One For The Money

TRAILER

Welcome to episode 79 of the One for the Money podcast. I am always glad and grateful you have taken the time to listen. This part 1 of a 2 part series on Medicare. Medicare is a significant part of every single American’s retirement planning. Knowledge of Medicare is critical to making the most of your retirement. In this episode I’ll share what you need to understand about Medicare and in Episode 80 airing on February 15th, I’ll share the Misunderstandings and Mistakes people make with Medicare.

In the tips, tricks, and strategies portion I will share a tip regarding Medicare enrollment.

In this episode...

• Rising Healthcare Costs [1:53]
• Medicare Basics [2:57]
• Importance of Annual Medicare Reviews [12:03]

MAIN

In Episode 79 of the One for the Money podcast, I shared how the first wealth is health. I also shared the importance of exercise and nutrition and how they can increase not only one’s life span, but their health span, which is the years one has good health.  Because healthier retirees incur fewer health related expenses it really is in retirees long term financial interest to INVEST in their health because health care related expenses in retirement are WAY higher than what most people anticipate.

In fact last August, the investment company Fidelity released its Fidelity's latest Retiree Health Care Cost Estimate, which surveyed retirees. Most individuals surveyed expect their share of health care related expenses in retirement to be ~ $75,000 retirement (or $150k per couple), but current retiree healthcare expense data shows that each individual should expect to pay $165,000 or $330k/couple in retirement for health care expenses. That is more than double what people estimate they will have to shell out.  Now these estimates assume that these individuals have health care coverage through Medicare. This might have many scratching their heads wondering what Medicare actually pays for. Quite a lot actually, it’s just that health care is incredibly expensive especially as one ages.

I’ll first explain what Medicare is and what it takes to be eligible before explaining why health care costs in retirement are still expensive even with Medicare. 

Medicare is health insurance for retired Americans. According to usdebtclock.org, the the US government spent ~ $1.8 Trillion dollars on Medicare/Medicaid in 2024 which accounts for over 25% of the annual Federal budget. 

Some of Medicare is paid for through payroll taxes. Employees pay 1.45% of their income and employers pay another 1.45% of their employees income to the government to help fund Medicare and Medicaid. These are part of the Federal Insurance Contributions Act or (FICA) taxes that we pay on our income. Social Security is funded with a tax of 6.2% paid by the employee and another 6.2% paid by the employer. However this is only paid on the first $176,100 of income. Any income earned above that level is not subject to the SS tax, and that’s because there is an upper limit on the social security benefit one could receive.  However, the 1.45% medicare tax has no income limit so whether a person earns income of $10,000 or $10 million  the Medicare taxes are applied to the entire amount. 

Now Medicare has been around for a long time. 

In 1935: President Franklin D. Roosevelt’s New Deal included the Social Security Act, which provided retirement benefits but did not include health insurance. Efforts to include health coverage in the program were unsuccessful due to political opposition.

By the 1960s, about half of Americans over 65 had no health insurance, as private insurers found them too risky to cover.

1965: Medicare was established under President Lyndon B. Johnson as part of the Social Security Act amendments. It aimed to provide health insurance for Americans aged 65 and older, regardless of income or medical history. Former President Harry S. Truman was the first enrollee, symbolizing his earlier advocacy for national health insurance.

Initial Structure

Medicare initially had two parts:

Part A (Hospital Insurance): Covered hospital stays, nursing facility care, and some home health services.

Part B (Medical Insurance): Covered doctor visits, outpatient care, and preventive services.

Since then there have been several notable Expansions and Changes

1972: Medicare expanded to include people under 65 with long-term disabilities and individuals with End-Stage Renal Disease (ESRD).

1997: The Balanced Budget Act created Medicare Advantage (Part C), allowing private insurance plans to offer Medicare benefits.

2003: Medicare Prescription Drug Improvement and Modernization Act added Part D, a prescription drug benefit, which became available in 2006.

2010: The Affordable Care Act (ACA) expanded preventive services coverage and reduced costs for beneficiaries in the Part D.

Today, Medicare covers over 65 million Americans and consists of four main parts: Part A: Hospital insurance; Part B: Medical insurance; Part C: Medicare Advantage, a private insurance alternative to traditional Medicare; Part D: Prescription drug coverage.

While Medicare has improved healthcare access and affordability for millions of Americans, it continues to face challenges, including rising costs, the aging population, and calls for reform to ensure long-term sustainability.

Eligibility for Medicare is based on a few factors

Eligibility by Age

Age 65 or older:

Most people qualify for Medicare when they turn 65 if they meet one of the following conditions:

- They are U.S. citizens or permanent residents who have lived in the U.S. for at least 5 consecutive years.

• Medicare part A covers inpatient hospital care, skilled nursing facility stays, hospice care, and some home health care,
• They or their spouse have worked and paid Medicare taxes for at least 10 years (40 quarters), which qualifies them for premium-free Part A. Those who don’t qualify can still buy Part A by paying a monthly premium. If they have at least 30 quarters of coverage, it will be $285/month in 2025, fewer than 30 quarters of coverage, $518 a month
• Medicare Part B (Medical Insurance):.
• Part B is optional and available to anyone who qualifies for Part A. It requires a monthly premium, regardless of work history.
• Part B covers doctor visits, outpatient care, medical services like lab tests, and most preventive services, essentially differentiating between "hospital insurance" (Part A) and "medical insurance" (Part B)
• Medicare Advantage (Part C) and Prescription Drug Plan (Part D):
• Eligibility for these plans requires enrollment in both Part A and Part B.
• Non-citizens:
• Legal permanent residents (green card holders) are eligible if they meet the 5-year residency requirement and have worked enough to qualify for Social Security benefits (or have a qualifying spouse).
• By meeting one or more of these criteria, individuals can enroll in Medicare during specific enrollment periods to avoid penalties or coverage delays.
• Enrollment Process:
• Some are enrolled automatically (e.g., those already receiving Social Security benefits).
• Others must apply through the Social Security Administration, especially if not receiving Social Security benefits or living in Puerto Rico/abroad.
• Specific Enrollment Periods:
• Initial Enrollment Period (IEP): A 7-month window around the person’s 65th birthday or 25th month of disability benefits.
• There is a General Enrollment Period (GEP) and Special Enrollment Period (SEP) which is available for those with group health coverage from current employment.
• Employer-based coverage from current employment may allow delay of Part B enrollment.
• COBRA coverage does not qualify as current employment coverage, so delaying Medicare may result in penalties and coverage gaps.
• it’s hugely important to enroll into Medicare at the right time as there will be a monthly penalty for life if one does not. 

Now back to the healthcare expenses in retirement. On average people expect to pay $165,000 or $330k/couple in retirement for health care expenses even with Medicare. Parts A, B, C and D. Of that $165k/person 43% of that will be Medicare Part B and Part D premiums, out-of-pocket prescription drug costs account for 10%, and other medical expenses (e.g., co-payments, coinsurance, and deductibles) make up the remaining 47%.

Part A Deductible and Coinsurance Amounts for Calendar Years 2024 and 2025

by Type of Cost Sharing

2024

2025

Inpatient hospital deductible

$1,632

$1,676

Daily hospital coinsurance for 61st-90th day

$408

$419

Daily hospital coinsurance for lifetime reserve days

$816

$838

Skilled nursing facility daily coinsurance (days 21-100)

$204.00

$209.50

Beneficiaries who file individual tax returns with modified adjusted gross income:

Beneficiaries who file joint tax returns with modified adjusted gross income:

Income-Related Monthly Adjustment Amount

Total Monthly Premium Amount

Less than or equal to $106,000

Less than or equal to $212,000

$0.00

$185.00

Greater than $106,000 and less than or equal to $133,000

Greater than $212,000 and less than or equal to $266,000

74.00

259.00

Greater than $133,000 and less than or equal to $167,000

Greater than $266,000 and less than or equal to $334,000

185.00

370.00

Greater than $167,000 and less than or equal to $200,000

Greater than $334,000 and less than or equal to $400,000

295.90

480.90

Greater than $200,000 and less than $500,000

Greater than $400,000 and less than $750,000

406.90

591.90

Greater than or equal to $500,000

Greater than or equal to $750,000

443.90

628.90

As one can see healthcare is a significant expense in retirement and is something I assess with all of my clients in their financial plan to ensure they are viable. 

And while 63% of Americans approaching retirement say they plan to review their Medicare options annually, a separate survey found that retirees aged 75 and older are the least likely to review their coverage each year (despite the potential for savings by comparing plans, given greater medical needs at this point in their lives).

Assessing your medicare options on an annual basis is a hugely important part of your financial planning. I strongly recommend you invest the time with experts to help you with that decision each year.

In conclusion, understanding Medicare is a critical part of any successful retirement and yet many people don’t make the effort to plan better with Medicare and as a result they make critical mistakes. That will be the focus of my next podcast episode, episode 80. 

TIPS, TRICKS AND STRATEGIES

Welcome to tips, tricks and strategies portion of the podcast where I will share a tip regarding enrolling in Medicare. As I noted previously in this episode, most people qualify for Medicare when they turn 65 if they meet one of the following conditions:

- They are U.S. citizens or permanent residents who have lived in the U.S. for at least 5 consecutive years.

• They or their spouse have worked and paid Medicare taxes for at least 10 years (40 quarters),
• Initial enrollment - As I mentioned there is a 7-month window around the person’s 65th birthday or 25th month of disability benefits. If they don’t have employer coverage they need to enroll in part B
• If they enroll late, there is a permanent penalty. It’s called the 
• The Medicare Part B late enrollment penalty (LEP) and it is an extra 10% of your monthly premium for each year you could have signed up for Part B, but didn't: 
• You'll have to pay this penalty for as long as you're enrolled in Medicare.
• If your monthly premium is calculated to be $250/month. That’s an extra $25/month, $300/year. Over a 25 year retirement that adds up to an extra $7500. so be sure to enroll at the right time.

References

Fidelity Investments® Releases 2024 Retiree Health Care Cost Estimate as Americans Seek Clarity Around Medicare Selection

 The Five Biggest Medicare Mistakes - Sensible Financial Planning

5 things you need to know about signing up for Medicare | CMS

2025 Medicare Parts A & B Premiums and Deductibles | CMS

TRAILER

Welcome to episode 78 of the One for the Money podcast. I am always glad and grateful you have taken the time to listen. In this episode I’ll share why the first wealth is health. 

In the tips, tricks, and strategies portion I will share a tip regarding Health Saving Accounts.

In this episode...

• The Holiday Season [0:57]
• Health vs. Wealth [1:57]
• Health Expenses in Retirement [4:04]
• Exercise and Long-Term Health Benefits [5:38]

MAIN

This episode airs on January 15th when we get a pretty good sense on how well we are doing on the resolutions we made a few weeks back. Often times, those resolutions focus on our health, which makes a lot of sense given all the delicious food we at during the holidays.

According to one medical Journal

Several studies suggest that the holiday season, starting from the last week of November to the first or second week of January, could be critical to gaining weight. 

But it’s not just the holiday foods to blame. As noted in an article by the University of Rochester Medical Center 

Shorter days, longer nights, cold weather, decreased exercise and changes in sleep habits all contribute to winter weight gain. When you add in the abundance associated with holiday meals and our tendency to overeat at special occasions, many of us enter the New Year a few pounds heavier than we were before Thanksgiving.

This may seem like unusual financial planning advice, but as the great American author Ralph Waldo Emerson said,  The first wealth is health. And as Bronnie Ware noted in her Regrets of the dying essay, that health brings a freedom that few realize until it’s gone. 

Years ago, I read an article that featured several prominent financial planners who worked with financially wealthy clients and when asked what was the most important advice they gave their clients, all of them emphasized the importance of health. One of the advisors recommended that for those over 50 you should plan to spend at least 1 hour a day on their physical health. Now some might think, of course these clients were already wealthy so they could in turn focus on their health, but it just goes to show that wealth isn’t anything unless one has their health. Many think you should exercise so you can have a longer enjoyable life but often times, your life can be just as long, but just not enjoyable, as I’ve seen in my own family.  Many in my family have a long life span but sadly a poor health span which are the years in which you have good enough health to enjoy it.

According to growwellthy.com, which is for an exercise physiologist that helps financial planners stay healthy, 96% of retirees say health is more important than wealth. 

The website includes a health check quiz that goes over key elements of one’s health; namely: Nutrition, regular and appropriate exercise, good sleep, ie more than 7 hours a night, taking more than 7000 steps a day, strength train at least 2 times per week, there were also questions regarding one’s physical fitness such as: are you able to get down and up off the floor easily, Can you hang from a bar for at least 30 seconds, do you eat protein at most meals, drink alcohol sparingly and do you drink lots of water? I heard a great quote a while back “A man’s health can be judged by which he takes two at a time — pills or stairs.” 

And it’s not just about feeling great, it’s having more money to spend on other things that you would enjoy. It really is in your long term financial interest to INVEST in your health and to keep exercising. Because health expenses in retirement are far higher than what most people anticipate.

According to Fidelity's latest Retiree Health Care Cost Estimate, while individuals expect to incur $75,000 of healthcare costs in retirement, the actual average is $165,000 (assuming the retiree enrolls in Medicare Parts A, B, and D), that’s a large difference. Medicare Part B and Part D premiums are responsible for 43% of this total, out-of-pocket prescription drug costs account for 10%, and other medical expenses (e.g., co-payments, coinsurance, and deductibles) make up the remaining 47%. And while 63% of Americans approaching retirement say they plan to review their Medicare options annually, a separate survey found that retirees aged 75 and older are the least likely to review their coverage each year (despite the potential for savings by comparing plans, given greater medical needs at this point in their lives).

Assessing your medicare options on an annual basis is a hugely important part of your financial planning. I strongly recommend you invest the time and the experts to help you with that decision each year.

And it’s imperative that we continually invest in our health. In episode 29 of this podcast, I shared information from Dr. Peter Attia, a physician whose medical practice focuses on increasing his clients health span. This doctor doesn’t treat the ill, but helps people get healthier. Something that is sorely needed in our society.

Dr. Attia shared that longevity and life span were impacted through major modifiable behaviors such as exercise, sleep, nutrition, and emotional health. But that Exercise is in a league of its own both on its ability to extend life and reduce all-cause mortality. 

Dr. Attia shared information from Dr. Mike Joyner an exercise physiologist to further demonstrate his point of why exercise is so critical. Dr. Joyner shared a fascinating study regarding the impact of exercise on life expectancy. This study was conducted by a Dr. Jerry Morris in the UK after WW2 where he studied employees that worked on the iconic red double decker buses you see in London. They compared the health of the persons driving the bus vs the conductor, who was on the same bus, that had to walk up and down the stairs getting tickets. These individuals were followed for years and it was determined that the conductors had about a 50% lower levels of drivers of cardiovascular disease. 

Dr. Joyner said that when they studied healthy people that they had a 4-5 year extension in life expectancy but even more interesting is that they also had a 4-5 year extension in health span, meaning how disability free you are. They had 4-5 extra good years and lived a long time and died quickly with minimal disability. Sign me up. I’ll put a link to the podcast in the show notes for those that want to learn more. 

But suffice it to say, exercise doesn’t just buy your more time but it buys you more quality time as well. 

In conclusion, exercise can extend your life and health span, and may greatly reduce the money you have to spend on healthcare during an early retirement. A great quote I read was  this, “Those who think they have not time for bodily exercise will sooner or later have to find time for illness.”Jim Rohn the entrepreneur, author, and motivational speaker also  said “Take care of your body, it’s the only place you have to live.”

TIPS, TRICKS AND STRATEGIES

Welcome to tips, tricks and strategies portion of the podcast where I will share a tip regarding how best to pay for health care expenses.  While staying healthy you may be able to avoid many of these costs when you do have healthcare costs there is a clear advantage on how to pay for them. 

Wouldn’t it be great to get a 20-30% discount on medical expenses? Well the great news is that you can with flexible spending accounts and health savings accounts. Both of these are available regardless of your level of income. Between the two, Health savings accounts have the clear advantage as they don’t need to be used up each year, but if FSA is all that you have, like my wife with her health care plan, it’s still a great way to get a “discount” on any healthcare related expenses. 

HSAs are a powerful tool, especially for early retirees as eligibility for medicare doesn’t begin until age 65. 

Here are why HSA are so great. These are the only investment vehicle that are triple tax free. Yes triple!  The contributions are tax deductible, and both the growth, and distributions (if used for a qualifying medical expense) are tax free and so with HSAs you pay $0 taxes. But not all people are eligible to invest in an HSA.  You must have a qualifying high deductible medical plan.  Additionally, the contributions are limited to the following amounts in 2025: Individual $4150, and Family $8300. For those 55 and older you can contribute an additional $1000.

You can use the money in the HSA at any time to cover health care expenses. That’s why they are ideal for early retirement. But if you don’t need to use these then you can really see the benefit when you let the money grow and pay for current health care expenses from other sources of personal savings when possible.

 But what if you don’t need all of the money for Healthcare Expenses?  It essentially becomes just like a Traditional IRA.  Distributions are taxed at ordinary income rates.

For my clients that are younger or “youngish” who think they can wait until later, remember that the earlier you invest your monies the longer it has time to grow, and that growth can be significant. Just $2000 invested in an HSA each year for 30 years that earns a 7% rate of return would grow to over $200,000. That would go a long way to help offset health care expenses in your early retirement.

References

Effect of the Holiday Season on Weight Gain: A Narrative Review - PMC.

Fidelity Investments® Releases 2024 Retiree Health Care Cost Estimate as Americans Seek Clarity Around Medicare Selection

Healthy, Wealthy, & Wise, Ep #29 — betterplanning.betterlife.

Winter Weight Gain: Why it Happens, What to Do | URMC Newsroom

#217 ‒ Exercise, VO2 max, and longevity | Mike Joyner, M.D. - Peter Attia

TRAILER

Welcome to episode 77 of the One for the Money podcast. Happy New Year as well as this episode is airing on Jan 1st, 2025. Crazy how time flies. I am both glad and grateful you have taken the time to listen. In this episode, I’ll share the biggest lessons I have learned in over 25 years as an investor.

In the tips, tricks, and strategies portion, I will share a tip regarding setting financial goals.

In this episode...

• The Importance of Starting Early [3:27]
• The Power of Paying Yourself First [4:19]
• Market Timing is a Fool’s Errand [5:36]
• The Need for Proper Planning & Tax Strategy [8:02]
• Spending While You Are Healthy [12:11]

MAIN

I’ve been investing in the stock market for a little more than 25 years and I’ve learned a lot about investing and building wealth during that time so I thought it might be helpful for me to share the biggest lessons I’ve learned at my silver jubilee investing anniversary. 

But first, I should share that I was introduced to the stock market by accident. I was told by a university guidance counselor that graduate schools and future employers expected those they accepted to be well-read and that one should read the paper every day. After that guidance every day I would grab our local paper and read the current events in the world which would feature such things as natural disasters, politics, wars, etc. I would then skip over the business section to review the sports section. However, as I turned the pages on the business section I often wondered what all of these abbreviations and numbers represented. I learned later that these represented companies that the general public could invest into. Well, one day the newspaper advertised a free investing seminar at the public library in the city closest to my small town. I attended the presentation and it was incredibly interesting. The gentleman who presented spoke of one Warren Buffett and how the stock market was the way to build wealth. At the time of this investing seminar, Warren Buffet’s company Berkshire Hathaway had a stock price of a whopping ~$60,000 per share. If you think that’s amazing today a single share of Berkshire Hathaway stock is over $700,000.

A short time after I was introduced to investing, it seemed the rest of America became interested due to the dot com era. At the time the World Wide Web was a new phenomenon and the stock market rocketed higher. The stock market eventually crashed down to earth, but despite the volatility, I became very interested in investing. 

These experiences started my journey into investing and here a little over 25 years later are the biggest lessons I have learned about investing and building wealth. 

The first lesson I’ve learned in my 25 years is that little actions have massive consequences when given time. In other words, it is WAY more important to start investing than the actual amount you have to invest. Every little dollar can grow to mind-boggling sums given time. One of the best examples I share with clients is that of an apple seed. It’s hard to conceive that this tiny little seed could grow into a large tree that could produce thousands of apples, and yet that’s exactly what it can do, of course, given the critical ingredient of time. But your wealth can’t grow if you don’t plant the seeds to start with.

As the old proverb goes - The best time to plant a tree was 20 years ago; the second best time is now. As you get older you usually can make more money but you can never get more time!

The second lesson I’ve learned in my 25 years is understanding how paying yourself first makes all the difference. As Warren Buffett said so well “Do not save what is left after spending; spend what is left after saving.” People who know how to manage their cash flow have the best life in the future. They have more freedom, more experiences, and way less stress. As a certified financial planner, I’ve seen this firsthand. I’ve met with 50 and 60-year-olds who have accumulated millions and are excited about retirement but I’ve also met 50 and 60-year-olds who have minimal to no net worth and are scared of what the future holds. These are sobering meetings when I tell them that they have to work for way more years than they want to and their retirement will still be challenging. My heart aches for them. It’s the reason, I teach financial literacy classes in the community and why I teach financial literacy to the teenagers and young adults of my clients. Just doing for them what I wished was done for me. I like to remind people that you will turn 65 regardless of what planning you put in place.

The good news is that many already pay themselves first with their automatic contributions to their 401ks, IRAs, and HSAs.

The third lesson I’ve learned in my 25 years is an investor is that no one can accurately predict the future and despite such an obvious statement, we continue to digest the predictions about the economy, the stock market, or even who will win the Super Bowl for American Football fans or the Champions League for those European football fans.

And yet many investors try to time the market based on certain predictions. The famous investor Peter Lynch explained the fools errand of market timing best when he said- “More people lost money waiting for corrections and anticipating corrections than the actual corrections.”

Another great quote regarding predictions is from Warren Buffet when he said “We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, we continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

In a fabulous and equally free resource from JP Morgan entitled Guide to Retirement, it highlights the perils of trying to time the market and why it doesn’t work. The guide uses a 20-year investment period for the S&P 500, from Jan 1, 20004 to December 31, 2023. During that time there were over 5000 trading days. And if you were invested for all 5000+ days a $10,000 dollar investment in the S&P500 would have grown to over $63,000. But if you would have missed just ten of the best days of those 5000+ days. Your investments would have only grown to just over $29,000 instead of over 63,000. In other words, if you were invested for 99.8% of the days your investments would be 54% less. If you had missed just the 20 best days of approximately 5000 trading days, your investments would have only grown to just over $17,000. Too many people believe they can time the market and know when to sell and when to buy, but it’s impossible. Here is why seven of the 10 best days occurred within two weeks of the 10 worst days and Six of the seven best days occurred after the worst days. 

This leads to the fourth lesson I’ve learned in my 25 years is an investor. Which is fear is not your friend. As the famous investment Advisor Nick Murray has said so well "All successful investing is goal-focused and planning driven. All failed investing is market-focused and performance-driven.”All successful investors are continuously acting on a plan. All failed investors are continually reacting to the markets. Everything else is commentary.”

The reason why planning-driven investing is so important is because it takes the emotions out of investing. Those emotions can have a huge impact. Nick Murray also said, “Wealth isn’t primarily determined by investment performance, but by investor behavior.” How true that is I know this from personal experience when very early in my time as an investor, I purchased a stock that then dropped 50%. I sold out only for the stock since that time to increased over 7,900%. that’s right, instead of selling I should have bought more and enjoyed a nearly 8 thousand percent gain. For more details on this painful lesson see episode 18 of this podcast entitled, When Life Gives You Lemons, Stay Invested.

Another fairly recent example, was during the Covid correction. Fidelity who manages over $4 trillion said that one third of their investors over 65 got out of the market during that correction. Since that time the market is up over 137%. 

The fifth lesson I’ve learned in my 25 years as an investor is that no one has their stuff together. Almost everyone needs help when it comes to investing. I was a do-it-yourselfer myself before I became a financial advisor but now that I have been investing for over 25 years and have been a financial planner for nearly 10. I’ve realized that no one is coming close to optimizing their investments. I’ve seen literally hundreds of portfolios and most were not in alignment with the clients' goals. Here are just a few examples:

• During downturns in the stock market, I’ve kept clients in the market. This increased their returns by hundreds of thousands
• I have had numerous clients with hundreds of thousands and in some cases millions of dollars sitting in cash at the bank making hardly any interest but investing these funds I’ve been able to help them earn tens to hundreds o thousands more than they would have. 
•   So many clients had the wrong allocations in their portfolios, too much allocated to a single company, or a single sector (technology for example) or a single country (the US) or in the wrong size (too much small cap or too much large cap)
• Too many clients weren’t pursuing the right type of retirement plans. Instead of saving $50-60,000 on a pre-tax basis, I’ve helped clients save hundreds of thousands on a pre-tax basis through Cash balance retirement plans.

Another example leads to the sixth lesson I’ve learned in my 25 years as an investor and that is taxes matter. It’s imperative that people implement strategies to reduce taxes because otherwise, they end up giving WAY more to the government instead. My clients do a way better job of spending their money than the government. You must pay taxes, but there’s no law that say’s you gotta leave a tip. Or as Judge Hand said so well “In America there are two tax systems; one for the informed and one for the uninformed. Both are legal.”

That’s why investors need to pursue Roth IRAs, Roth 401ks, Roth Conversions, Pre-Tax IRAs, Regular 401ks, Cash Balance Plans, 529 plans, and Health Savings accounts and pursue these when the time is right. In addition, they need to consider gifting strategies and tax loss harvesting just to name a few more.

I could share many other lessons but I leave with one last lesson I’ve learned in my 25 years as an investor and that lesson that the primary purpose for investing is so we can spend later, and yet far too many struggle with making that switch from saving to spending. For my clients that have struggled with this concept I’ve given them the book called Die with Zero which is written by Bill Perkins. One of the most significant learnings for me from the book was his explanation regarding the intersection of time, money, and health and how too many worked too long to the point where they had plenty of time and money but didn’t have the health to truly enjoy it. He argued that people should be spending more money when their health is better. More money to be spent in the 40s 50s and 60s than after 65 during the typical retirement.

I often tell clients that there are two significant risks in retirement. The first is running out of money and the second is dying with too much. So many are fixated on the first risk, that the vast majority succumb to the second. Research has shown that 84% of retirees have MORE money in their account at the end of retirement than they started with and 66% of retirees over a 30-year retirement will have 2 TIMES MORE money at the end than what they started with using traditional spending amounts. Ultimately Your life is a sum of your experiences and so to maximize your life you need to maximize your experiences. Memories are an investment in our future selves. Buying an experience just doesn’t buy you the experience itself–it also buys you the sum of all the dividends that experience will bring for the rest of your life. 

What many fail to understand is that you need to have a plan to spend your money just as much as you need a plan to build the wealth you have to spend. 3 people will spend your retirement money: You, Your beneficiaries or The Government. We employ a dynamic distribution strategy that makes adjustments based on the stock market. Consequently clients get to spend as much as 62% more than they would under traditional distribution strategies.

I’ve invested now for over 25 years and the blessings I have received from attending that first investment seminar nearly 26 years ago are nothing short of remarkable. That one investment presentation sparked an interest that led to me to max out Roth IRAs for my wife and I, max out my 401k, start 529s for my boys and ultimately establish a company that enables me to help others make the most of their money. This has taught me some of the most valuable lessons I’ve learned from the importance of getting started, paying yourself first, not trying to predict market movement, not succumbing to fear, why tax planning is critical, and ensuring one plan so they can spend on the things that matter most. 

TIPS, TRICKS AND STRATEGIES

Welcome to the tips, tricks, and strategies portion of the podcast where I will share a tip regarding setting financial goals. This podcast airs on January 1st when we typically make resolutions for the new year. Interestingly, the month of January is named after the Roman God Janus who is the God of beginnings and endings and as such is usually depicted as having two faces. One facing forward and one facing backward. This is a great analogy for our financial goals. We should look back at 2024, see what we did well, look forward to 2025, and make improvements. Personally, I plan to automate the savings into my kids' Roth IRA accounts. I also plan to establish a sole proprietorship to pay my kids to eliminate certain taxes. I’m also finalizing vacation plans for 2025 and 2026. 

References

When Life Gives you Lemons, Stay Invested

JP Morgan's Guide to Retirement

TRAILER

Welcome to episode 76 of the One for the Money podcast. I am both glad and grateful you have taken the time to listen. In this episode I’ll share how you can use a drop in the stock market to your advantage.

In the tips, tricks, and strategies portion I will share a tip regarding year end planning strategies.

In this episode...

• Opportunities in Down Markets [0:59]
• Investment Strategies During Market Declines [2:55]
• The Historical Behavior of the Stock Market [11:10]

MAIN

Better Planning Leads to a Better Life, and that can especially be the case in down markets. Many people fear stock market downturns but hopefully at the end of this episode you are able to see the silver linings amongst the rain clouds. In fact that reminds me of a fantastic quote by one of the worlds most famous investors, Mr. Warren Buffett. 

He said and I quote ““Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”

This speaks to the tremendous opportunities that a down market can present, but you have to have the stomach to handle them. During such times it’s easy to get gripped by fear and I don’t blame people as losses are incredibly hard to stomach. In fact losses are twice as impactful for investors than equivalent gains.  Studies have shown that a 10% loss hurts twice as much as a 10% gain. I know this from personal experience when very early in my time as an investor, I purchased a stock which then dropped 50%. I sold out only for the stock since that time to increase over 7,900%. that’s right, instead of selling I should have bought more and enjoyed a nearly 8 thousand percent gain. For more details on this painful lesson see episode 18 of this podcast entitled, when life gives you lemons, stay invested.

With a pessimistic mindset, you can make really poor decisions and miss incredibly once-in-a-generation type of opportunities, like I did, but with the right mindset you can see the economic rain storms and instead of running for cover you grab a bucket as Warrant Buffett said so well. And when you employ these better investment strategies it will make for an even better life.

Here are the strategies to consider based on how far down the market is. I’ll use each calendar year, January 1st, as the starting point.

Here is what one should do when the stock markets are down 5%.

If the stock markets are down 5% from where there were on January 1st, there really is nothing one should do other than stay the course. Drops in this magnitude are far more typical than one might imagine. In fact in the last 44 years, the stock market has been down on average 14.2% at some point during the calendar year. So at one point between January 1st and December 31st of every year since 1980, the stock market was down around 14% on average and yet, 33 of those 44 years, the markets ended up higher on December 31st than where it had started on New years day. 

Most times the best thing you can do is nothing at all. 

Here is what one should do when the stock markets are down 10% , the definition of a correction. 

Your first option is to do nothing and stay the course but there are also some ways to take advantage of these likely temporarily lower prices. 

The first consideration is to rebalance your accounts. For example, let’s say you have identified a portfolio of 80% stocks and 20% bonds to be your ideal portfolio to help achieve your goals.  Now let’s also say there is a drop in the stock market of ~10% and this causes the stock holdings to go down to 70% from 80%.  Alternatively the bonds portion of your portfolio rises by from 20% to 30% in this hypothetical example. Rebalancing merely, shifts your portfolio back to it’s initial distribution, so 10% of bonds or bond funds are sold and 10% stock funds are purchased to get back to your original ratio of 80% to stocks and 20% to bonds. This enables you to buy stocks while they are lower priced. This was a huge win for my clients during the Covid crash because I rebalance client accounts on a quarterly basis. We were fortunate in the market low just happened to occur on March 23rd. Stocks had crashed as much as 34% on that date and so when clients accounts were rebalanced on March 30, they were able to purchase stock at these very low prices. In fact stocks, represented by the S&P500 were up 50% at the end of 2020 from the low point on March 23rd, 2020. 

Other strategies you can consider when markets are down 10% that are specific to retirement accounts are as follows. You could accelerate retirement plan contributions. Instead of spreading contributions over the year, you could increase those contributions when markets are down 10%. Of course the stock market could go down further so you could also keep your recurring contributions as they are. However, one additional consideration is to initiate partial Roth conversions. 

Roth conversions work just as they sound, you convert portions of your not-yet-taxed retirement accounts to never again taxed accounts. There are no income limitations but since you will be paying income taxes in the year of the conversion it makes the most sense to complete Roth conversions in the years when your income is lower. For example if you work part time in the years prior to full retirement that would be a great time to consider Roth Conversions.There are many factors to consider so be sure to speak with the right CFP. 

For those with Non-Retirement Accounts  you can consider Tax Loss Harvesting. That’s where you sell investments with gains to offset those with losses. For example, let’s say you purchased stock ABC for $5000 and it’s now worth $10,000. Let’s say you also purchased stock DEF for $7500 and it’s now worth $5000. You could sell both stocks and the $5000 gain in ABC would be offset by the $2500 loss in DEF so you’d only be taxed on $2500. Please note, that you have to wait more than 30 calendar days before you purchase stock DEF otherwise it would negate the offset due to wash sale rules.  

I usually conduct tax loss harvesting in the fall each year and occasionally during the year if conditions allow for it. 

What strategies should one consider if stock markets are down 20% or more, which is the definition of a bear market. 

Generally they are the same strategies you would consider when the stock market was down 10%. If the stock market was down 20% from where it was on January 1st again you will want to definitely consider Rebalancing to increase your exposure to stocks. In retirement accounts it’s straight forward as there are no taxable implications but with non-retirement accounts those need to be considered. Also regarding retirement Accounts  you will want to further expedite Roth Conversions and/or accelerate retirement account contributions (Roth or Traditional). Again for those with Non-Retirement Accounts  you will want to consider tax Loss Harvesting.

And for those that are already retired, you will want to assess if you need to make adjustments to your income distributions and only take distributions from dedicated income sources (ie conservative investments). We implement income guardrails for our clients and adjust their income lower or higher based on market events. Clients are often surprised how much their investments drop before they would have a drop in their income. 

What if stock markets are down 30%, One of those rare moments when it can rain gold.

If markets are Down 30%, this may surprise you but it really is more of the same. Rebalance your stock and bond ratio to increase your exposure to stocks. With Retirement Accounts - Expedite Roth Conversions &/or Contributions and with Non-Retirement Accounts - Tax Loss Harvesting. For those that are Retired take distributions from dedicated income sources and Confirm one hasn’t hit your Income Guardrails.

All of this of course is easier said than done. When markets drop, especially when they do so steeply it can be a challenging time. For this reason one should always invest according to ones goals and in alignment with time-tested investment principles but that shouldn’t prevent you from taking advantage of when the market provides opportunities. As Warren Buffett also said, when people are greedy get fearful but when people are fearful get greedy or better yet, get planning for a better life. 

This is a way better option than the alternative, which is selling your stocks. 

The last few years have offered more than enough unprecedented events, the stock market included. Back in 2020, with the global pandemic shutting the world down we had the fastest bear market which is more than a 20%, it just took 16 days for that to happen and then dropped further still. But only a short time later the stock market rocketed higher with the fastest 50 day rally in history, and later still with one of the fastest 100 day rallies in history. 

But it was those that reacted to the losses that really were impacted financially. Fidelity manages over $4 trillion dollars and they found that close to one-third of their investors over the age of 65 sold all of their stocks during the Coronavirus meltdown*.  Unfortunately because they sold, their investments missed out on these significant rallies to the upside. Here’s a great quote from the WSJ article at that time “people tend to sell after an economic downturn is already priced into equity markets, By selling at this time, investors are locking in their losses”

Maybe these facts regarding stocks will be helpful to people to take advantage of stock market downturns:

Over the past nearly 100 years, the U.S. stock market 

is up nearly 75% of the time (3 out of every 4 years)

And 60% gains in excess of 10%. 

More than 33% of the time gains are 20% or more

25% of the time the market will be down

So you are more likely to gain 20% or more than experience a down year.

TIPS, TRICKS AND STRATEGIES

Welcome to tips, tricks and strategies portion of the podcast where I will share a few end of year financial planning tips so you make the most of your money before the end of the year. 

As i’ve heard it said, the days are long but the years are short and that phrase seems especially true in December when many wonder where did the year go. But there is still time to make some smart money decisions for the year is up. Often times this planning can’t wait until January since taxes are looked at on a calendar basis. So most things have to be completed on or before December 31st. 

Of course any of this planning needs to be viewed through the lens of your financial plan which in turn is aligned with your ideal life. 

This year end planning especially needs to be considered in years when there were significant life changes such as births, deaths, marriages or divorce or retirement as these can have a significant impact on your personal finances and your strategic financial plan.

The first planning tip is to confirm you are contributing as much as you can to your 401(k) or Simple IRA account contributions.  These contributions need to be made by the end of they year. If you aren’t able to max these out did you at least contribute as much as the company match? 

Another year end planning tip is to ensure you are contributing as much as you can to your health spending account (HSA), should you have one. You want to ensure you receive a tax break for any medical expenses you would need to pay for.

Another year end planning tip is to ensure you use up your FSA. HSAs don’t have to be used every year but FSAs have to spent by the end of each year. There are some qualified products you may not have thought of, from contact lens solution to bandages, that you can purchase with those funds.

One of the biggest end of the year planning strategies is directly related to taxes. For example based on your anticipated income for next year, would deferring or accelerating any bonuses, property sales, other taxable transactions, deductible expenses, charitable gifts, etc., benefit you from a tax perspective. 

Examples include paying your January mortgage early as you could deduct the interest on your 2024 tax return.

You will also want to look at your charitable contributions

For example, If you plan to donate the same amount of money each year, consider “bunching” the donations into a single year. This could increase your potential itemized deductions for that year. 

This is just one of many end of year considerations.

References

Retirement Income Worries Often Overblown, Survey Shows

Year-End Financial Checklist

18 To-Dos For Your Year-End Financial Planning Checklist

TRAILER

Welcome to episode 75 of the One for the Money podcast. I am both glad and grateful you have taken the time to listen. They say wisdom is learning from the mistakes of others and in that spirit, this episode will feature the mistakes a retirement expert made about her own retirement and I’ll share ways to avoid these same mistakes.

In the tips, tricks, and strategies portion, I will share a handy rule of thumb regarding knowing if you are on track for retirement.

In this episode...

• Who Is Alicia Munnell? [1:45]
• Mismanagement of Investments [2:47]
• Failure to Utilize Roth 401(k) [5:24]
• Premature Government Pension Withdrawal [8:14]
• Using Retirement Funds Early [10:07]

MAIN

Most people really only have one shot at retirement so you want to be sure you get it right and you will want to be sure to avoid any mistakes. They say wisdom is learning from the mistakes of others and in that spirit, there was a recent article in the WSJ on the ways a retirement authority got it wrong. This can serve as an example of what not to do. The Oct 12, 2024 article states in its opening line “Alicia Munnell spent decades trying to improve how Americans retire. Even she made mistakes in her retirement planning.”

First, let me share more about Alicia Munnell. She is an economist who served as an assistant secretary at the Treasury Department under President Bill Clinton. Her time in the Treasury Department was preceded by 20 years at the Federal Reserve Bank of Boston. After her time in the public sector, she established Boston College’s Center for Retirement Research, a think tank in 1998. 

Alicia, who is 82 years young, has been steeped in finance for many decades and her work covered everything from improving the 401(k) to whether the U.S. faces a retirement crisis.(Her Answer: Probably yes, since she and her colleagues calculate about 40% of the working population isn’t saving enough to maintain their lifestyle throughout retirement.) And yet despite the focus of her life’s work, she made some basic mistakes about her very own retirement. 

Here were some of her mistakes along with my thoughts on how she could have avoided them. 

One mistake she repeatedly made was not regularly monitoring her investments.  Like many people, she said that she lacked the time and interest to manage money. What she would do would rely on the occasional advice from her son, who works at a financial firm.

In her words “Every now and then, he tells me to send him my asset allocation and then he tells me how to adjust it. If I had to figure out what to invest in, I’d have no clue,” said Munnell. “People have busy lives. Retirement planning should not be something they have to put a lot of effort into.”

This boggles the mind. I am shocked a retirement authority, who highlights the importance of 401ks handles her retirement investments so carelessly. First, she doesn’t have a set schedule to review her investments on a regular basis, instead, she said that “every now and then” she reaches out to her son who works at a financial firm for changes she should make. And because she approached things so haphazardly, she or her son never consider her overall goals or taxable implications regarding her investments as demonstrated by the other mistakes that she had made.  

Here’s how Alicia could have avoided this investment management mistake. She should have spent the time with her husband outlining their specific goals for retirement. These goals would then be used to align her investments with those specific goals. She then should have had regularly scheduled meetings to confirm their goals and re-align their investments if necessary. She should have assumed this responsibility herself or delegated it to a financial planning professional who was aware of her goals and could meet with her regularly.

Alicia admitted she didn’t have the time and yet still was personally making the changes to her investments based on the occasional advice she solicited from her son. Since she lacked the time and desire to manage these investments she most likely would have benefited from the right CFP that would have taken the time to understand her and her husband’s goals and manage their investments accordingly. It’s a real shame that she didn’t engage in this type of guidance. What we have learned about our clients in our goal meetings is often surprising and is only a result of taking the time to have our clients go through the exercises to help them better articulate and prioritize the goals that are most important to the life they want to live. Using these goals, we then create and implement the best investment strategy to achieve them and we meet and speak with our clients regularly to re-confirm their goals and adjust their investments when needed.

Alicia said another mistake she made about retirement is that she didn’t move any of her money from a traditional 401(k) to a Roth 401 (k) and Neither did her husband. She said as a result that they are required to take more withdrawals (via Required minimum distributions) than they need right now and have to pay more taxes as a result. She said and I quote “someone should have said, “If you’re going to work until 82, you might not want to put all your savings into a traditional 401(k). Put some into a Roth.” 

Again, it’s really surprising that a “retirement expert” would say “Someone should have said….put some in a Roth”. My first question is who does she think this “someone” should be? Her co-worker, her husband,  or her son? Talk about taking zero personal responsibility. And if she is expecting “someone” to tell her this information, why didn’t she seek out professional advice? Again, it’s strange that someone so steeped in retirement readiness was so unready for retirement. 

Here’s how she could have avoided that mistake. She could have spent the time to project her income, retirement balances, RMD requirements, and the potential taxable implications. Years and even decades prior she then could have modeled different scenarios such as Roth conversions, Roth Contributions, or Back Door Roth strategies to determine what the most effective way she could have created tax-free forever funds. It’s unclear how “someone just saying something” would have put her in the best possible situation. It also seems as if she, her husband, or their son didn’t have the time or inclination to conduct such an analysis so she should have delegated this task to the right CFP because many CFP don’t go to these lengths of tax and income projections. 

At my firm, we really enjoy helping our clients navigate their approach to taxable, tax-deferred, and tax-free funds to ensure they will pay fewer taxes in retirement. Everyone has to pay taxes so it all comes down to having clients pay taxes when it is to their advantage. For our clients with lower income years that means Roth contributions or Roth conversions. For clients in higher earning years that means having them make the maximum pre-tax retirement contributions.  This type of planning is some of the greatest value we provide clients where we can help them save literally millions in taxes by implementing the right strategies at the right time and project the results and making adjustments in the subsequent years. She would have benefited tremendously from working with a CFP that models current and future tax rates, account balances, and required minimum distributions.

Another mistake she made that was noted in the article was regarding her government pension. She said, and I quote “When I left the Federal Reserve at age 50, I listened to someone who said I should take my monthly pension benefit early because I’d be so much better at investing the money than the Fed. So I took my monthly checks starting at 50 and didn’t invest a penny. Very quickly, my pension check became part of my spending. The monthly payment would have been meaningfully higher had I not taken it early.”

There are those words again, “I listened to someone”. What qualifications and analysis did this “someone” provide to determine that it was better to take the pension early and invest it than take a higher pension later?  This still may not have been a poor decision, but why did Alicia Munnell follow the first part of the “advice” and not follow through with arguably the most important piece of advice, investing the pension instead? Clearly she didn’t have the inclination, time, or knowledge of why it was so important to invest these proceeds instead. 

Here’s how she could have avoided that mistake. She could have spent the time to project what her pension benefit would be at 65 and compared that to what her benefit at 50 + investment returns would be and project these further throughout retirement.  It’s again mind-boggling that a “retirement expert” listens to the advice of a random coworker but doesn’t once advocate the need to sit down with a planner who could have modeled such a scenario for her to make the best decision.

I’ve modeled these scenarios for many of my clients and in almost every instance you want to delay your pension for as long as possible. The only time it makes sense to take a lump sum or take it early is if you have a shortened life expectancy. 

Alicia Munnell said another mistake was taking money out of a retirement account to help with a child’s wedding, which she said, and I quote “probably not a smart thing to do”. Again, I’m not sure if that was or was not the right decision. But what is clear, is that she never analyzed this financial decision in the context of her entire financial plan and how this related to her goals. 

Here’s how she could have avoided that mistake. She could have spent the time to fully articulate her life goals and then analyze the various options she had in relation to all other goals to see if this was the best decision. 

I should note that this podcast episode wasn’t meant to bash Alicia Munnell at all. In fact it seems she did some great planning as they have more income than they need in retirement but I believe it is helpful to see how even an “expert” in retirement can make significant mistakes. I believe that Alicia had/has the intellect to make the right decisions but may not have had the time and consequently, followed the advice of others who did not know her full situation. This example emphatically demonstrates the need for people to take the necessary time to articulate their goals. They then should analyze their tax return, investments, and savings rates and project these into the future to ensure they are aligned with their current and future goals. This takes a lot of knowledge and technical know-how. If a person doesn’t have the time, knowledge, or inclination to conduct and continually adjust their planning then they should delegate it to the right Certified Financial planner to do this for them. The right type of CFP will take the time to understand you and your goals, they will analyze your tax return, analyze your income, saving rate,s and investment allocations to ensure they are aligned with your stated goals. 

After all you usually only have one chance at retirement and better to learn from the mistakes of a retirement expert to get it right. If you would like to review your retirement readiness with a Certified Financial Planner and discuss strategies to maximize your readiness, please schedule a free initial consultation by clicking the “Schedule a Meeting” button on my better planning better life .com website via the Contact page. 

TIPS, TRICKS AND STRATEGIES

Welcome to the tips, tricks, and strategies portion of the podcast where I will share a tip regarding retirement readiness. 

One of the questions I get asked most often is how much do I need to have saved to retire. Of course,e there is a lot of factors to consider regarding what you need to have saved. But here is a very general rule of thumb that you can use to determine based on what you should have saved at different ages**: 

By 30: Have one time your salary saved

By 35: Have two times your salary saved

By 40: Have three times your salary saved

By 45: Have four times your salary saved

By 50: Have six times your salary saved

By 55: Have seven times your salary saved

By 60: Have eight times your salary saved

By 67: Have ten times your salary saved.

So for example, if you earn $100,000/year by age 67 you should have ~$1 million saved. 

Of course, because this is a general rule, there are a number of factors that one needs to consider to determine what they need to have saved. Consider the following questions:

• Will you be receiving a pension
• What is your potential life expectancy
• Do you plan to relocate to another state, or even country during retirement? Which can greatly impact your expenses and consequently your income needs
• Will your current home suit your needs as you age?
• Will you be carrying a mortgage into retirement, or should you consider paying it off first?
• Will you be receiving an inheritance or would you like to leave one? I generally don’t like to plan for people receiving an inheritance as things can change (absent an irrevocable trust).

These are just a few of the factors that one needs to consider if you are on track for retirement. 

References

How Much Do I Need To Retire?

She’s a Retirement Authority and Still Made Mistakes. Here’s What She’d Do Differently.

Welcome to episode 74 of the One for the Money podcast. I am so very grateful you have taken the time to listen. In this episode, I will share when you should max out your retirement plan such as a 401k, and when you should not. 

In the tips, tricks, and strategies portion, I will share a retirement saving tip for those who don’t have access to a retirement plan through their job. 

In this episode...

• 1978 Revenue Act [1:05]
• When Not to Max Out Contributions [3:03]
• When You Should Max Out Contributions [6:46]

1978 was a watershed moment in the history of retirement for Americans. That was the year that a Revenue Act was enacted by congress and established 401k and 457b retirement plans. 401k retirement plans are for the private sector and 457b plans are for state and local government employees, as well employees of certain tax-exempt organizations. These plans now allowed employees to defer some of their income and avoid taxes on that income until they take it out later in retirement. This was huge. People could now save for retirement in tax advantaged ways.  

Prior to that, most American’s relied on pensions from their employers for income in retirement. With a pension, the employer is committed to providing a specific amount of money to the employee for life during retirement. And that was feasible when people worked for several decades for the same employer and didn’t live that long in retirement. But as individuals started changing jobs more frequently for better opportunities and peoples life expectancy increased significantly, the pension system became untenable for both the public and private sector. 401ks are for companies government employees use 457b plans and public school employees (teachers) and non profits use 403(b) plans. 

Specifically regarding 401ks, 68% of private sector American workers currently have access to an employer sponsored retirement plan.

For those Americans who have access to a retirement plan at work be it a 401k, 403b, 457b, SEP IRA or Simple IRA some wonder whether it makes sense to max it out every year. As with any financial planning, it depends upon your unique situation and circumstances.

When you should NOT max out your 401k/403b/457b/SEP or Simple IRA

There are times when you shouldn’t max out your retirement account. One of the most obvious reason is if you have high interest debt that needs to be paid off first. However, I would recommend in this scenario that you at least contribute to the company match as that is free money. No higher contributions should be made until after your high interest debt is paid off. You need to pay down high-interest debt, for example credit card debt. The average credit card currently has an APR of more than 20%, which is well above the amount you could reasonably expect to earn on a diversified portfolio in any given year. That’s why it is always better to funnel extra cash toward paying down high-interest debt instead of maxing out retirement plan contributions.

Another reason not to max out contributions to your work retirement plan is if you don’t have a sufficient emergency fund. As a reminder, you should have 3-6 months of your minimum expenses in savings to cover a potential financial emergency. We learned this first hand a few months ago when our eldest son nearly drowned while surfing. He was rushed to the hospital and was released the next day, but I was glad we had the savings to cover the incredibly high costs we have incurred as a result.

A third reason why you shouldn’t max out your company retirement plan is if you haven’t yet funded a Health Savings Account or HSA. As a reminder, HSAs are available to individuals with qualifying high deductible medical plans. HSAs are incredibly powerful as they are the only triple tax free retirement account and they have the added advantage of early accessibility. You should max out your HSA before maxing out a retirement account. Another huge advantage of HSAs is that they can be accessed at any time without penalty for qualified medical expenses, whereas 401ks it can be as early as 55 and IRAs its as early as 59.5. See episodes 2 and 49 for more on HSAs.  

A fourth reason why you may not want to max out your contributions to a retirement plan is if the plan has high costs and/or poor-quality investment options. Across the retirement industry, the majority of plan participants pay less than 80 basis points in combined costs (including administrative fees for the plan plus expense ratios for the underlying investment options). But costs span a wide range. If you work for a smaller employer, you’re more likely to be saddled with a higher-cost plan. In episode 73, I shared an example of a client that had hugely expensive investments. One had a management cost of nearly 2% and it had inferior performance. 

A final reason not to max out your work place retirement plan is if you plan to retire before 55 as you cannot access your money without a hefty penalty. If you roll your money to an IRA then you won’t be able to access your money without a hefty penalty until 59.5. Keeping your money in a 401k has that advantage over an IRA. When you invest in a 401(k)/403b/457b plan, your contributions are effectively off-limits until age 59½ (or 55 for retirement plan participants who have separated from service).

Here are reasons when you SHOULD max out your 401k/403b/457b/SEP or Simple IRA

If someone is behind on saving for retirement, it’s imperative to stuff as much money as you can into a 401(k)/403b/457b as these allow you to put away the most amount of money in tax beneficial vehicles. In 2024 people can contribute $23,000 and if you are 50 or older you can take advantage of catchup contributions and contribute an additional $7500 or $30,500 in total.

I recommend when you are young that you put in as much as you can in retirement vehicles because the longer your money is invested the greater the potential growth. I didn’t start saving in my 401k until I was nearly 30 and I didn’t make great money, but through budgeting, maximizing my 401k and selecting the right investments, and following a sound financial plan we are on track to have a great retirement. 

Another compelling reason to max out contributions to your pre-tax 401(k)/403b/457b is if you expect to be in a lower tax bracket after retirement. Most retirement savers have less taxable income after they stop working. Of course, tax rates can change in the future, but given American government’s reliance on income taxes and that lower incomes pay at lower tax rates you can benefit from contributing as much as you can to pre-tax 401(k)/403b/457b account. Contributing to a pre-tax retirement 401(k)/403b/457b account can also be used by early retirees to greatly lower their taxes in retirement by employing Roth conversions during their first few years of early retirement. There are a lot of factors to consider, but have employed these for my clients and it will save them hundreds of thousands of dollars in taxes. See episode 49 of this podcast for more details.

Another reason to max out your retirement plan contributions is if you think your tax rate will be higher in retirement. Of course this time the recommendation is to contribute to a Roth retirement plan account as it will allow you to put away way more money in a never-taxed-again retirement account, allowing it to compound and grow tax free for as long as possible. 

I hope I was able to provide better understanding of when and when not to max out your work retirement plan such as a 401k, 403b or 457b. There are many factors to consider when making these decisions and having a certified financial planner provide guidance can be a tremendous help. Feel free to schedule a no cost or obligation meeting with me on my website at betterplanningbetterlife.com 

Thank you again for listening and I hope you found this helpful, now on to the tips tricks and strategies portion of the podcast.

TIPS, TRICKS AND STRATEGIES

Welcome to the tips, tricks and strategies portion of the podcast where I will share a saving tip for those that don’t have access to a work retirement plan such as a 401k, 403b or 457b. 

There are a few reasons why you may not have a work retirement plan. If you are a small business owner, these can be expensive. In episode 35 of this podcast I highlight the different options available to you. The options mentioned in that episode include IRAs, Sep IRAs, Simple IRAs, Solo 401ks and defined benefit plans. 

A great option if you don’t have access to a retirement plan is to save in a non-retirement account. These accounts have a few advantages over retirement accounts. The first is that they can be accessed at anytime (no having to wait until age 55 or 59.5). The second advantage is that for investments held for longer than a year, the taxation will be at the generally lower long term capital gains rates than the generally higher income tax rates. Now you will be required to pay taxes annually on any dividends and interest received but this annual taxation has less of an impact than most people think. 

I will share an example where $10,000 contribution is made each year into a Roth 401(k) versus a $10,000 invested each year into a taxable account (i.e. brokerage) for over 30 years. This analysis is courtesy of Nick Maggiulli of Dollars and Data.

For this comparison, it assumed that both accounts grew at 5% a year and that the taxable account had to pay the long-term capital gains rate of 15% on a 2% annual dividend and when the portfolio was sold (in the last year). This means that no sales were made in the taxable account until retirement (when all long term capital gains taxes are paid). It’s buy and hold for three decades. After running this simulation for 30 years, it was found that the Roth 401(k) ended up with $114,000 more than the taxable account (after all capital gains taxes had been paid):

That $114,000 means that the Roth 401(k) ends up with 14% more than the taxable account after 30 years. That may seem like a lot but if you break it down by how much of a benefit it was per year it was only 0.73%. That’s it. You get a smaller return, just 0.73% in extra return each year to lock up your capital until you are 59½.

There are many factors to consider regarding when choosing the type of retirement or non-retirement account best aligned with your goals. I recommend that you speak with a Certified Financial planner that will listen to your goals, analyze your tax return and designs an investment and financial plan to help you achieve your goals. Listen to the end of this episode for how you can schedule a no cost or obligation with me. Again, I hope you found this helpful and Remember a better life is a result of better planning. Have a great one!

RESOURCES

401(k): What It Is, How It Works, Pros, and Cons

Should You Max Out Your 401(k)?

Should I Max Out My 401k? [The Surprising Truth]

• https://BetterPlanningBetterLife.com 
• Connect with Jonny on LinkedIn

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Welcome to episode 73 of the One for the Money podcast. I am so very grateful you have taken the time to listen. In this episode, I will share why investors should look beyond investing in just the S&P500. 

In the tips, tricks, and strategies portion, I will share a tip regarding mutual fund and ETF management fees (also known as expense ratios). 

In this episode...

• Cost Considerations [2:39]
• Growth Limitations [4:55]
• Diversification and International Exposure [9:49]

Years ago, I spoke with a gentleman who had his own company. He learned I was a wealth manager and expressed his frustration that the advisor who was managing his company’s 401k plan had made some poor predictions about the economy and consequently grossly underperformed the stock market. He then asked me an interesting question: why not just invest everything in the S&P500 and be done with it?

This gentleman isn’t the only one with that same question and some, in fact, follow this philosophy by investing only in the S&P500 believing it is a wise investment strategy. Here are several significant reasons why investors should look beyond investing in just the S&P500.

But first, it must be noted that the possibility of this discussion is entirely thanks to the pioneering work of Jack Bogle of Vanguard. He deserves so much credit for what he accomplished in ensuring people could invest in passive index-based funds. Before him, you couldn’t inexpensively invest in the 500 stocks of the S&P500. There wasn’t an option, but because of the index funds he created, he made it possible to do so incredibly inexpensively. It will cost you just $3 a year for every $10,000 to invest in the 500 companies of the S&P500 index. That is remarkable. 

Now many think one can solely invest in the S&P500 and be done with it. But historical analysis has shown that there are compelling reasons to invest in more than just the stocks listed in the S&P500. 

Indexing vs Indexing plus

The first reason is that investing in an index can actually be more expensive. Many think it is a really inexpensive way to invest and from a cost of management perspective, it is. But you have to consider more factors than just the cost of management. I’ll explain. The S&P500 is an Index. An index is just a publicly available list of stocks. It’s sort of like an investment recipe. But unlike grandma’s tried and true chocolate chip cookie recipe, the “ingredients” of the S&P500 change from time to time. In a dynamic capitalist-based economy, companies grow bigger and others grow smaller. This requires changes to be made to the list of stocks, or in other words, changes to the investment recipe. And whenever changes are made to the index, it’s announced so everyone knows the stocks that will be added, the stocks that will be removed, and the date when it will happen. Consequently, everyone knows what all of the indexes are going to buy and sell. As one can imagine the costs can increase as a result. There are passive investment strategies, like factor investing which I featured in episode 68, where they employ more flexibility in what they buy and sell. Buying stocks whenever one else is, is a lot like buying roses on Valentine's Day. It’s a more expensive way to buy both roses as well as stocks. 

We have a very recent example. On September 6 of this year, 2024, it was announced that the company Palantir would be added to the S&P500 Index starting on Sept. 23, 2024, and you will never guess what happened, The stock rose 13% in the next trading session. By the time all of the indexes add this stock to their investment list, the price of the stock will likely be much higher. That’s an expensive way to buy stocks.

Another reason why the index can be more expensive is because they only buy and sell a few times a year when the changes are announced. The S&P 500 rebalances on the third Friday of March, June, September, and December. This process involves changing the weightings of companies in the index and sometimes adding or removing companies. That can lead to buying stocks at higher prices. But with other types of passive investing, it allows managers to buy and sell every day the market is open and take advantage of more favorable prices.

Large cap vs small cap

The second reason why the S&P500 index isn’t necessarily the best option is because it only represents the largest companies in the United States, namely those with a market capitalization of at least $10 billion. You might think that’s a good thing but it’s wise to remember that every company started out as a small one. Amazon and Apple and Microsoft are what’s called MegaCap companies because they have a valuation of over $200 billion. In fact, Apple and Microsoft have a larger value than the GDPs of Canada, Russia, or Spain. But at one time Amazon, Apple, and Microsoft were operated out of a garage or small office and would then grow to become small publicly traded companies and later mid-sized companies, then large companies, and now mega-sized companies. By investing only in the S&P500 you missed out on the most significant aspects of their growth. Take Shake Shack vs McDonalds. When it comes to investing, you want the company you are investing in to grow rapidly and smaller companies will grow faster. Shake Shack from a percentage perspective will be adding a lot more restaurants than McDonalds will. That doesn’t mean we don’t invest in McDonalds and larger companies. In fact a good amount of my and my clients’ investments are invested in large companies, however, we also have a good amount invested in smaller companies because that’s where the most explosive growth can occur. But if people only invest in the S&P500 you are only investing in the American companies after they got really large and you will miss out on buying the Apples, Teslas, Nvidia, and Microsofts when they were smaller. Again, using Palintar as an example. In the two years prior to joining the S&P500, the stock soared 350%. Those who invested in mid/small caps could have enjoyed that growth but those who solely invested in the S&P500 missed out on all of it.

To further my point as to why investing in small company stocks is important. For the period between 1926–2016, the compound annual growth rate of return was 11.4% for the Small Company Index and it was 10.0% for the Large Company Index. That may not seem like a significant difference but over that 90-year period, $1 invested in small caps would have grown to over $20,000 where as $1 invested in Large cap would be just over $6k.  And since 1927 through December 2023 small stocks outperformed large stocks and 68% of the time after 10 years. 

Another reason to invest beyond the S&P500 is because of valuations.

Some stocks are more expensive than others. Confusingly, this has nothing to do with the price of the stock but rather the price of the stock relative to the earnings of the company. This is known as the P/E ratio.  Companies for which you pay a higher price for earnings are called a growth stock whereas companies for which you pay a lower price for earnings are called a value stock. The difference can be significant.  Historically, value stocks have outperformed growth stocks in the US, often by a striking amount. Data covering nearly a century backs up the notion that value stocks—those with lower relative prices—have higher expected returns.

The S&P500 at times has become overvalued and some of that overvaluation can be concentrated on growth stocks. For example, in September 2024, the top 10 companies of the S&P 500 are 36% of the index. That’s right 2% of the companies make up 36% of the value. 

And as of July 31, 2024, the top 10 companies had a price-to-earnings ratio of 31.4 times earnings whereas the bottom 100 had a ratio half that, 15.3%. No one can predict where the market goes from here but historically growth stocks at these high valuations tend to come back to earth. In fact value stocks have outperformed growth stocks by 4.4% annually in the US since 1927. Since 1926 through December 2023 value stocks were higher than growth stocks 70% of the time after 5 years and 78% after 10 years. 

Another reason to look beyond the S&P500 is it doesn’t focus on a company’s profitability. That may seem like a captain obvious type comment but factoring in companies with higher profitability can make a significant difference for investors. Since 1963 through December 2023 high profitability companies were higher than lower profitability companies, 67% of the time after one year, 82% of the time after 5 years, and 92% of the time after 10 years. The S&P500 doesn’t always reflect the most profitable companies.

Domestic vs International

A final reason to invest beyond the S&P500 is because you miss out on investing in great international companies. The S&P500 is composed of solely large American Companies, but there are a lot of great companies beyond our nation’s borders. Some of those companies reside in more developed countries such as Great Britain, France, Taiwan, or Japan while other up-and-coming countries, defined as emerging market economies have great companies as well. 

An additional reason to consider international stocks is sometimes they zig while the S&P500 zags. In fact there was a period of time where an investment in the S&P500 was down 9% after ten years. so if you had invested $10,000 in the S&P500, ten years later your investment would have been worth just shy of $9100 dollars. That’s a poor return after 10 years time. That period of time was from January 2000 to December 2009. January 2000 was the height of the dot com/dot-bomb era and December 2009 was during the global financial crisis aka the Great Recession. How did international stocks during that time perform?

The MSCI International index that excludes the USA, returned over 17% during that time, the MSCI International value stocks index, returned over 48%, the MSCI International small cap index returned over 94% and the MSCI International emerging markets index and emerging markets value index returned over 154 and 212% during that same Jan 2000-December 2009 time period. As it’s often said, past performance cannot predict future performance but history has shown that it can help if you invest internationally. 

In summary, an S&P500 fund can end up being an expensive way to buy stocks because it’s like buying roses on Valentine’s Day. The S&P500 fund also misses out on the faster growth of small and mid-sized company stocks, an S&P500 fund can become over-concentrated on Growth stocks, doesn’t emphasize the most profitable companies and finally, an S&P500 fund excludes good international companies. For these reasons, investors should look beyond investing in just the stocks of the S&P500 which me and my clients do. 

Tips Tricks and Strategies 

Welcome to the tips, tricks, and strategies portion of the podcast where I will share a tip regarding investment fund management expenses. Nothing in life is too good to be free and the same goes for the management costs of mutual and exchange-traded funds. Now mutual and exchange-traded funds are a fantastic way for you to spread your money across as many investments as possible with the least expense incurred. It’s the most cost-effective way to obtain diversification of your investments which is one of the of the bedrock principles of sound investment strategy. It’s based on the modern portfolio theory which ensures that you achieve the maximum return for the least amount of risk.  Think of the unfortunate individuals who had all of their retirement or investment funds in a company that was found to be fraudulent. Enron being a prominent example. Those who failed to diversify outside of the company stock ended up losing everything. 

As I noted earlier in this episode Jack Bogle, the founder of Vanguard, has mutual funds with exceptionally low management costs. Now the term used to describe these management fees is “expense ratio”. And with some mutual funds, the expense ratio can be as low as 0.03%.  That’s just $3 a year for every $10,000 you invest. 

Some mutual and exchange-traded funds have much higher management costs or expense ratios as they reflect additional costs involved. For actively managed funds you are paying for the investment managers, research, and marketing teams. For other funds, you are paying for the type of investments within the fund which may have a higher cost associated with acquiring them. 

Most people aren’t aware of this internal expense but it is important to assess your investment portfolio management expenses to ensure you are getting value for them. The investment portfolios I build tend to have an average management cost of 0.2 to 0.3%. So $20-30/year for every $10,000 invested which allows for exposure to small and mid-sized companies, highly profitable companies, value companies, and international companies. However, I’ve seen some mutual funds for clients as high as 1.89%. That’s $189/year for every $10,000 invested. This fund was in a client's retirement plan at his former employer. What was worse was that this fund had massively underperformed similar passive mutual funds, which would have cost him just $3/year. Now what was really disappointing about this expensive active management fund is that it was from the very same provider as the company 401k retirement plan. Was there a conflict of interest? I can’t definitively say but it certainly doesn’t look favorable. 

When I help clients with rollovers I always assess their current investments to see if they are invested in accordance with sound investment principles and in alignment with their goals. I also assess a number of factors. Such as the region, are allocated to just the United States or are they also allocated to international and emerging markets, which have proven through evidence to provide higher risk-adjusted returns. I also look to see if they have too much allocated to one sector such as healthcare, energy, or technology), and what about the size of the companies. Do they have too much allocated to small companies or large companies?  I also look at their performance ranking against other similarly categorized funds. I’ll look at one large US company fund vs another large USA company fund. I also look at the fund expense ratios. As I mentioned I saw some of the fund expense ratios, for actively managed funds to be as high as 1.89%. What’s worse is that this fund had far inferior performance to the same category of passive investment funds that would have cost way less. Of course, past performance is no guarantee of future returns, and fund performances can come and go but fund expenses are forever.

All in all, it’s important that you are aware of many of the aspects of your investments including the associated expenses because they can have a significant impact over the course of years and decades on your ability to build wealth. 

EXTRA

If you are invested in mutual or exchange-traded funds, which you likely are in your 401k, you are paying these fees, you just may not it. that’s totally normal, as most people aren’t aware that there is an internal management expense called the expense ratio. This is the fund paid to the mutual or ETF fund provider to assemble, manage, and market the fund. This fee covers the costs associated with the administration, portfolio management, marketing, and more. These are usually percentage-based and represent the cost each year. So they can be as low as 0.03%. To give you an idea how much a fee that would be. On $10,000 invested, it would cost you $3/year. Pretty great deal. But I’ve seen some funds paying as much as 1.89%. That would be $189/year. Now these fees are deducted internally. Why are these funds even necessary? Mutual funds and ETFs provide the most cost-effective way to spread your money across investments. The technical term we use for this is diversification. It's one of the most critical aspects of investing. It helps ensure that all of your nest eggs are in more baskets. This isn’t just age-old wisdom but rather based on evidence-based research proving that diversification is better for investors. The theory is called the modern portfolio theory and it is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. In layman’s terms, you get the highest potential return for the level of risk you are taking. That’s important because it doesn’t make sense to take more risk if you won’t be getting a higher potential reward. It would also be bad if you accepted a potential lower return but took on more risk.

This makes sense if you don’t have all of your accounts allocated to a single stock like they did with Enron when the stock cratered. 

Mutual funds and Exchange-traded funds allow you to spread your money out. You couldn’t do that on your own. One of the best-performing stocks is Berkshire Hathaway. A single A class share of stock is over $680,000 as of this recording. That’s right, it’s over $680,000 for a single share. There is a B share that trades for just over $45o but even at these prices, $1000, $5000, or $10,000 won’t buy you many shares in different companies. That’s where mutual funds and ETFs come in to make it way more affordable to spread across small amounts over hundreds and thousands of companies. 

The amount of the expense ratio is based on how much management you are going to have. Some are called Actively managed and what we mean by that is there are portfolio managers and research teams that are determining which company stocks are best to invest in. Some funds are passively invested and are invested based on a publicly available list. Like the S&P500 or DJIA. An actively managed fund may not select all 500 of the S&P500 but will select 258 that they think will outperform. Passive have very low expense ratios because little management is required than active. There is a lot of debate as to whether passive is better than active. You might think that active management with their research and expertise would have a clear advantage but long-term data shows otherwise. But long-term data shows otherwise that passive will outperform active over the longer term especially when you account for the fees.  While there is certainly a place for active management in certain situations, a diversified passive investment strategy used in conjunction with a financial plan can serve you well.

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Welcome to episode 72 of the One for the Money podcast. I am so very grateful you have taken the time to listen. Estate and tax planning are critical aspects of better financial planning so your beneficiaries can have a better life. In this episode, I’ll discuss the individual states with the highest estate and inheritance taxes. You’ll learn why you don’t want to die in Oregon or Maryland or a few other states. 

In this episode...

• Federal Estate Taxes [1:49]
• Estate Taxes vs. Inheritance Taxes [3:04]
• Considering Your State [3:38]

Benjamin Franklin famously said “In this world, nothing is certain except death and taxes” and in this episode, my focus is on a combination of the two, namely estate and inheritance taxes which are levied at one's passing. 

A reminder, your estate is the sum total of all your assets at death. It would include retirement accounts, your home and other real estate, vehicles, jewelry, your classic 23-window van, and other valuable items. For a number of Americans, their estate will be worth millions of dollars. Many wonder if it would be taxed. As a reminder, there are often two categories of taxes you have to consider, namely Federal and State taxes. The good news is that most won’t have to worry about Federal estate taxes because the Tax Cuts and Jobs Act which was passed a few years ago, doubled the amount of an estate that won’t be taxed.  Now only those estates that have a value over $13.61 million for an individual or $27.22 million for a couple will be taxed. Those are 2024 numbers and each year it is adjusted for inflation. It should be noted that starting in 2026, if the TCJA does expire then those numbers will be halved. But even in half, those are pretty large values that an estate would have to exceed for that amount to be subject to tax. Consequently, only a tiny percentage have to factor federal estate taxes into their financial planning, and those that do can pay lawyers and accountants to minimize or eliminate most of the Federal estate taxes. 

But just because we don’t have to worry about Federal taxes, doesn’t mean that our estate won’t be taxed because our state residence may apply a tax or even two. 

The two types of taxes are estate taxes and inheritance taxes. Estate taxes are paid by the estate of the person who died before assets are distributed to the heirs of the estate. Inheritance taxes are paid by heirs on the gifts they receive. There are twelve states and the District of Columbia that impose estate taxes and six states impose inheritance taxes. Maryland is the only state to impose both an estate tax and an inheritance tax (spouses are usually exempt from the inheritance tax).

Now most states have reduced or eliminated their estate and inheritance taxes over the past decade to dissuade well-off retirees from moving to more tax-friendly jurisdictions. But even if you don’t consider yourself particularly wealthy, the value of your home and funds in your retirement savings could exceed the estate tax threshold in some states. With that in mind, if you live in a state that imposes an estate or inheritance tax—and you don’t plan to move—you may want to talk to a certified financial planner or tax professional about steps you can take to reduce the size of your estate.

Just so you are aware here are the states that tax your estate and those that tax the heirs of your estate.

The Estate tax states are Washington, Oregon, Minnesota, Illinois, Vermont, NY, Maine, Mass, Connecticut, RI, Maryland, and DC.

The Inheritance tax states are Nebraska, Iowa, Kentucky, Pennsylvania, NJ, and Maryland.

As noted previously, the state of Maryland is on both lists as they tax both the estate and those who inherit it. 

While most individual states that tax Estates or Inheritance will have a high threshold, there are some that do not. 

In most states, estate taxes are progressive: the tax rate increases with the total value of the decedent’s assets. Two states, Connecticut and Vermont, have flat estate taxes with a single tax rate. Hawaii and Washington have the highest top rates in the nation at 20 percent. Eight states and the District of Columbia are next with a top rate of 16 percent. All states impose certain exemptions that prevent smaller estates from being subject to these taxes. Oregon has the lowest exemption at $1 million, and Connecticut has the highest exemption at $12.92 million.

Of the six states with inheritance taxes, Kentucky and New Jersey have the highest top rate of 16 percent. Iowa is phasing out its inheritance tax, with full repeal scheduled for 2025, with the tax’s top rate at 6 percent in 2023. All six states exempt spouses, and some fully or partially exempt immediate relatives. Compare state estate tax rates and state inheritance tax rates below.

Here are a few of the states with the highest estate taxes in the U.S. as of 2024:

1. Oregon: Oregon’s top estate tax rate is 16%, with a relatively low exemption amount of $1 million. The Beaver State is the worst place in the U.S. to die if you’re concerned about estate taxes. Oregon has resisted the trend to raise its estate tax exemption or even adjust it for inflation. In addition to taxing estates valued at as little as $1 million, Oregon imposes a relatively high minimum tax rate of 10% on even the smallest of qualifying estates. 
2. Massachusetts: The top rate in Massachusetts is 16%, with an exemption amount of $1 million. 
3. Washington: With a top estate tax rate of 20%, and threshold is $2.193 million.
4. Minnesota: Minnesota imposes a top estate tax rate of 16% with an exemption amount of $3 million.
5. Hawaii: Hawaii also has a top estate tax rate of 20%. The threshold is $5.49 million.
6. New York: New York has a top estate tax rate of 16%. The exemption amount is $6.58 million. 

How impactful inheritance taxes can be really depends on the heir’s relationship with the deceased. For example, Kentucky has no estate tax but it does have an inheritance tax with rates ranging from 4%–16% As with other states with an inheritance tax.  The tax isn’t an issue for spouses, parents, children, grandchildren, and siblings. They’re all exempt from Kentucky’s inheritance tax. However, the Kentucky tax can be a nightmare for other heirs. Nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles, and great-grandchildren are taxed at rates ranging from 4% to 16%, depending on the value of the property inherited. 

Estate and inheritance taxes can be burdensome and should be considered if you live in the state mentioned. While Benjamin Franklin is right that there is nothing certain except death and taxes, with better planning, you can limit or even eliminate their effects. 

Tips Tricks and Strategies 

Welcome to the tips, tricks and strategies portion of the podcast where I will share a simple yet important estate planning tip when it comes to your beneficiaries. 

We often look at our estates being divided in terms of percentage but it may be more helpful to look at it from a dollar perspective. For example an estate divided equally amongst two children would yield 50% to each. But rather than look at it from a percentage perspective, it can be helpful to look at it from a dollar perspective. For example if a person had an estate of $5 million split between their two children it would give them each $2.5M. Looking at it this way can help you decide if you want your children to receive all $2.5m at your passing. Maybe it would be better for certain individuals to receive certain amounts distributed over time, especially if someone in their late teens or early 20s is to receive that kind of money. too many sad stories of young people blowing their inheritance. 

References

Estate and Inheritance Taxes by State, 2023

18 States with Scary Death Taxes

• https://BetterPlanningBetterLife.com 
• Connect with Jonny on LinkedIn

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Welcome to episode 71 of the One for the Money podcast. I am both glad and grateful you have taken the time to listen. In this episode, I’ll share about an estate plan checkup, for those that have one and for those that don’t. 

In this episode...

• Importance of Estate Planning [1:03]
• Review and Update of Estate Plan [2:34]
• Consequences of Not Having an Estate Plan [4:38]

An estate plan is an absolutely crucial part of one’s financial plan. Over a lifetime you accumulate assets—real estate, investment accounts, a classic VW van, etc. When you pass away, there needs to be an orderly way for these assets to be distributed to those people you want to receive them. An estate plan is the way to carry out your wishes. Otherwise, the state of your residence, i.e. California, Hawaii, Texas, etc, will decide how it is divided up amongst your family. And if your estate is of significant value, you’ll have a lot of people claiming to be your family. 

Because estate planning is a critical piece of better planning it is one of the five financial planning domains I focus on with my clients. These five domains are investments, income (aka cash flow), Insurance, taxes, and Estate planning. 

Of those five domains, estate planning is the one most often ignored and that makes sense for a few reasons. We usually have a long time before we have to worry about it so it’s easy to put it off and the second reason is that no one wants to consider their own death. It’s rather depressing. But despite these facts, it’s incredibly important that any adult who owns real estate and or has children must have an estate plan. 

For those who already have an estate plan in place, I say well done! You should commend yourself for doing what far too many do not. 

But even if you already have one it’s important to complete a periodic check-up of your plan. Here is when to consider a checkup:

First, When was the last time your estate plan was reviewed? If it has been ten years or more you will want to review it to ensure it reflects your current desires and circumstances and that the people who are assigned as the decision-makers are the people you still want.

The second reason to consider a check-up is if there have been substantive changes in your life or the life of your beneficiaries. For example: marriages, divorce, births, adoptions, or even challenges faced by your beneficiaries (such as health events or substance abuse) all of which can change how you might wish to distribute your assets. Additionally, moving to a new state can affect your estate plan due to differing laws, so a review is advisable when relocating.

Now if you have reviewed your estate plan and everything reflects your current desires and circumstances the next thing you need to do is ensure your loved ones know about it. Do they know where to locate the documents in the event they are needed? Do the people who will make the financial and medical decisions on your behalf, know they have that responsibility?

It would be helpful to rehearse such a scenario to see how it plays out. The military practices scenarios to ensure they have made the necessary preparations as do firemen, policemen, lifeguards, and other professionals. It would be wise to consider what would happen if you and your spouse were incapacitated and couldn’t make a decision-what would happen then. Would the person named in your durable power of attorney documents know they are making the decisions and what you wanted them to decide? This is especially relevant for those of you in the later stages of life (70s and above). An older family member of ours recently had a health event, that put our preparations to the test. For a year before we had expressed the need to get the estate planning documents in the hands of the decision makers only until this recent scare had this been remedied. It’s wise to consider the what-ifs, as painful as such a thought may be. 

Now for those who don’t have an estate plan, there is work to do. Yes, you do have a default plan. In fact, every state in the United States, from Alaska to Wyoming has a default plan in place. BUT YOU ABSOLUTELY DON’T WANT it. It will take way longer and is way more expensive. 

Now you may be thinking, that sounds like something I’d want to avoid. And you would be right, but as I’ve shared in previous episodes you’d be surprised by the number of people that didn’t have an estate plan when they died. Here are just a few of the famous people you would know that sadly did just that: Pablo Picasso, Sonny Bono, Aretha Franklin, Prince (the artist formally known as), and the actor Chadwick Boseman (he played Black Panther in the Marvel Studios film). He did a phenomenal job in that role. Maybe you can’t entirely fault those who died suddenly, such as Sonny Bono and The Artist Formerly Known as Prince, but Aretha Franklin and Chadwick Boseman both had longer-term illnesses and still didn’t have an estate plan. Not a lot of R-E-S-P-E-C-T for one’s loved ones.

Speaking of Aretha Franklin’s estate, her own sons had a five-year legal battle, before they were finally awarded real estate. A judge made the decision based on a handwritten will from 2014 that was found between couch cushions.

It took 44 years to settle Jimmy Hendrix’s estate. Hendrix died in 1970 without a will. Without a will, Jimi Hendrix’s estate passed to his father. When his father died in 2002, he left behind his son’s estimated $80 million estate to Janie Hendrix, Jimi’s sister, cutting out Leon Hendrix, Jimi’s brother Leon Hendrix contested his father’s will in 2004, but it was upheld in 2007. Even when there isn’t lots of money there can still be a lot of drama.  

There are so many advantages to an estate plan as it allows you to name who gets to receive what, and also when they receive it and on what conditions.  For example, you could say, I want money to go to my kids at 25, 35, and 45 years of age, rather than a lump sum of money at age 25. Most people in their early 20s wouldn’t make a great decision if hundreds of thousands were dropped into their lap.  But without an estate plan, the State of your residence will be making all of those decisions for you because that’s the default estate plan, which isn’t great, but at least it’s better than the State assuming ownership.

You might reason - but I’m already dead, who gives a rip, let my family sort things out when I’m gone. That’s a great strategy if you want your family’s last memory of you to be one of stress, expense, and struggle and you want your legacy to include family members fighting over your fortune, however small. If this isn’t enough reasons here are three additional reasons why you need one:

First, it will take a long time without one - Even if you don’t have a huge estate like Aretha or Jimmy. Because the courts are backlogged, it can take 9 months before you can schedule just an initial hearing and likely several more years to finalize it (depending on the size of the estate and number of people who want to benefit).

Second, It’s dang expensive - Without a trust, your family would need to pay all of the legal fees, namely court filing fees and the billable hours of an estate planning attorney. It’s WAY less expensive to pay for one before.

The third and final reason you need an estate plan is that without one it is open to the public. That’s why we know about Aretha and Jimmy Hendrix's estate. It’s all played out in public. With an estate plan, it can be handled privately. But without an estate plan, your beneficiaries' names will be listed for the public to see and for the scammers who specialize in taking money from them. 

In conclusion, when it comes to estate planning it’s imperative that you complete a check-up. For those that have one, well done, but be sure it reflects your current circumstances and values and that all of the affected parties are notified and aware of the location and details. 

For those who own real estate or have minor children and don’t have an estate plan, get on it. You can complete these quickly and easily and inexpensively online. As you get older you can meet with an estate planning attorney to complete a new estate plan as you will have a better idea about your and your beneficiaries' situations. 

Tips Tricks and Strategies 

Years ago, I spoke with another advisor and asked how everything was going. He said he was in the midst of a challenging time because one of his clients in his early 50s had died unexpectedly. The good news was that this client had life insurance. The bad news was that his ex-wife from over 10 years ago was still listed as the only beneficiary on the policy, and his current wife wasn’t too happy about things. The advisor told me that he didn’t facilitate the purchase of the original policy so hadn’t thought to review that policy to ensure the beneficiaries were up to date.

Things will transfer first by title, then by beneficiary designation, and finally by probate. In this case, there was a legal battle because the beneficiary was the ex-wife and her being the beneficiary of the life insurance wasn’t a part of their divorce agreement. Needless to say, this caused a huge issue for the widow. 

This is an example of exactly why we review clients' estate plans and regularly conduct beneficiary reviews. We always want to ensure everything is in alignment with your wishes, and we’ve made more than a few updates to beneficiary designations. None as drastic as the example just shared, but we’ve still made changes.

References

Estate Planning Basics

9 Famous People Who Died Without a Will

• https://BetterPlanningBetterLife.com 
• Connect with Jonny on LinkedIn

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Welcome to episode 70 of the One for the Money podcast. I am so very grateful you have taken the time to listen. In this episode, I answer the question “How much should one spend on vacation?”

In the tips, tricks, and strategies portion, I will share some cost-saving travel tips. 

In this episode...

• How Much Should You Spend [3:15]
• Why You Should Travel [6:21]
• Travel Saving Tips [8:56]

MAIN

When it comes to travel, St Augustine and Mark Twain said it best in my opinion. 

St Augustine said that -The world is a book and those who do not travel only read one page. 

And Mark Twain said - Travel is fatal to prejudice, bigotry, and narrow-mindedness, and many of our people need it sorely on these accounts. Broad, wholesome, charitable views of men and things cannot be acquired by vegetating in one little corner of the earth all one's lifetime.

My family and I are enamored with travel because of what we learn about the world, other cultures, and about ourselves. There are few things that create better memories than a vacation. Some have argued that life is really about collecting wonderful memories and research has shown that people tend to be happier when they have purchased experiences rather than things. 

That certainly is the case with our family. When both my children and my business were young, we traveled by car around the Western United States and Western Canada. We love the outdoors and visited over 25 national parks in both the US and Canada with Banff, Jasper, Waterton, Glacier, Yosemite, and Crater Lake being some of our favorites but there were so many others that were really great as well. 

As my business and kids grew we have been fortunate to be able to take a few international trips with Moorea and Cinque Terre being some of our favorites. 

When our family talks about our favorite memories it almost always involves experiences we’ve had together on our trips and our favorite family photos have come from our trips as well.

This is why I am a strong advocate of traveling. It doesn’t have to require an airplane, because seeing a local museum or park can also provide a memorable time. 

In fact, when I was a kid our family never took an airplane on our trips. Instead, we all piled in our wood-paneled station wagon with the rear-facing seats in the back and went to the national park near our home, and a couple of times we visited family that lived in the Western States of Utah, California, and Texas. It was an incredibly long drive from Alberta, Canada but I have some cherished memories from those trips. 

One question that many ask is how much should one spend on travel.  Some financial experts recommend that you spend 5-10% of your net income per year on vacations.

For example, if your net income is $100k a year, and as a reminder that is your income after taxes and retirement contributions. then you could reasonably spend $5-10k a year on vacations.

My family and I tend to spend more than 10% but we restrict our expenses in other areas of spending to compensate. We only eat out rarely and if we do it’s usually inn-n-out. Our kids don’t participate in club sports and just play AYSO soccer instead. With savings in those areas, we are able to do more on our vacations. 

When it comes to money for vacation it should be saved in advance of the year of travel and would be in addition to what you have in your emergency savings.

I recommend you tentatively plan your upcoming trips for the coming years so you can anticipate the expenses. We have already planned our travel destinations for the next 2-3 years. I’ll do research on the expected expenses and create a Google spreadsheet that forecasts potential transportation, accommodations, food, activity, and other related expenses.  As the trip gets closer, I even break it down by a daily expense. We usually save money on our trips by only eating out one meal a day and it’s usually a one to two-dollar sign place we find on Tripadvisor or like website. We also frequent the grocery stores of the country which is an enriching cultural experience to shop with and amongst the locals. 

For those who like to eat out more or at nicer restaurants, you can forecast those anticipated expenses beforehand. I always add a few extra thousand dollars to our overall travel budget just in case we have some unexpected trip expenses. 

Regarding travel, you will also want to consider the season of life you’re in. If you’ve got little kids, you will likely want to spend less of your income on vacations and do lower-key, closer-to-home trips. That’s what we did with our road trips to National parks. So many great memories from these. However, my wife and I have many more memories than our kids because they were so young they don’t remember them as well, but they do look at the photos as they play on our TV. Now that our two oldest kids are older we have justified spending more than the 10% of our net income on vacations. That was the rationale used for our recent trip to Europe. When my wife would ask about planning the trip, I’d tell her that we have 2 reasons why we should go on it, and that number represented the number of summers we have left with our oldest son Lucas before he leaves the nest. 

Now as wonderfully amazing as trips are one should never, ever,  go into debt to go on a vacation. Instead, visit a local national or state park instead. Often the memories are just as good. 

I was reading an article on travel spending and they had a very appropriate warning which was beware of luxury creep. They said “Remember that it’s much easier to go up in the luxury level of a vacation than it is to come back down. That is, right now, you feel a 2-star hotel is perfectly amenable. However, once you stay at a 4-star property, a 2-star hotel will seem like an unacceptable comedown. 

One book that accelerated my travel was the book Die with Zero written by Bill Perkins. 

One of the most significant learnings from the book was his explanation regarding the intersection of time, money, and health and how too many worked too long to the point where they had plenty of time and money but didn’t have the health to truly enjoy it. He argued that people should be spending more money when their health is better. He argues that more money on travel should be spent in their 40s then their 50s, and more in their 50s then their 60s, and more money in their 60s than their 70s because you have the health to do it.  Too many wait until after they have retired to travel and they just don’t have the stamina needed. For some, due to work obligations and other factors, they cannot travel until they have retired. And for those people, I strongly recommend that you pack a lot of travel in those first few years of retirement. In fact this is exactly what I encourage and help my clients to do. 

Whether it’s a trip in your car across a county or state line or a flight across the international date line, travel can create unique conditions for you and your loved ones to make incredible memories. The key is to be away from the daily requirements and to be fully present with your loved ones while you collectively experience with your 5 senses new places and things. You’ll have some incredibly memorable times as you meet with locals and read additional pages about the world, in the words of St. Augustine. You’ll also develop a broader more wholesome view of men and things as Mark Twain advised.  

All of these experiences will be incredibly enriching. As Bill Perkins notes in Die with Zero, one's life is a sum of your experiences and so to maximize your life you need to maximize your experiences. He notes that memories are an investment in our future selves. Buying an experience just doesn’t buy you the experience itself–it also buys you the sum of all the dividends that experience will bring for the rest of your life. Consequently, we need to make the most of whatever health we have at every point in our lifetime and see the world around us. It could be as simple as exploring a nearby museum or park and interacting with the people in that area. All told, you should be investing and spending according to a plan so you can have even more experiences.

If you want to learn more about working with me to plan your ideal life, go to my website, betterplanningbetterlife.com. On the “getting acquainted page you can schedule a free introductory meeting that should be worth your time.

Thank you again for listening and I hope you found this helpful, now on to the tips tricks, and strategies portion of the podcast.

TIPS, TRICKS AND STRATEGIES

Welcome to the tips, tricks, and strategies portion of the podcast where I will share a few tips on how to spend less on vacation.

As I mentioned earlier in this podcast, when both my children and my business were young, we traveled by car around the Western United States and Western Canada visiting various National parks. I have always loved the outdoors and wanted to instill that same love in our 3 sons. One of the impetuses for visiting National Parks was that every 4 grader and their family gets into National Parks for free because of the wonderful Every Kid in the Outdoors program. This was Federal legislation that was passed that allowed 4 graders and their families to have free access to hundreds of parks, lands, and waters for an entire year. You just need to register online at everykidoutdoors.gov and print out your pass as electronic copies aren't accepted. We would present our paper and they gave us a plastic pass to our 4th grader. When we did this for our two oldest boys, they felt pretty special that they were able to get the whole family into the parks for free. When Lucas was in the 4th grade we visited Death Valley, Zion, Bryce, Canyonlands, Arches, Capitol Reef, Grand Canyon, and Joshua Tree National Parks. When Conway was in the 4th grade, we visited Redwoods, Crater Lake, Olympic, Mt Rainier, North Cascades, Yellow Stone, Grand Tetons, Sequoia, and Kings Canyon national parks. Our youngest son Quinton just entered the 4th grade this year so we look forward to planning our national park trips for this year. 

Another travel tip for having less expensive vacations is to utilize Google Flights to scan for less expensive airline tickets. It’s important that you start watching for flights at least 6 months in advance of your trip. What that allowed me to do was determine what the usual price would be for a flight. I would monitor it regularly and when I would see the prices drop, I’d purchase the tickets. Sometimes those tickets were purchased 8 months in advance and other times they’d be purchased just 2-3 months in advance.

My final travel tip is I would recommend going for longer international trips if possible. The reason is that transportation costs, often airline tickets, can be the most expensive part of a trip. For shorter trips, travel expenses were 60-70% of the total trip cost but with longer trips, they would be 40% of the costs. Yes, your accommodation expenses would increase but there is a benefit if you’ve already spent the money to get to a location to stay longer. 

Well, I hope you found these travel tips helpful. As a great friend and mentor of mine said, happiness is being on vacation or planning your next one. And with Better travel planning you can have a better life. Have a great one!

References

Every kid in the outdoors

How much you should spend on vacation

• https://BetterPlanningBetterLife.com 
• Connect with Jonny on LinkedIn

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