longer term, 2% rate. They seem to be ignoring that concept, John. They’re focused on starting these rate cuts. In my view, it’s potentially a mistake here. Stock markets at record highs, housing prices are at record highs, the economy seems to be doing well. Why in the world do we need rate cuts? Why not leave it tighter for longer, and really try to break the back of inflation?

John: You mentioned the markets at all time highs. Based upon sentiment indicators, I don’t know if it’s 1999 again, but people are pretty exuberant about the markets. Should they just put everything in Bitcoin? What’s the strategy here?

Charlie: Forget Bitcoin. You got to go right to Dogecoin, if we’re going to be in the speculative-

John: Perfect, Cuban likes that one, I think, yeah.

Charlie: Pick the most ridiculous crypto meme coin that you can find, and go all in there. No, of course not. What they got to be mindful of is the change in sentiment as an investor, is not usually your friend. The old saying, greedy when others are fearful, fearful when others are greedy, there’s something to that. And if we go back to October, 2022 at the bear market lows, there was a lot of fear out there. There’s many different sentiment metrics, but one that looks at different newsletter writers who make recommendations and tell people, should you be long stocks or short, or somewhere in between? Well, one sentiment indicator there, back in 2022, was only 25% bulls among that group. And today, the S and P 500 is 44% higher than back then, right? We’re at all time highs. We’ve already hit 19 of them this year. We’re not even at the end of March, and 44% higher, and guess what the percentage of bulls is today among those newsletter writers, over 60%

John: So predictable.

Charlie: The exact opposite of how anyone who’s listening should be thinking about investing. You want to be more bullish when prices are lower, when there’s fear, when valuations are better. So what does the data and evidence suggest? Doesn’t suggest that the market will likely go down, but when you have sentiment extremes, and we’re in the top 5% of bullish readings today, you tend to see below average returns going forward. Still positive, but below average, which is the opposite of what we saw in October, 2022. When you have extreme negative sentiment, so a lot of bears and not many bulls, you very frequently see above average returns going forward. That’s, of course, what we saw. So not an outright sell signal, but definitely if you’re a long-term investor, you don’t want to be more bullish today, and you won’t want to be thinking about FOMO and what should I jump into on a speculative basis today, as compared to 2022 at the lows.

John: Yeah, that greedy when fearful, fearful when greedy saying is a classic one that sounds really good, but then put it into practice, it’s like “I’m not afraid of snakes.” Well, how are you going to feel when a cobra’s thrown in your lap? People say that when the birds are chirping and it’s springtime, and the blue skies out there, “Oh, this is going to be great. I’m going to rebalance, and buy more when things are on sale. And I’m going to listen to Buffett.” But it never goes down in a vacuum, so while it’s going down, the entire narrative is run for the hills, move to cash. This is never coming back. This is one of the worst times ever. Look at all the reasons why it’s going down. That’s why if you can have some sort of automated mechanism in place, and a rules-based approach that says, “When my asset classes deviate this much, I sell some bonds and I buy stocks.”

Or on the flip side, as we’re experiencing right now, rebalancing works both directions. Which also means markets are at all time highs, they’ve been ripping like crazy. I have more equity exposure than I want within my plan, maybe it’s time to sell some of my stocks and buy some bonds.

I’m speaking with Creative Planning Chief Market Strategist Charlie Bilello. The forecasters were wrong again, Charlie. I hear the talking heads explaining, by the way, very eloquently, all the reasons why they were wrong. They’re really good at that. Why did they get it wrong, and how do you think we can apply that to future decisions as investors?

Charlie: They get it wrong because we’re not dealing with something that’s a static system. It’s a dynamic system. There’s a lot of randomness, there’s a lot of noise in the short term. And there are so many factors that go into predicting where the stock market’s going to be, you have to not only predict what earnings are going to do, but how people are going to evaluate those earnings. You have to predict future sentiment. So last year, you would’ve had to predict that people are going to get much more bullish. Nobody was anticipating that. The amazing thing though, John, is the frequency of getting it so very, very wrong. And you and I talked about this, I think, early in the year-

John: The opposite of what I say.

Charlie: Yeah. Or the end of last year, how the S and P at the end of last year, finished above every single strategist projection, every single one.

So the surprising thing coming into this year, was that they weren’t extremely bullish. Because usually when the market has a strong year, and S and P was up over 20%, people think that’s going to continue. That wasn’t the case. They were actually predicting on average, a less than 2% game for the S and P 500 this year, and boy did they get that wrong. We’re already up 10% on the year. We’re already ahead of every single year-end strategist forecast, and it’s the end of March, so it’s absolutely unbelievable. They got it wrong in 2022, the other direction, saying that stocks were going to be up, and the market was actually down, and so on and so forth. It’s just been remarkable, the consistency of getting it wrong. And the reason is very simple, this is a dynamic system.

As you said, all the news was very bad a few years ago. Well today, look at the news in terms of the economy, in terms of stock market, it seems like all news is good news, and people were definitely not anticipated. As far as individual investor, what should they do with that forecast? Well, this should tell you don’t do anything. Stick to your plan. Stick to your long-term goals. Ignore this, because even if you believe that there’s going to be someone who can predict that, they have to do it consistently for it to matter. And you’re going to have to make a wholesale change in your portfolio, relying on that, it’s going to be right. Just never, never a good idea.

John: Well, so do you think it’s just that we’re so desperate to create these false patterns, or have some sense of control, that even though all the data supports exactly what you said, they’re terrible at it, awful. It’s just completely random. People subscribe to what they say, and then make decisions with their entire life savings, as if what they’re saying has, not just a little credence, but is borderline gospel. This is awful. Do you think that’s what it is, is we just want to have some sense of control?

Charlie: Yes.

John: We have a reason why we’re doing it, and we can explain why things are happening. Is that the downfall?

Charlie: 100%. We crave certainty. We want an explanation. We want to treat this the same way as we’re treating going to the doctor. And you have this ailment, and this is a solution. This is what’s worked. And in the investment world, you can’t do that. You can invest based on probabilities over 10, 20 year periods of time, but that’s very boring in terms of the media. You don’t get very much attention.

So when people ask me, “Charlie, what’s your forecast?” If I said, “It’s going to be in a range of 20% up or 20% down,” that’s incredibly boring. Much more dramatic to say “Either it’s going to be a crash, or there’s going to be a spike in prices.” The individual investor has to understand, this is a different animal than almost any other field in terms of that uncertainty. And the crazy thing is that uncertainty is actually why you’re getting the return in the first place. If you were certain that the S and P 500 was going to go up 10% this year, if it was some type of bond, not going to get that 10%. Immediately, your stocks would reprice higher, and long-term returns would be lower.

John: People see that volatility as a fine. It’s just the fee. It’s just the cost of admission. It’s what you have to go through to get those returns. I want you to do the research, Charlie, to say, “What if you just zigged against all broad sentiment of the, quote-unquote, experts,” and you literally just invested. Sentiment’s high, everybody thinks it’s bullish, and you’re a bit more defensive, and vice versa. When everybody said the sky’s falling, you actually subscribed to the-

Charlie: I’ve tested that. Yes, it’s very tough to do that as a strategy. The extreme sentiment when everyone’s bearish, that can work, adding more money when everyone’s bearish.

John: Right. You have to do it on the extremes, is what you’re saying. It’s hard to operate just on all in middle, yeah.

Charlie: Correct. Most of the time it’s just noise. And extreme on the upside, is not like extreme on the downside, because we have this momentum, and we have this idea that, it’s not the idea, it’s true. Expansions last longer than recessions, and bull markets last longer than bear markets. So trying to time, say, going short, when the market’s at an all time high, or sentiment is extremely bullish, that doesn’t tend to work on average. It could work. You could get lucky, right? And that could be the extreme peak, but not the same thing.

John: Yeah, and we’re not advocating market timing.

Charlie:

Nope, not at all.

John: But to your point, when the market’s down and everyone is doom and gloom, those have proven to be very good opportunities to buy, like March of 2020, or March of 2009, or whatever it might be, because we know that it’s always darkest before the dawn, and the market is forward-looking, and I think that throws people off. By the time you feel better about things with the market, it’s already come way off of its lows.

Charlie: Well, just think of it in terms of a consumer price. You want to buy things when they’re cheap. If there’s a sale and a discount, and you could get 30% discount, that’s got to be much better. It’s no different in the stock market. The difficulty of course, is that 30% decline can become 50%. But if you have 10, 20 years, you’re likely to have a much better return following big drawdowns than any other random period of time.

John: The stock market is the only store on earth where they put up a giant clearance sign, and everyone goes screaming and running out of the store. It definitely doesn’t make sense when you think about it logically.

Charlie: It’s amazing, right? The stock market, after the run-up its had, how excited people are today to buy at today’s prices. The same people were running out of the store back in October, 2022, in March, 2020. It’s just incredible to see human behavior doesn’t change, and I don’t suspect it will, unless we’re all replaced by AI bots.

John: Absolutely. Well, thank you so much for sharing your insights here today with me on Rethink Your Money, Charlie.

Charlie: Thanks, John. Great to be with you.

John: Carl Richards had a great tweet. He said, “Let’s talk really quickly about risk, specifically about the difference between frequency and impact. Most of the time when we think about and try to mitigate risk, we’re focusing on events that are most likely to happen. We’re addressing that frequency piece, which makes sense in the abstract. But when you think about impact, it’s the events at the tail end of the risk bell curve, that catch us unaware, unprepared, and those are the ones that can have devastating consequences.” Another perspective on this came from Morgan Housel in an article he wrote discussing the three dimensions of risks. He outlined known risks, the risks that we perceive as safe risks, and then also those unknown risks. Let’s look at each of these three risk categories.

First, the known risks. This would be a potential job loss, driving a motorcycle without a helmet, smoking cigarettes, premature death, maybe health issues. These risks are easier to plan for due to their predictability. Next, perceived safe risks. This is like driving on the highway, which we know, statistically, is incredibly dangerous, yet virtually all of us do it, and do it often. Another perceived safe risk is holding onto a stable job that actually might not account for unexpected disruptions in the labor market, but we’re comfortable so we perceive it as it’s pretty safe. Last are those unknown risks. Examples that stand out, the 9/11 terrorist attacks, the 2008 financial crisis, where unless you were Michael Berry in the Big Short, you weren’t expecting it. It caught people off guard because they were not previously considered or accounted for in their plans. With investing, the average consequences of risk make up most of the daily news headlines, but the tail end consequences of risk, like pandemics, like depressions, are what Housel cites as making the pages of history books. They’re really all that matter. They’re all you should focus on.

And we spent the last decade debating whether economic risk meant the Fed setting interest rates at a quarter of a percent or half a percent. Then 36 million people lost their jobs in two months because of a virus. It’s crazy. And so I say again, the tail risk events are really all that matter. If that’s the case, how do you hedge when seeking to protect and grow, and hopefully, transfer your life savings? Well, you do your best to eliminate, or at least mitigate known risks. So you have proper insurance coverage. You don’t drive a motorcycle on icy roads without a helmet. For the perceived safe risks, you try to use wisdom. Don’t bury your head in the sand and be ignorant to the risks that are in fact there. John Madden used to drive that motor coach all over the country to do the color for Monday Night Football because he was afraid of flying. That’s insane.

Statistically, flying is significantly safer. It’s just not logical. And so maybe hedge that by having some decent accountability people in your life, that can speak truth, expose some of your blind spots. We all have them. And for the unknown risks, these are tougher. Because by definition they are unknown, they’re unexpected, they’re difficult to prepare for. But as an investor specifically, it’s one of the most notorious words in all of personal finance, you hedge unknown risks through diversification. You have different types of investments, with different risk profiles, that react differently in various market conditions. You’ve got US stocks and international stocks, and big stocks and small stocks, and tiny stocks, and corporate bonds and short-term bonds, and intermediate-term bonds, and money market funds and cash. Maybe you’ve got some private investments that don’t trade on the market. Maybe you have some real estate. Diversification is by far, the most effective way to hedge against those unknown risks.

So how do you diversify? How much of each of those asset classes should you own? Where should you save? Knowing whether you’re saving enough, how do you do so tax efficiently? These are all answered by having a written, documented, dynamic financial plan. Do you currently have one? This isn’t a theoretical question. Do you have a documented financial plan that is current for your life, and up-to-date for what is happening right now in the world, and applicable for today’s laws? If not, no other money conversation is needed. You don’t need to worry about these three different types of risks. You need to worry about having a game plan for what you’ve worked so hard to accumulate. I encourage you, invest an hour of your time and speak with a certified financial planner. If you’re not sure where to turn and you’d like to visit with one of our nearly 500 certified financial planners just like myself, visit creative planning.com/radionow. Why not give your wealth a second look?

Well, speaking of risk, I want to rethink this idea that everyone needs the same level of insurance. The reason potentially, that insurance has sort of a negative stigma, a bad reputation, is that it’s often sold, not bought. Insurance should never be put in place outside of the context of a financial plan. And a good financial advisor’s job is to identify exactly what your insurable need is. If you’re purchasing term life, or some other low-commission policy, not as big a deal. Cancel it whenever premiums are low, you still should know the number. But the consequences for being over-insured at least, aren’t that punitive. Now, if you’re underinsured because you don’t know that number, that could in fact, if we’re talking about life insurance, have a very negative impact on your family. But especially if you’re considering buying permanent life insurance, or a longer-term, locked up annuity, have a financial planner who is not going to be the one who sells you that policy, provide you a second opinion on your plan, before implementing a long-term contract and a commitment that may lead to buyer’s remorse.

I have two recent examples of this. One good, one bad, and I’ll start with the good. Had a 68-year-old couple, net worth of about $25 million, doing fantastic for themselves, most of their net worth in farmland. So they’re not quite over the estate tax exemption now, which is around $26 million, meaning anything over that is what you have to pay estate taxes on. But they’re bumping right up against it, and think if their net worth even doubles just once more over the course of their life, it’ll likely double at least twice probably, at historical rates of return. But even if just once, their net worth would be $50 million. Their two sons want to keep the farmland. They are passionate about that, and it’s probably the biggest financial priority in the family. So if the estate exemption drops, and after indexing for inflation even, let’s say it’s $10 million each, or $20 million is the exemption for a couple in 20 years, that would subject $30 million to 40% estate taxes.

I’m oversimplifying this, but roughly, their estate would owe $12 million in taxes right off the top. But remember, they don’t want to sell off a bunch of the farmland to pay a $12 million tax bill. They want to retain the farmland. Well, fortunately, these two 68 year olds are healthy, and so they utilize permanent life insurance in coordination with an irrevocable trust. Again, this is the good scenario for where, within the context of a comprehensive financial plan, looking at things like estate planning and taxes, permanent life insurance made a lot of sense for them. I said I was going to give a good and a bad. Here’s the bad, and this one, it’s just atrocious. Had someone else come in, 45 years old, behind on saving for retirement, and was still saving a thousand dollars a month into a whole life policy sold to him by his buddy from college, who after graduating, took a job at one of the big insurance companies that you would recognize. The friend did their make a list of 500 of your friends and family, and call all of them, borderline harass them, try to sell them insurance.

This person had absolutely no business being in a permanent life insurance policy, as they had been for a couple of decades, paying a thousand dollars a month while not maxing out their 401Ks, not having an adequate emergency fund, and it achieved less than a 3% internal rate of return after the cost of insurance, just atrocious. Terrible. Buy term insurance, you’re healthy, you’re young. It’d be incredibly inexpensive for the same death benefit as this permanent policy had, and get the rest invested for growth. My last piece of common wisdom for today, that I want to rethink with you, is this idea that the early bird gets the worm. Remember Netscape Navigator? It was one of the earliest web browsers, and it did play a pretty crucial role in popularizing the internet back in the mid 1990s. However, Microsoft came along, Internet Explorer, which was bundled with their Windows operating system, and Netscape’s market share dwindled.

It was eventually acquired by the giant America Online in 1999, and we all know what happened with AOL eventually. You’ve got mail. But let’s not just pick on Netscape or AOL. How about MySpace, Blackberry, Blockbuster, even Yahoo? But there’s a big difference between the cutting edge and the bleeding edge. Yeah, I’m not interested in waiting in line in the middle of the night, out front of the Apple store, just to get the exact same iPhone I can get without waiting in the line a couple days later. Remember, being first to something isn’t as important as being right. This is why you should avoid stock picking, not only because it’s hard, but thankfully, you don’t need to for success with your money. You weren’t required to find Apple back in 1983. You could have simply bought it in 2009. It’s up 3400% the last 15 years.

You didn’t need to know about Nvidia back in the 1990s. It’s up 2000% the last five years. Microsoft was already huge in 2009, one of the biggest companies in the world, and it’s up 1900% the last 15 years. And by not being so worried about getting caught up in the newest fad of investing, or the hottest brand new stock, trying to be first, and instead owning index funds and diversifying, you ensure that you picked up all the gains from the companies I just referenced. Because while, yes, it would’ve been great to have owned Apple from the very beginning, your returns would’ve been a lot better than the 3400% of the last 15 years, I agree. But how much more likely would you have been to have bought General Electric, or Kodak, or Washington Mutual, or Enron or WorldCom, or AOL, or even Intel, that wasn’t an early bird gets the worm scenario. That was, “Hey, this is a pretty established company.”

Intel is essentially flat since the turn of the century. It’s still down 25% from its all time highs 25 years ago. See, short-term gains are very common for the early bird. Everyone’s oohing and ah-ing when they see this great, exciting new thing, and you’re feeling pretty good too, until you’re not. Being a successful investor is not a sprint, it’s a marathon. And durable returns require that you’re never really wrong. So be okay not owning the Cybertruck the day that it comes out, and be more than happy to pick up the consistent, long-term returns delivered from a well diversified portfolio.

It’s this week’s one simple task, where throughout the year, I’m sharing 52 easy to execute steps in improving your financial life. Today’s tip, decide how you’ll use your tax return refund before you receive it. Now, you may be listening thinking, “John, I’m not getting a refund. I’m going to owe money.” All right, we’ll figure out how you’re going to pay for it before you owe it. But if you are receiving a tax refund, do you plan to give some of it? Should it be saved for an emergency fund? Should it be used to pay off debt, a long-term objective? Do you plan on running off the Vegas and throwing it all on the craps table? I hope not. But whatever it is, decide now, within the context of your plan, how it will be used. And if you’d like to reference all the tasks from this first quarter of 2024, they are listed on the radio page of our website at creativeplanning.com/radio.

It’s time for listener questions, and as always, one of my producers, Lauren, is here to read those. Lauren, how’s it going? Who do we have at first?

Lauren Hi, John. First, I’ve got Jerry in North Dakota. He asks, “My plan has been to retire at the end of 2024, but some changes in my life have occurred, and it looks like I can now do it mid-May. Are there any restrictions on how much I can invest in 401Ks, HSAs, or other accounts? Does this restrict the amount I can invest in? Are there any other considerations I should be aware of?”

John: Well, Jerry, congrats on your upcoming retirement. Because I’m assuming that you don’t plan to contribute any money additionally to a 401k once you retire, you can put the full amount into your retirement plan at any point before the end of the year. Keep in mind, that for the purposes of the 23 grand, or you’re retiring, so you’re probably able to do the catch up of a $30,500 limit. It does include money that you contributed to other types of retirement accounts as well, like a TSP, but I’m going to assume that you don’t have those. But it’s just worth noting, many of the retirement accounts are aggregated. Your contribution to a 401k plan though, does not impact the amount of money you can put into an IRA, but that participation in a 401k plan can impact whether your contribution to an IRA is deductible or not.

And also it’s important that you check with your HR because certain companies limit the maximum percentage of each paycheck that you can contribute to a 401k. They won’t let you put 100% of a paycheck. Some companies will, some won’t. Therefore, since you’re going to have a limited number of checks, it may make it hard, per the restrictions of your plan, to reach the limits. Now, HSAs, which you referenced, are a little bit of a different animal.

If you aren’t enrolled in an HSA eligible healthcare plan for the entire year, you give up that plan once you retire, you may only be able to contribute a portion of the allowable amount. So in most cases, you can calculate your prorated contribution amount by counting the number of months you were enrolled in the HSA eligible health plan on the first of the month, and just dividing it by 12. Then multiply the number by the total amount you could contribute if you were eligible for the whole year. I know that’s probably clear as mud. If you have questions, you can certainly reach out to us at creativeplanning.com/radio, and we’re happy to walk you through this, because there’s certainly some complexity and nuance to getting it right. All right, Lauren, who’s next?

Lauren Bob from Tucson, Arizona writes, “I just started a business, and another owner at a local networking group I attend, mentioned estimated payments. How do I make estimated payments? When are estimated payments due? Should I be making estimated payments?”

John: Oh, Bob, your question on estimated tax payments, take solace in the fact that you are not even close to the first person that’s been confused. And with just having started a business, you have a lot of moving parts, this being one of those that’s different than before. So these are taxes that are paid to the IRS throughout the year on earnings that are not subject to federal tax withholding. Most commonly, self-employed earnings. But sometimes it’s on income you’ve earned on the side, such as dividends or realized capital gains, prizes, basically non-wage earnings. And certain states will also require you to make estimated payments on the state side as well. You’re here in Arizona, where if your gross income for both the prior year and the current taxable year exceeds $75,000 or 150 if you’re married filing a joint return, you are also required, for the state, to file estimated payments as well.

They’re due on a quarterly basis, which is again confusing, because it doesn’t coincide perfectly with the quarterly intervals of a calendar year. But you are able to make them more frequently, and I see a lot of business owners make monthly estimated payments, just to break them down a bit more bite-sized, so that they don’t have to manage cashflow quite as carefully over that longer period of time, waiting three months. There are certain requirements to penalty-proof yourself based upon the previous year’s income, and in conjunction with what you expect to make in the current year. Sounds like the complexity of your situation has increased, and it probably is time to talk to a CPA, or a good bookkeeper who do this for a lot of business owners just like you, and can help offer you guidance to ensure that you pay the right amounts at the right times to the right places.

Of course, if you need help, we do this for thousands of clients here at Creative Planning, and have multiple offices here in Arizona. Visit creativeplanning.com/radio if you’d like to speak with us, Bob. Let’s wrap it up with another Arizona question from Suji.

Lauren Suji in Scottsdale, Arizona wrote, “I’ve been thinking about my retirement strategy, and wanted to ask, how does private equity play a role in planning? Are there any potential benefits or risks that I should be aware of?”

John: Well, Suji, there are plenty of benefits and risks, and pros and cons, like most investments, when it comes to private equity. In a nutshell, public equities are the stock market. You have ownership in companies that are publicly listed and traded. Private equity is where you are an owner in the same way, but of a private company that’s not listed on a stock exchange. And the reason this has gained a lot of steam and momentum, and you’re hearing more about private equity, is one, the returns historically have been pretty good, but more so because there are far fewer publicly-traded companies than there used to be.

If you want to have a truly diversified portfolio, but you don’t invest in any private companies, you’re failing to have exposure to significant portions of some of the best companies in the country, or potentially, the world. So the pros of private equity is that you have the potential for higher returns, you have active management in most cases, and value creation. As I just mentioned, it provides another level of diversification beyond traditional asset classes that are publicly traded, stocks and bonds, for example. It gives you access to unlisted opportunities, and there’s an alignment of interest because private equity fund managers typically invest alongside you as the limited partner, which aligns your interests with those of the investors.

But there are certainly some cons. The largest of which is illiquidity. When you buy Apple stock, you can click a button and sell it that same day. Private equity investments are typically illiquid, potentially not even giving you any opportunity to redeem shares until they exit and lockup periods can extend for, we’re talking several years. I mean, many of these private equity investments are 10 year time horizons at a minimum. Traditionally, they have high minimum investment requirements, so you have to be an accredited investor with over a million dollars or a qualified purchaser with over $5 million to even have access. And then complexity and due diligence is another con manager selection is critical in the private equity space. It’s a classic fat head, long tail industry. The very, very best private equity firms have demonstrated an ability to create returns in excess of the stock market.

Of course, past performance, no guarantee of future results, but the vast majority of the industry, you wouldn’t want to touch with a 10-foot pole because you’re going to lock up your money, have more complexity, and probably not get better returns. This is why working with a firm like us here at Creative Planning, that has access, because we’re able to have a seat at the table with who we believe to be some of the best private equity managers, from a historical perspective, in the world. So I’m personally a fan of private equity, as a small portion of the portfolio for the right type of investor, who has no need for liquidity and is willing to put up with some headaches like getting a K-1 and needing to file an extension on their tax return for the next several years, but it’s not for everyone.

And two smart people can arrive at different conclusions when it comes to investing in private equity within their specific plan. This is definitely something, Suji, I would sit down, talk with a certified financial planner, build out your financial plan, really identify your objectives. And through that process, you should be able to determine whether or not private equity makes sense for you. I plan to spend a sizable portion of an upcoming future show talking in more detail about private investments, as I know that’s of interest to a lot of listeners. And if you have questions, just as these listeners did, email your question to radio@creativeplanning.com.

The Beatitudes say, “Blessed are the meek.” When you hear the word meek, what comes to mind? I’ve often thought about meekness as people being timid or intimidated. But meekness isn’t weakness, as it’s often confused. Being meek means having power under control. Yes, being quiet and gentle and humble. But here’s the key word, willingly. Being willingly obedient, being willingly submissive. Meekness is strength that’s suppressed, and this is an important life principle. It’s an important money principle as well. If you’re in a good financial situation, don’t use your money to hold over other people. Don’t be that parent who uses their money as a weapon within the family to manipulate and control others. We’re all familiar with that person. Maybe you’ve experienced it personally, but when it comes to your money, making the world a better place through meekness, involves adopting a selfless approach to financial resources.

And I think there are a few principles for how this can be achieved. Generosity, whether it be through charitable donations, supporting causes you believe in, or just simply helping those in need, can make a significant positive impact on individuals and on communities. Humility, a real core tenet of this idea of meekness is recognizing that your wealth is not solely your own. You probably worked really hard for it, and you probably repeated many of the behaviors, consistently, that made you successful in many areas of your life, including having financial success. But there were also probably a lot of contributing factors that were outside of your control, like being born in America, having some of the opportunities that were provided to you. And demonstrating humility by stewarding your money wisely can lead to more mindful and ethical financial decisions. Humility helps you avoid, maybe excessive consumption, and may help prioritize the wellbeing of others, over just solely your own personal gain.

Empathy is another avenue to achieving a meek spirit with our money. Cultivating empathy really allows us to understand and connect with the struggles and needs of others. I know for myself, sometimes I’m just so oblivious and unaware of how other people might be living, or what they’re going through because I’m so busy. The common word that we use in America, “How are you? Busy.” Sometimes that busyness doesn’t allow us even enough time to recognize the experiences of others. And so by using your financial resources to alleviate suffering, you can create a more compassionate world, which is a pretty neat opportunity.

And then last, through community building. Investing in local communities and businesses, fosters economic growth, strengthens social bonds, deepens friendships. Maybe it’s patronizing small businesses, supporting local initiatives, participating in community building efforts. You can contribute to creating thriving and resilient communities with the resources that you’ve worked so hard for. In summary, practicing meekness with money involves using your financial resources in a humble manner to uplift others and contribute to creating a more equitable and compassionate world. The world that we want our kids and our grandkids, and our great grandkids, to hopefully be thriving in long after we’re gone. 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. Creative Planning, along with its affiliates, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. United Capital Financial Advisors is an affiliate of Creative Planning. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests, are solely their own, and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. Should not be construed as investment, tax, or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results, is no assurance of future performance. The information contained herein, has been obtained from sources deemed reliable, but is not guaranteed. If you 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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