Episode Transcript
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Speaker 1 (00:06):
Tonight, are you rich or just comfortable? You're listening to
Simply Money, presented by all Worth Financial on Bob'spond Seller
along with Brian James. So maybe you've got two million
dollars saved, maybe more, so why do you still worry
about money? Tonight, Brian, We're going to unpack the difference
between being quote unquote rich and being truly financially independent.
Speaker 2 (00:30):
This is an important topic, Bob, because obviously, you know,
everybody wants to be rich, because we assume that just
a little bit more money will remove all the stress
that I have in my life. So let's talk about
how that doesn't exactly work out the way we expect it.
Speaker 1 (00:42):
So, but just look a little bit of benchmarking here. First.
Speaker 2 (00:45):
It doesn't take a whole lot of net worth to
kind of put you in the upper echelon of wealth
in the United States. But if you so, if you've
got a million dollars, you're about the top ten percent
of US households according to Networth. If you've got three million,
now you're in the top three percent. And if you're
up there at five million, now you're in the top
one percent. So there's an awful lot of people out
there who just don't have a whole lot to work with,
and if we could push a button and fix that,
(01:07):
we would have done it already. But we're going to
talk today about the ones that are in these situations
and have a little bit more opportunity to kind of
fine tune things for them.
Speaker 1 (01:15):
Brian, I don't know about you, but I strongly dislike
all these benchmark numbers. You know, but I think it's unavoidable.
People like to know. Occasionally, I've got client I don't
know about you, but I've got clients to say, well,
what's everybody else have, what's your average client look like,
what's everyone else doing? Kind of where do I stand
in the pecking order? And my answer is pretty much
(01:36):
always the same. It doesn't matter. The only thing that
matters is your personal financial plan and what you're trying
to accomplish for you and your family.
Speaker 2 (01:45):
Yeah, I take that question in a slightly I get
it too, but I take it in a slightly different
direction than you. I pivoted toward let's talk about how
your spending compares to other people.
Speaker 1 (01:54):
To me, that's what's relevant.
Speaker 2 (01:55):
Somebody who's got twenty five million dollars might spend like
they have fifty million, which means they're basically dirt poor.
Somebody who's got, you know, five hundred thousand dollars, but
spends like they have fifty thousand dollars, they're going to
be just fine. It's spending that matters, not your pile
of money.
Speaker 1 (02:10):
Well, what this really comes down to, and I agree
with you, I think we're saying the same thing in
a different way. One of the things that I'm always
shocked at sometimes, Brian, is no matter how much money
people have, I am literally shocked that a lot of
people have no idea, to your point, what they actually
spend and where they spend it every year. And I
think that can tend to happen when people have a
(02:32):
very high income. You know that they have a successful career,
they got a lot of cash flow coming in. They
haven't needed to think too much about where and what
they spend. But when it comes time to turn, you know,
turn the page and flip from retirement into turning that
pile of money into a paycheck, Well, now it matters
a lot what where you spend, how you spend, the
(02:54):
tax efficiency of what you spend, and to make sure
you don't run out of money. You got to make
sure you spend with this within your means.
Speaker 2 (03:00):
Yeah, and this is the part of the meeting where
we say, Okay, what do you think you spend on
a monthly basis, And a lot of people that's your point,
just really don't know because they haven't had to pay
attention to it. I'm not forced to stick to a budget,
so therefore i have no idea what my budget is.
All I know is that I'm not running up credit
card bills and cash is not piling up in the bank,
so therefore I must be kind of an equilibrium. And
I think, Bob, that's a good way for those of
(03:22):
you out there who are listening to this and trying
to think about your own situation while you're standing at
the inside of your windshield. A great way to think
about what you're spending is look at what hits the
bank account on a monthly basis, and then figure out
what are the things in there that are finite. Your
mortgage is in there, maybe there's college expenses for kids,
or things that are auto loans, whatever, stuff that is
not going to be out there forever. Take that off
(03:45):
and then look for a surplus, Is there money left?
Is there extra money in that bank account after every month?
If there is, knock that off too. At what's left
after those items being removed. That's what you spend on
a monthly basis, assuming you also aren't running up credit
card balances.
Speaker 1 (03:59):
Yeah, getting back to that you know, what's your number
kind of thing. I mean, some people, Brian will find
they have two million dollars and they're thinking, you know, well,
they're not thinking, you know, if you if you take
five percent of that, it's one hundred grand a year
coming out. And people are shocked, you know. I think
even though this is kind of back of the cocktail
napkin math, they're shocked to conclude we'll shoot, I can't
(04:22):
or I don't want to live on one hundred thousand
dollars a year. But they saw that two million dollar
accumulated amount and their default provision was I got enough,
I'm rich, And it's not. It's not the case when
you start looking again, and what are you actually going
to spend during retirement? Yeah?
Speaker 2 (04:38):
And I think the other pivot point there that comes
up is what will you do with that vacuum of time?
Speaker 1 (04:43):
Right?
Speaker 2 (04:43):
So we spend what we spend on travel and all
these other things while we're working, because we're shoehorning it
in with all the other stuff we have to do
that's consuming time. Well, sooner or later, you and possibly
a spouse are going to have more time than you've
ever had. When we get bored, we tend to spend.
That's not a bad thing necessarily, as long as you
see it coming ahead on the railroad tracks. So make
sure you're budgeting for it. If you go to the
Beats twice a year now while you're both working full time,
(05:06):
well then what will that be when nobody has to
go anywhere anymore? Will it be four times, six times
eight times budget for it?
Speaker 1 (05:12):
You're listening to simply Money presented by all Worth Financial.
I'm Bob sponseller along with Brian James. Brian, let's pivot
a little bit. Sometimes I think people can know they
got a bunch of money, they know it's enough, but
they're still feeling anxious. You know, people worry the bigger
that net worth becomes, they allow themselves to get consumed
(05:33):
by every jot and tittle in the financial markets. You know,
a three percent pullback. Some people can act and behave
like the whole world's coming to an end, you know,
and they're wondering, am I missing something? You know, as taxes,
there's always things to worry about, and sometimes we just
have to counsel people kind of off the ledge as
far as you don't really need to worry so much.
(05:54):
Your plan is solid, it's intact, we still got well
over a ninety percent probability of success of pulling off
all your goals. Sometimes it's more of just an emotional reaction.
The higher that pile of money, you know, value wise becomes.
Speaker 2 (06:09):
I think speaking of emotions either, the saddest times I've
had in my office with people, believe it or not,
are not when they when we realize that their plan
isn't going to work. Maybe they have to work a
little bit longer, or you know, there's just something else
drastic needs to change. That's that's sad, But at the
same time, that usually happens when people are young enough
to react to it and deal with it. The saddest
(06:29):
times bobs are when people come in and they realize
they could have retired five, six, seven years ago. There's
nothing you can do about that. They missed out on
their grandkids growing up things that they thought they maybe
wanted to do, but they simply never took the time
to take stock and realize what they had built for themselves.
And again that's why a financial plan comes in so importantly,
because that's going to help you know exactly what you
(06:50):
can get away with and what you can't.
Speaker 1 (06:52):
That leads us into a few key questions. I think
these are great questions to ask yourself or sit with
an advisor and talk about out. Let's get into some
of these questions, you know, in terms of well, how
do we address this whole topic in practicality in real life?
Question number one, can you clearly identify how much income
you'll need each year and what source that income is
(07:15):
coming from. That's a great question to ask. It's a
loaded question, but one that needs to be answered.
Speaker 2 (07:20):
Yeah, and this goes back to what I was referring
to earlier. Figure out where it goes on a monthly basis. Now,
what's your spending now is going to come awful close
to what you're going to be spending in retirement for
probably the vast majority of it. That's probably at least
eighty percent of it. The rest of it is again,
like I said, think about what you'll do when you
have time, and then budget for it appropriately. But the
whole point is have a target.
Speaker 1 (07:39):
Here's another great question to ask yourself. If the market
dropped twenty percent this year, how would that impact your lifestyle?
Would you need to cut spending, delay a vacation or
a trip or do you have a guardrail strategy in play?
Another great in play, Another great conversation to have with yourself,
your spouse, or with your advisor. Yeah, and we call
(08:00):
this stress testing. So in other words, let's build a
financial plan and figure out what course are we on
right now?
Speaker 2 (08:05):
How's it coming? Are we doing okay? If the If
the baseline scenario is okay, that's great. Everybody agrees that
if nothing bad ever happens again, then here's what here's
how we're going to look. Then right next to that,
run another one and just make twenty percent of your
net worth go poof. It doesn't matter how you gambled
it away, the market took it doesn't make any difference.
Just run the numbers again with less money and see
if you're still okay. That's a stress test and it's
(08:26):
important to do.
Speaker 1 (08:27):
Here's another great question to ask, are you confident that
your portfolio is set up not just for growth, but
for tax efficiency, volatility, and long term care needs. It
comes back to that stress test that you talked about,
but also tax efficiency. Asset location is very important. Ask
that location.
Speaker 2 (08:45):
What that means is what kind of an accounts one
thing to you know, own XYZ stock, but what kind
of account is it sitting in that's gonna dictate how
you're going to how you're gonna react to it. So,
for example, I have a lot of clients that you know,
maybe inherited assets or they sold a business or whatever,
and there's a and sized pile of money that is
not tax sheltered. It didn't come from employment for a
one kay that kind of thing, so it's not in
(09:06):
an IRA. That means it's going to get taxed every
year and very frequently, especially in the case of inheritances,
people don't have the cost basis these I have active
conversations with people who might be listening to this right now,
going yep, he's talking about me where people don't know
the cost basis, so we don't know the tax impact,
and they're always resistant to sell those assets because of
that concern. The problem though is what I have to
(09:29):
tell them is, look, if we can't if we're saying
we're not going to sell them, then we don't own them.
I can't account for them in your financial plan. If
they are walled off, they don't help you. If your
goal is to sit there and let it go to
your kids, you know, with a stepped up cost basis,
then that's fine, except for that makes it impossible for
us to count as a cash flowable asset for you.
Speaker 1 (09:46):
So we need to think about how we react to this. Yeah.
The point Brian and I are trying to drive home
here is if you can't answer that short list of
questions that we just went through, then we'll say I mean,
even if you're in the top five percent in the
country by net worth, you're probably still in that quote
unquote comfortable but uncertain category. And uncertainty is never a
(10:06):
good thing. And that's what we want to try to
help all of you get out of.
Speaker 3 (10:09):
That.
Speaker 1 (10:10):
Uncert brings certainty and a plan into your life. Here's
the all Worth advice to some Being rich is just
having a pile of money, but being financially independent is
having a plan, and in the long run, the plan
is oftentimes worth more than the money to itself. A
healthy emergency, a healthy emergency fund is smart. But what
(10:34):
about having too much cash? We're going to break down
that and how to avoid it. Next. You're listening to
Simply Money, presented by all Worth Financial on fifty five
KARC the talk station. You're listening to Simply Money and
presented by all Worth Financial. I'm Bob Sponseller along with
(10:55):
Brian James. If you can't listen to Simply Money every night,
subscribe and at our daily podcast you can listen the
following morning during your commute or at the gym or
out on your walk. Just search Simply Money on the
iHeart app or wherever you find your podcasts. Straight Ahead
of six forty three, the one document every high income
(11:16):
family needs but very few ever create. All right, Brian,
we all know there's great comfort in having a bunch
of cash. It feels safe, it's accessible, it never drops
twenty percent like the stock market can. But holding too
much cash that comfort can come with a big cost. Yeah.
Speaker 2 (11:36):
Oftentimes we see this when when people inherit cash or
somehow come into a windfall. And it's always interesting to me,
and this happens especially a little bit more when the
market is a little bit wobbly. But it's always interesting
to me that somehow in somebody's brain that they know
they inherited let's say two hundred and fifty thousand dollars
in cash, somehow that has now become the emergency fund.
They didn't decide that they needed two hundred and fifty
(11:58):
thousand liquid. It just is liquid, and therefore that's the
amount they need, and they're hesitant to do anything with it,
which is always an interesting conundrum for me, because cash
is of course the least efficient acid you can have.
It's important, and you can put it in things that
get a return. But an emergency fund doesn't need to cover,
you know, five years worth of expenses. We're really looking
for more like a year or possibly two years spending
(12:19):
on how you feel about things, minus anything you know
you're going to spend. If you know you're gonna you
gotta buy a car for fifty sixty thousand dollars maybe more,
replace the roof for the HVAC or those different kinds
of things, then carve that out first, and then the
rest of it can be your cash. But use the
tool for what it is that enables you to do
a bunch more things rather than just sit on it.
Speaker 1 (12:38):
Brian, I don't know about you, but I find sometimes
when people sell that business or have that big inheritance
come through and that big pile of cash is sitting there,
it's not so much sometimes that people get too conservative.
They see that pile of cash is their slush fund.
You know, they got the bat in the back of
their mind. Well, I can put it in a pool,
I can take four cruises next year, I can give
(13:00):
a bunch of money away. They don't want to do
anything with that cash and really don't want to talk
to us about it because in their mind that's the
money they can go blow on certain things and a
short Do you ever run into that?
Speaker 2 (13:12):
Absolutely all the time. But I will say I'm a
big proponent of doing the things that you want to
do that make you happy, provided that your plan supports it.
So I'll never stand in the way of somebody who
wants to do those things to make their living situation
for them and their families a better situation.
Speaker 1 (13:26):
However that is. But they got to understand what the
impact is. That's my main goal for sure, and that's
a great lead in to some of the dangers that
we're going to talk about here of holding too much
cash for too long. The first danger obviously is inflation erosion.
And again we're talking about Brian within the context of
a fully developed, comprehensive financial plan. So we got to
(13:48):
run the model and say, hey, wherever your money is cash, stocks, bonds,
what have you pension, social security? Do you have enough
money to generate the cash flow you need to generate
for the rest of your life in for inflation because
inflation is just compounding year after year in the background,
and a lot of people misunderstand or don't want to
(14:08):
think about, uh, the impact inflation has in terms of
eroding that large capital base.
Speaker 2 (14:15):
Right, And a lot of people have a general understanding
of inflation, but haven't really applied that to their own situation.
Speaker 1 (14:21):
In other words, what does it mean for my own expenses?
Speaker 2 (14:24):
Because every situation is a different set of puzzle pieces.
Everybody spends differently and has different resources, so inflation is
going to affect them affect them differently. But Baba, I
want to also point out that, you know, I think
a lot of people assume when I know when I
when I talk to my clients, who are in this situation.
They say, I know you think I should invest this,
but and I always stop them there and I say, yeah,
of course that's the default. Yes, we can always invest.
(14:44):
But that's not the first thing that comes to mind.
What are the other things in your in your life
that are screaming for money, whether you know it or not.
Perhaps there's an expense coming up that we need to cover.
Maybe there's a mortgage or some other kind of debt
out there that we could use to blow it all
up at once. Perhaps we keep it liquid to wait
for that period of time when between when you retire
and you turn on your social securities. Bigots to use
(15:06):
that cash to do wroth conversions when you are in
the lowest bracket that you have been in in decades.
There are other things to do than invest it before
we just officially decide.
Speaker 1 (15:15):
That, yeah, because to make those wroth conversions really work
and really sing and hum, so to speak, you got
to pay the taxes. And it's great to have some
cash sitting there.
Speaker 3 (15:24):
All right.
Speaker 1 (15:24):
Well, let's get into a second risk of holding too
much cash for too long, and that's just missed growth.
For example, over the last twenty years, a basic sixty
percent stock forty percent bond portfolio has returned roughly seven
percent annually. Holding large amounts of cash means you're just
flat out missing out on that opportunity to grow and
(15:46):
compound your wealth at a rate higher than inflation on
an after tax basis. It's a missed opportunity.
Speaker 2 (15:54):
Yeah, and the way compounding works, the way that snowball
effect really kicks in those early years when when I'm
speaking early retirement, right, there's different phases in life. Just
like the first dollar you put into your four oh
one k when you were in your twenties, that's the
most valuable dollar you'll ever own because it has spawned
many many more dollars over the forty years that it grew. Well,
you're in the same situation even if you're retired, because
we're still looking for twenty five thirty years for this
(16:15):
money to grow. So don't take a time out for
three years to decide what to do with that pile
of cash. Come up with a plan, prioritize your goals,
and then execute.
Speaker 1 (16:24):
And then the final risk we want to cover here
in this segment is just emotional decision making, making basic
financial decisions purely on emotion. And we see this sometimes
with families who have built a significant amount of wealth
or inherited a large amount of money. They get very,
very conservative after a market pullback or correction, say two
(16:46):
thousand and eight, or shoot even in twenty twenty two,
and they just stayed in cash. It's like, again, I
got this big pile of money. I never want to
see that dollar amount drop at any time for any reason.
And that's not be because of logic, it's because of fear.
And again, if your financial plan will support a boatload
of cash and everything's going to work out, fine, we're
(17:08):
not going to talk you into taking risk you don't
need to take. But oftentimes we find things Brian the
fine time that the opposite opposite is true. Sitting there,
you can feel comfortable in the short term, but when
you project that plan out long term without earning any
rate of return on that cash, you could see some
dangerous things happen later on in life.
Speaker 2 (17:29):
I'm gonna throw a baseball analogy at you know you're
a baseball fan, you're a huge baseball You know you're
watching a game and you're in between pitches or new
batter up to the plate and you see the outfielders
pull that little card out of their pocket.
Speaker 1 (17:43):
What are they doing.
Speaker 2 (17:44):
They are reading the notes that they have on that
batter so that they can anticipate what the play might be.
And they know if I get a fly ball, I
got to go to this base for this runner or
the guy on second is pretty quick, so I may
not be able to. They're thinking ahead of time. Financial
planning is absolutely no different. If I find myself with
an abundance of cash at some point, here are the
five things that I would like to do with it
in order that I will accomplish them. In other words, first,
(18:06):
my emergency fund is X amount of dollars. Once I've
got that goal, you know, check the box. That goal
is done.
Speaker 1 (18:10):
Now.
Speaker 2 (18:11):
Any dollar amount over that emergency fund amount can be
applied to anything else. Maybe it's the mortgage, it could
be roth conversions, it could be helping your kids, whatever.
But once, if you have a plan put in place first,
then you can easily execute on your goals because you
already prioritize them.
Speaker 1 (18:24):
Yeah, and in the few minutes we got less left
than this segment, there are some great alternatives that we
can use here to not take a bunch of risk
with that money sitting in cash, but still earn a healthy,
respectable rate of return. Things like ladder treasuries, you know,
where you're getting yields way above what you're going to
get in a checking account or save his account or
(18:45):
money market account. Things like buffer ETFs or structured notes
where you can get a piece of participation in the
market and have that downside covered. There's ways to blend
strategies to still kind of be in the game, get
a healthy ry to return, and not be subject to
you know, big market decline impacting your portfolio. Yeah.
Speaker 2 (19:06):
I think a lot of people get confused by the
term latter. What that means is you're spreading the time out,
so I'll have five bonds coming to one in one
year than two years, three years, four years, five years.
That way, you've kind of locked in an interest rate.
Always have fresh cash coming due to be reinvested.
Speaker 1 (19:20):
Yeah. In other words, you can be conservative without being
one hundred percent idle. Cash has its place, but you
know it's about where and when you deploy that. Here's
the all Worth advice. Holding too much cash without a
plan might feel safe, but over time you could be
just going broke safely. Coming up next some great advice
from our estate planning expert, Dan Perry from the law
(19:45):
firm of Wooden Lamping. You're listening to Simply Money presented
by all Worth Financial on fifty five KRC the talk station.
You're listening to Simply Money presented by all Worth Financial
Lumbops Funseller along with Brian James, joined tonight by our
state planning expert, Dan Perry from the law firm of
(20:09):
Wooden Lamping. Dan, first of all, thanks for making time
for us today and I know you want to talk
today about estate planning, the importance of having one, and
then maybe even debunking some of the more common myths
out there when it comes to estate planning.
Speaker 3 (20:24):
Yeah, that's right again, thanks for having me, happy to
be here. You know what I say is estate planning
is just real, simply is about making a plan for
what happens to your property, whether that's you know, your money,
your home, your car, even your pets after you pass
away or if you can't make decisions for yourself. It's
(20:45):
not just the wealthy, and it's really for everyone over
the age of eighteen who wants to protect their family
and ensure their wishes are followed, and I like to
think of estate planning encompassing four key pieces, the first
being a last will and estimate, and that's just a
document that says who gets your assets and who takes
(21:05):
care of your kids if they happen to be to
be minors at the time of your death, and without
a will, a court is going to decide, which can
of course lead to delays and disputes. Another key piece
is a trust, and I like to explain trust as
containers that hold your assets and are managed by someone
you choose to avoid a court process called probate. Trust
(21:28):
can also save on taxes or protect money for your kids.
A third key piece would be a power of attorney
and that names someone to handle your finances if you're incapacitated,
such as after an accident, for example. And a final
key piece would be a healthcare directive, and that says
who makes medical decisions for you and what care you
(21:50):
want if you can't speak for yourself, such as if
you're in a coma.
Speaker 1 (21:54):
Dan, thanks for breaking it down like that.
Speaker 2 (21:56):
That. Really this topic can get overwhelming and Bob and
I are of course not attorneys, so we don't draft
documents or anything like that. But as certify financial planners,
these topics come up all the time and we help
people understand exactly how to arrange it. I want to
drill into one comment you made about trust, because I
think every other day I have this conversation with people
who had a trust written up, and it would makes
(22:18):
logical sense. I have a trust, I paid money for
it to exist. I should now name it as the
beneficiary of everything or the owner of everything, and.
Speaker 1 (22:24):
So that the objectives of the trust to be carried out.
Speaker 2 (22:27):
Where this comes up as an issue sometimes is when
we kind of kneed jerk name the trust as the
beneficiary of iras or four oh one k's tax advantage money.
And that can sometimes make a mess in terms of denying,
in worst case scenario, denying beneficiaries their right to spread
that tax impact of liquidating that pre tax IRA or
four O one k over ten years.
Speaker 1 (22:48):
How do you address that?
Speaker 2 (22:50):
How can we safely make sure a trust can serve
its purpose as well as protect that benefit sure?
Speaker 3 (22:57):
Absolutely so. As you may know, as you probably know,
you know, the tax laws changed significantly in this regard
a few years ago, and a spouse named as a
beneficiary in IRA has the ability to stretch that benefit
out over their lifetime upon them reaching age seventy two,
(23:18):
but a non spouse beneficiary doesn't have that right. And
when a lot of clients want to name their trust
as a beneficiary, and the problem with that is if
it doesn't have special language in the trust documentself, what
we lawyers call it as see through language. If it's
not seen through the trust agreement to the specific name beneficiaries,
(23:41):
it can create a situation where the non spouse beneficiary
such as an adult child, can't withdraw that benefit over
a ten year period, and it can create a much
larger tax bull event when they inherit that account.
Speaker 1 (23:56):
So ce through is the keyword. I appreciate that. Is
there a way?
Speaker 2 (24:00):
Obviously, you know somebody who's concerned about this should check
with their the attorney who drafted the document. But is
there a are they literally looking for the words c
through in the document or is there a special section
where where is this language hidden?
Speaker 3 (24:11):
Usually so the language is usually hidden in a article
or a paragraph that describes that says retirement accounts, and
the language is going to usually reference a section of
the Internal Revenue Code on how the trustee is going
to view these retirement benefits. So if you're listening this
(24:33):
and wondering if there's c through language in your trust,
try to find a section titled retirement accounts and it
almost always will have the see through language and will
say see through to the individual beneficiaries something along those lines.
Speaker 1 (24:48):
Hey, Dan, I know you see all kinds of situations
come past your desk, you know, as part of your practice.
I know probably most of the listeners out there are
thinking of themselves, Hey, I've got some kind of a
state plan and way shape or form. I got this covered.
What are some of the things. There are situations you
come across every day in your practice, some of the
land minds out there that people might not be aware of,
(25:11):
you know, due to the fact that they just didn't
cross all the t's and dot all the ey's, you know,
in terms of actually implementing a good estate planning strategy.
Speaker 3 (25:21):
So the one I see the most is people that
believe that they're done when they complete their plan because
you know, as we all know, life changes. You know,
there's marriage, perhaps divorce, kids, starting a new business, and
your plan needs to keep up with those changes. You know,
for example, I had a client who wrote a will
in his thirties and he named his wife as a
(25:43):
beneficiary of that will, and after their divorce, he never
updated it. However, in Ohio, divorce operates as what's called
a revocation of any provision going to the X YF.
But it can also create a situation of ambiguity and
the will on who is to rest the property that
was to go to the wife when they were married,
(26:04):
and that can create some problems.
Speaker 2 (26:06):
So that would send it back through probate, then, wouldn't
it wouldn't that result in them saying there's no beneficiary.
Speaker 3 (26:11):
Therefore it would either get it would either go back
to there's no beneficiary or this falls through what's called
the residuary cause of the will. But again that's ambiguity
that a court has to has to weigh out.
Speaker 2 (26:24):
Hey, one more question that comes up very frequently. A
lot of times we have we have clients come in,
they bring, you know, there, they bring their their stack
of papers and statements and trust documents and they'll kind
of casually throw out, well, we set up this trust,
h you know, because it's going to protect us in
the event of long term care needs or if we
ever need to be on Medicaid or something like that.
Speaker 1 (26:41):
That's almost like the just just.
Speaker 2 (26:43):
Thrown out there, and I know it is not that
not nearly that simple, if it's even possible at all.
Can you weigh in a little bit on how a
trust and whether a trust can truly protect in a
situation like that.
Speaker 3 (26:53):
So trust can be designed to protect for medicaid Medicaid
planning purposes, in general, those trusts have to be what's
called irrevocable trusts, and the person who set up the trust,
such as a set lore is what they're called, cannot
act as the trustee of that trust. And more importantly,
(27:16):
for trust to really protect for medicaid planning purposes, the
trust has to be funded with the person's assets at
least five years prior to applying for Medicaid. So I
hear that a lot from clients as well, and I
always say, well, slow down, let's take a look at
what the trust actually says and what assets have you
funded to this trust?
Speaker 2 (27:37):
Okay, one more quick on in the last few seconds here,
what about nursing homes. What if it's not a case
where we're trying to impoverish to get to medicaid stage.
Speaker 3 (27:45):
If we're not trying to impoverish a person to get
to a medicaid stage, there's really no benefit for an
irrevocable trust for medicaid purposes. There could be a benefit
for irrevocabal trust for tax planning. It's their estate is
value to or thirteen point nine million, for example. But
if it's for if we're just if we're not looking
(28:07):
at those two issues or any kind of asset protection,
an ear vocal truss in my experience, just as in
providing that benefit.
Speaker 1 (28:15):
A lot of good things to think about and consider
as we review our estate plan, you know, and I
think the key point is is review it at a
minimum of every three to five years. Great stuff from
Dan Perry are a state planning expert with the law
firm of Wood and Lamping. You're listening to Simply Money
presented by all Worth Financial on fifty five KRC the
(28:36):
talk station. You're listening to Simply Money presented by all
Worth Financial on Bob Sponseller along with Brian James. If
you have a financial question you'd like for us to answer,
there's a red button you can click while you're listening
to the show right there. On the iHeart app. Simply
(28:56):
record your question and it will come straight to us.
Speaker 3 (29:00):
All right.
Speaker 1 (29:00):
When we talk to families who've done a great job
building wealth, one of the most common things we hear
is this something like, Hey, we don't want to spoil
the kids, but we do want to help them enter
the family mission statement, or what some like to call
a wealth letter. Brian, this is an excellent topic that
I want to get into, and I'm anxious to hear
(29:21):
your perspectives on this because I have some as well.
Speaker 2 (29:24):
So, yeah, the wealth letter is just really sitting down
and figuring out what does money mean to me? And
a lot of times it's most impactful in a situation
where maybe you are the first generation who had a
significant amount of wealth over and above what you needed
to pay the bills. Mom and dad might have done
a great job raising you and getting you off on
your feet and everything, such a great job that you
(29:45):
are in a position to have more than you need,
and therefore you have.
Speaker 1 (29:48):
To prioritize how you're going to spend it.
Speaker 2 (29:50):
Some people like the creature comforts and they choose to
spend on that, and then there's nothing wrong with that,
you know. Free Country Our only concern is that the
financial plan work. Other people think very differently about it.
I have obligate to families, to charities and other things
I have. I've been given so much. I need to
give back a little more. Lots of people are solidly
in the middle, and there's no right, wrong, or indifferent
to any of it. But those are the kind of
(30:11):
values that you would pass along, you know, via something
like a wealth letter, which essentially is just really documenting
here's what I believe, and here's how we got in
this position, and here's what I want to pass on
to you children, as opposed to, uh, here's a big
pile of money.
Speaker 1 (30:24):
I think this is an excellent idea to go through,
and a lot of families don't do this, and I
think it's a potential miss. Here's what we mean by
that wealth letter. Here's a couple questions that you could
just sit down think about with your spouse. And it
doesn't have to be a one time thing. This can
be a letter that evolves over over time. But here
are some of the big questions to write down, Answers
(30:46):
to what does money mean to our family? What are
our responsibilities with money as a family, What legacy do
we want to leave behind, not just in.
Speaker 2 (30:57):
Dollars, but in character, you know, Bobi, we often hear
about situations where a significant amount of wealth was passed
from one generation to the next, and you know, sometimes
that includes a business, for example, and a lot of
times that second and third generation, you know, maybe perfectly
well meaning people, but they did not have to put
in the same blood, sweat and tears and elbow grease
(31:17):
into building that business that the original generation did, and
that it's not their fault, but they tend to view
it a little bit differently, and it can be tough
to pass that to pass that drive on to someone
who didn't have to do it in order to survive.
So it can be very very important to make sure
that everybody knows the history of the family, where did
this come from, and what is their obligation in keeping
(31:37):
it moving forward. So let's talk about a local example here, Bob.
We know a family from Hyde Park. They put a
whole letter together that went all the way through their
entrepreneurial story and this starts with an old shoe store
down and over the rhine, and now they go through
it every Thanksgiving to remind to everybody of where it
all came from. And again this goes back four and
five generations. It's a great story, and I think that's
a great place to Thanksgiving. It's a great time to
(31:58):
come together not only be thanks full for the situation
that you're in, but also remind everybody how you got
there in.
Speaker 1 (32:03):
The first place. Well, and the key thing I love
about that story and that example from the family in
Cincinnati is they're not waiting for them to die to
leave a piece of paper behind. They're talking about it
at the Thanksgiving dinner table. In other words, they're living
it out now. They're talking about their family history and
their value now when everyone's seated at the table and
(32:26):
they can hear mom and dad and grandma and grandpa
talk about it today. That is a powerful way to
actually pass down these values and live them out instead
of just leaving a document behind that says basically, it
might be like, hey, do what I say, not what
I necessarily did. That tends to sometimes fall on deaf ears.
Speaker 2 (32:46):
Yeah, and a lot of you might be hearing this going, okay,
do I need another documentary? Got to worry about my
will and my trust and all these other things. Those
estate planning documents are about how those are the instruction
manual for how your assets are to be distributed according
to whatever you have, whatever the goals are, whatever. This
one is about the why. There is no legal requirement
that you put it together, but it will help your
(33:07):
descendants understand exactly why you made the decisions you did.
Speaker 1 (33:11):
You're listening to simply Money presented by all Worth Financial.
I'm Bob Sponseller along with Brian James. Brian talk about
what you've seen. Have you seen actual clients of yours
go through anything like this, either in written form or
conversation with family or both. You know, can you cite
maybe an example that you've seen your clients do that
(33:32):
have really warmed your heart and made you feel real
good about the future of a family based on this
kind of planning.
Speaker 2 (33:40):
You know, when you ask me that question, the one
that comes to mind immediately. I have a family who
every year they get together and they do they do
a state planning gifts. This is a fairly common type
of situation. If you know an elderly couple has more
than they need and what they're concerned about the state taxes,
then what they'll do is they'll use what's called the
annual gift exclusion. You can give anybody you know a
certain amount. I'm thinking of a family that does annual
(34:04):
gift exclusions, meaning they use the annually available mount that
they can give to their families without any repercussions for taxes,
gift taxes, anything like that. And a lot of families
do this, but a lot of times it's just a
check in the mail, which just means it's money that
falls from the sky and the recipients simply sticking the
bank or blow it on something or whatever and have
no appreciation for it. But the family I'm thinking of
makes a production in the Over the holidays, everybody sits
(34:27):
down for holiday Thanksgiving or possibly Christmas dinner, and they
will talk about again, as many do. They'll talk about
why they're thankful to their situation, what it is about
their situation that they're truly grateful for, and then what
they are going to do with that money that's coming
from the generations above. And that is a tradition that
will continue on in this family, it already has for
several generations.
Speaker 1 (34:47):
Great stuff. Here's the all Worth advice. A family mission
statement won't show up on a balance sheet, but it
may be the most valuable document you ever create. Coming
up next, we've got Brian's bottom Line. Brian going to
spend a few minutes talking to us about roth conversions
and he does a wonderful job counseling clients through this.
I'm excited to hear his take on the whole wroth
(35:10):
conversion topic. You're listening to Simply Money presented by all
Worth Financial on fifty five KRC the talk station.
Speaker 3 (35:20):
The thing moment.
Speaker 1 (35:22):
You're listening to Simply Money presented by all Worth Financial,
I'm Bob Sponseller along with Brian James, and it's time
for Brian's bottom line. Brian Philip give us some wisdom
about roth conversions as seen through the eyes of Brian
James rob Well.
Speaker 2 (35:38):
Roth conversions are an amazingly powerful tool that not a
lot of people understand. You know, the pros and cons too,
but what we're talking about, of course, for a long time,
if you have had a job with the last several
decades and you had a four O one, okay, most
likely that was a traditional or pre tax four O one, kay,
because it's just what you did. It was the only
choice for a very long time Roth came to be
(35:59):
in the early two thousands, literally the year two thousand
that was iras, and then eventually it found its way
into four to oh one case. Now WROTH, of course,
means that you are paying taxes upfront. This doesn't mean
more tax You're not gonna get an extra tax bill.
You're simply just not getting it deducted, getting it deducted
from your income at the payroll level. But you'll pay
(36:19):
taxes on it now, and you'll invest it in something
and it'll grow to whatever it grows to over time.
You're gonna pull it out completely tax free. That means
that there are no capital gains, no dividends, no kind
of ordinary income tax at all, and there are no
required minimum distributions. So when you are seventy three or
seventy five, depending on your year of birth, you're not
gonna have to deal with those kinds of things, with
(36:41):
being forced to take money out and pay taxes on it.
And most beneficially, your kids will inherit it tax free.
Speaker 1 (36:47):
Not only that, when they.
Speaker 2 (36:48):
Inherit wroth, iras or WROTH four oh one k's are
subject to the same ten year rule, meaning it has
to be completely liquidated. For anybody who passes after twenty twenty,
the airs have ten years to totally liquidate that roth
ira or four to one K. But what that means, though,
if you think about it, that means those errors can
let it grow an additional ten years, completely tax free,
(37:10):
because they don't have to empty that bucket until then.
Speaker 1 (37:12):
The benefits of all this are obviously, you know, many,
and it's lucrative. But walk us through how do you
actually guide somebody through this process of saying, Brian, this
all sounds great, How do I do this? How do
I decide the amount to do when to do it?
Speaker 2 (37:28):
Walk us through your So, first of all, acknowledge the
fact that you are voluntarily writing a fact check to
the irs that is often sometimes in the mid to
high five digits, depending on what we're trying to accomplish.
So I'm thinking of somebody who, of course, had you know,
had a lucrative career, maybe thirty four year, forty years
of work, the end of which was in the higher
tax brackets, and then they retire and we've got cash
(37:50):
set aside to pay the bills for a while, and
now all of a sudden they're in a really, really
low tax bracket because they literally have no income. This
is before you turn on social Security and other incomes dreams.
You know, maybe you can hold off as well if
there's a benefit to it. But take advantage of those
low tax brackets. Don't just be happy paying no taxes.
Turn that around. Pay low taxes, not no, but low
(38:10):
taxes to get those roth conversions done now, and then
you can turn the ship around. All the growth that
will happen inside the count from then on out will
be tax free. But again, you are definitely sacrificing a
good chunk upfront. That is a sacrifice. There's a break
even point out into the future. But in the right situation,
it can be an extremely powerful tool to control the
income taxation of your hard earned assets.
Speaker 1 (38:31):
Good stuff, Brian, thanks for listening. You've been listening to
Simply Money and presented by all Worth Financial on fifty
five KRCV talkstation.
Tonight, are you rich or just comfortable? You're listening to
Simply Money, presented by all Worth Financial on Bob'spond Seller
along with Brian James. So maybe you've got two million
dollars saved, maybe more, so why do you still worry
about money? Tonight, Brian, We're going to unpack the difference
between being quote unquote rich and being truly financially independent.
Speaker 2 (00:30):
This is an important topic, Bob, because obviously, you know,
everybody wants to be rich, because we assume that just
a little bit more money will remove all the stress
that I have in my life. So let's talk about
how that doesn't exactly work out the way we expect it.
Speaker 1 (00:42):
So, but just look a little bit of benchmarking here. First.
Speaker 2 (00:45):
It doesn't take a whole lot of net worth to
kind of put you in the upper echelon of wealth
in the United States. But if you so, if you've
got a million dollars, you're about the top ten percent
of US households according to Networth. If you've got three million,
now you're in the top three percent. And if you're
up there at five million, now you're in the top
one percent. So there's an awful lot of people out
there who just don't have a whole lot to work with,
and if we could push a button and fix that,
(01:07):
we would have done it already. But we're going to
talk today about the ones that are in these situations
and have a little bit more opportunity to kind of
fine tune things for them.
Speaker 1 (01:15):
Brian, I don't know about you, but I strongly dislike
all these benchmark numbers. You know, but I think it's unavoidable.
People like to know. Occasionally, I've got client I don't
know about you, but I've got clients to say, well,
what's everybody else have, what's your average client look like,
what's everyone else doing? Kind of where do I stand
in the pecking order? And my answer is pretty much
(01:36):
always the same. It doesn't matter. The only thing that
matters is your personal financial plan and what you're trying
to accomplish for you and your family.
Speaker 2 (01:45):
Yeah, I take that question in a slightly I get
it too, but I take it in a slightly different
direction than you. I pivoted toward let's talk about how
your spending compares to other people.
Speaker 1 (01:54):
To me, that's what's relevant.
Speaker 2 (01:55):
Somebody who's got twenty five million dollars might spend like
they have fifty million, which means they're basically dirt poor.
Somebody who's got, you know, five hundred thousand dollars, but
spends like they have fifty thousand dollars, they're going to
be just fine. It's spending that matters, not your pile
of money.
Speaker 1 (02:10):
Well, what this really comes down to, and I agree
with you, I think we're saying the same thing in
a different way. One of the things that I'm always
shocked at sometimes, Brian, is no matter how much money
people have, I am literally shocked that a lot of
people have no idea, to your point, what they actually
spend and where they spend it every year. And I
think that can tend to happen when people have a
(02:32):
very high income. You know that they have a successful career,
they got a lot of cash flow coming in. They
haven't needed to think too much about where and what
they spend. But when it comes time to turn, you know,
turn the page and flip from retirement into turning that
pile of money into a paycheck, Well, now it matters
a lot what where you spend, how you spend, the
(02:54):
tax efficiency of what you spend, and to make sure
you don't run out of money. You got to make
sure you spend with this within your means.
Speaker 2 (03:00):
Yeah, and this is the part of the meeting where
we say, Okay, what do you think you spend on
a monthly basis, And a lot of people that's your point,
just really don't know because they haven't had to pay
attention to it. I'm not forced to stick to a budget,
so therefore i have no idea what my budget is.
All I know is that I'm not running up credit
card bills and cash is not piling up in the bank,
so therefore I must be kind of an equilibrium. And
I think, Bob, that's a good way for those of
(03:22):
you out there who are listening to this and trying
to think about your own situation while you're standing at
the inside of your windshield. A great way to think
about what you're spending is look at what hits the
bank account on a monthly basis, and then figure out
what are the things in there that are finite. Your
mortgage is in there, maybe there's college expenses for kids,
or things that are auto loans, whatever, stuff that is
not going to be out there forever. Take that off
(03:45):
and then look for a surplus, Is there money left?
Is there extra money in that bank account after every month?
If there is, knock that off too. At what's left
after those items being removed. That's what you spend on
a monthly basis, assuming you also aren't running up credit
card balances.
Speaker 1 (03:59):
Yeah, getting back to that you know, what's your number
kind of thing. I mean, some people, Brian will find
they have two million dollars and they're thinking, you know, well,
they're not thinking, you know, if you if you take
five percent of that, it's one hundred grand a year
coming out. And people are shocked, you know. I think
even though this is kind of back of the cocktail
napkin math, they're shocked to conclude we'll shoot, I can't
(04:22):
or I don't want to live on one hundred thousand
dollars a year. But they saw that two million dollar
accumulated amount and their default provision was I got enough,
I'm rich, And it's not. It's not the case when
you start looking again, and what are you actually going
to spend during retirement? Yeah?
Speaker 2 (04:38):
And I think the other pivot point there that comes
up is what will you do with that vacuum of time?
Speaker 1 (04:43):
Right?
Speaker 2 (04:43):
So we spend what we spend on travel and all
these other things while we're working, because we're shoehorning it
in with all the other stuff we have to do
that's consuming time. Well, sooner or later, you and possibly
a spouse are going to have more time than you've
ever had. When we get bored, we tend to spend.
That's not a bad thing necessarily, as long as you
see it coming ahead on the railroad tracks. So make
sure you're budgeting for it. If you go to the
Beats twice a year now while you're both working full time,
(05:06):
well then what will that be when nobody has to
go anywhere anymore? Will it be four times, six times
eight times budget for it?
Speaker 1 (05:12):
You're listening to simply Money presented by all Worth Financial.
I'm Bob sponseller along with Brian James. Brian, let's pivot
a little bit. Sometimes I think people can know they
got a bunch of money, they know it's enough, but
they're still feeling anxious. You know, people worry the bigger
that net worth becomes, they allow themselves to get consumed
(05:33):
by every jot and tittle in the financial markets. You know,
a three percent pullback. Some people can act and behave
like the whole world's coming to an end, you know,
and they're wondering, am I missing something? You know, as taxes,
there's always things to worry about, and sometimes we just
have to counsel people kind of off the ledge as
far as you don't really need to worry so much.
(05:54):
Your plan is solid, it's intact, we still got well
over a ninety percent probability of success of pulling off
all your goals. Sometimes it's more of just an emotional reaction.
The higher that pile of money, you know, value wise becomes.
Speaker 2 (06:09):
I think speaking of emotions either, the saddest times I've
had in my office with people, believe it or not,
are not when they when we realize that their plan
isn't going to work. Maybe they have to work a
little bit longer, or you know, there's just something else
drastic needs to change. That's that's sad, But at the
same time, that usually happens when people are young enough
to react to it and deal with it. The saddest
(06:29):
times bobs are when people come in and they realize
they could have retired five, six, seven years ago. There's
nothing you can do about that. They missed out on
their grandkids growing up things that they thought they maybe
wanted to do, but they simply never took the time
to take stock and realize what they had built for themselves.
And again that's why a financial plan comes in so importantly,
because that's going to help you know exactly what you
(06:50):
can get away with and what you can't.
Speaker 1 (06:52):
That leads us into a few key questions. I think
these are great questions to ask yourself or sit with
an advisor and talk about out. Let's get into some
of these questions, you know, in terms of well, how
do we address this whole topic in practicality in real life?
Question number one, can you clearly identify how much income
you'll need each year and what source that income is
(07:15):
coming from. That's a great question to ask. It's a
loaded question, but one that needs to be answered.
Speaker 2 (07:20):
Yeah, and this goes back to what I was referring
to earlier. Figure out where it goes on a monthly basis. Now,
what's your spending now is going to come awful close
to what you're going to be spending in retirement for
probably the vast majority of it. That's probably at least
eighty percent of it. The rest of it is again,
like I said, think about what you'll do when you
have time, and then budget for it appropriately. But the
whole point is have a target.
Speaker 1 (07:39):
Here's another great question to ask yourself. If the market
dropped twenty percent this year, how would that impact your lifestyle?
Would you need to cut spending, delay a vacation or
a trip or do you have a guardrail strategy in play?
Another great in play, Another great conversation to have with yourself,
your spouse, or with your advisor. Yeah, and we call
(08:00):
this stress testing. So in other words, let's build a
financial plan and figure out what course are we on
right now?
Speaker 2 (08:05):
How's it coming? Are we doing okay? If the If
the baseline scenario is okay, that's great. Everybody agrees that
if nothing bad ever happens again, then here's what here's
how we're going to look. Then right next to that,
run another one and just make twenty percent of your
net worth go poof. It doesn't matter how you gambled
it away, the market took it doesn't make any difference.
Just run the numbers again with less money and see
if you're still okay. That's a stress test and it's
(08:26):
important to do.
Speaker 1 (08:27):
Here's another great question to ask, are you confident that
your portfolio is set up not just for growth, but
for tax efficiency, volatility, and long term care needs. It
comes back to that stress test that you talked about,
but also tax efficiency. Asset location is very important. Ask
that location.
Speaker 2 (08:45):
What that means is what kind of an accounts one
thing to you know, own XYZ stock, but what kind
of account is it sitting in that's gonna dictate how
you're going to how you're gonna react to it. So,
for example, I have a lot of clients that you know,
maybe inherited assets or they sold a business or whatever,
and there's a and sized pile of money that is
not tax sheltered. It didn't come from employment for a
one kay that kind of thing, so it's not in
(09:06):
an IRA. That means it's going to get taxed every
year and very frequently, especially in the case of inheritances,
people don't have the cost basis these I have active
conversations with people who might be listening to this right now,
going yep, he's talking about me where people don't know
the cost basis, so we don't know the tax impact,
and they're always resistant to sell those assets because of
that concern. The problem though is what I have to
(09:29):
tell them is, look, if we can't if we're saying
we're not going to sell them, then we don't own them.
I can't account for them in your financial plan. If
they are walled off, they don't help you. If your
goal is to sit there and let it go to
your kids, you know, with a stepped up cost basis,
then that's fine, except for that makes it impossible for
us to count as a cash flowable asset for you.
Speaker 1 (09:46):
So we need to think about how we react to this. Yeah.
The point Brian and I are trying to drive home
here is if you can't answer that short list of
questions that we just went through, then we'll say I mean,
even if you're in the top five percent in the
country by net worth, you're probably still in that quote
unquote comfortable but uncertain category. And uncertainty is never a
(10:06):
good thing. And that's what we want to try to
help all of you get out of.
Speaker 3 (10:09):
That.
Speaker 1 (10:10):
Uncert brings certainty and a plan into your life. Here's
the all Worth advice to some Being rich is just
having a pile of money, but being financially independent is
having a plan, and in the long run, the plan
is oftentimes worth more than the money to itself. A
healthy emergency, a healthy emergency fund is smart. But what
(10:34):
about having too much cash? We're going to break down
that and how to avoid it. Next. You're listening to
Simply Money, presented by all Worth Financial on fifty five
KARC the talk station. You're listening to Simply Money and
presented by all Worth Financial. I'm Bob Sponseller along with
(10:55):
Brian James. If you can't listen to Simply Money every night,
subscribe and at our daily podcast you can listen the
following morning during your commute or at the gym or
out on your walk. Just search Simply Money on the
iHeart app or wherever you find your podcasts. Straight Ahead
of six forty three, the one document every high income
(11:16):
family needs but very few ever create. All right, Brian,
we all know there's great comfort in having a bunch
of cash. It feels safe, it's accessible, it never drops
twenty percent like the stock market can. But holding too
much cash that comfort can come with a big cost. Yeah.
Speaker 2 (11:36):
Oftentimes we see this when when people inherit cash or
somehow come into a windfall. And it's always interesting to me,
and this happens especially a little bit more when the
market is a little bit wobbly. But it's always interesting
to me that somehow in somebody's brain that they know
they inherited let's say two hundred and fifty thousand dollars
in cash, somehow that has now become the emergency fund.
They didn't decide that they needed two hundred and fifty
(11:58):
thousand liquid. It just is liquid, and therefore that's the
amount they need, and they're hesitant to do anything with it,
which is always an interesting conundrum for me, because cash
is of course the least efficient acid you can have.
It's important, and you can put it in things that
get a return. But an emergency fund doesn't need to cover,
you know, five years worth of expenses. We're really looking
for more like a year or possibly two years spending
(12:19):
on how you feel about things, minus anything you know
you're going to spend. If you know you're gonna you
gotta buy a car for fifty sixty thousand dollars maybe more,
replace the roof for the HVAC or those different kinds
of things, then carve that out first, and then the
rest of it can be your cash. But use the
tool for what it is that enables you to do
a bunch more things rather than just sit on it.
Speaker 1 (12:38):
Brian, I don't know about you, but I find sometimes
when people sell that business or have that big inheritance
come through and that big pile of cash is sitting there,
it's not so much sometimes that people get too conservative.
They see that pile of cash is their slush fund.
You know, they got the bat in the back of
their mind. Well, I can put it in a pool,
I can take four cruises next year, I can give
(13:00):
a bunch of money away. They don't want to do
anything with that cash and really don't want to talk
to us about it because in their mind that's the
money they can go blow on certain things and a
short Do you ever run into that?
Speaker 2 (13:12):
Absolutely all the time. But I will say I'm a
big proponent of doing the things that you want to
do that make you happy, provided that your plan supports it.
So I'll never stand in the way of somebody who
wants to do those things to make their living situation
for them and their families a better situation.
Speaker 1 (13:26):
However that is. But they got to understand what the
impact is. That's my main goal for sure, and that's
a great lead in to some of the dangers that
we're going to talk about here of holding too much
cash for too long. The first danger obviously is inflation erosion.
And again we're talking about Brian within the context of
a fully developed, comprehensive financial plan. So we got to
(13:48):
run the model and say, hey, wherever your money is cash, stocks, bonds,
what have you pension, social security? Do you have enough
money to generate the cash flow you need to generate
for the rest of your life in for inflation because
inflation is just compounding year after year in the background,
and a lot of people misunderstand or don't want to
(14:08):
think about, uh, the impact inflation has in terms of
eroding that large capital base.
Speaker 2 (14:15):
Right, And a lot of people have a general understanding
of inflation, but haven't really applied that to their own situation.
Speaker 1 (14:21):
In other words, what does it mean for my own expenses?
Speaker 2 (14:24):
Because every situation is a different set of puzzle pieces.
Everybody spends differently and has different resources, so inflation is
going to affect them affect them differently. But Baba, I
want to also point out that, you know, I think
a lot of people assume when I know when I
when I talk to my clients, who are in this situation.
They say, I know you think I should invest this,
but and I always stop them there and I say, yeah,
of course that's the default. Yes, we can always invest.
(14:44):
But that's not the first thing that comes to mind.
What are the other things in your in your life
that are screaming for money, whether you know it or not.
Perhaps there's an expense coming up that we need to cover.
Maybe there's a mortgage or some other kind of debt
out there that we could use to blow it all
up at once. Perhaps we keep it liquid to wait
for that period of time when between when you retire
and you turn on your social securities. Bigots to use
(15:06):
that cash to do wroth conversions when you are in
the lowest bracket that you have been in in decades.
There are other things to do than invest it before
we just officially decide.
Speaker 1 (15:15):
That, yeah, because to make those wroth conversions really work
and really sing and hum, so to speak, you got
to pay the taxes. And it's great to have some
cash sitting there.
Speaker 3 (15:24):
All right.
Speaker 1 (15:24):
Well, let's get into a second risk of holding too
much cash for too long, and that's just missed growth.
For example, over the last twenty years, a basic sixty
percent stock forty percent bond portfolio has returned roughly seven
percent annually. Holding large amounts of cash means you're just
flat out missing out on that opportunity to grow and
(15:46):
compound your wealth at a rate higher than inflation on
an after tax basis. It's a missed opportunity.
Speaker 2 (15:54):
Yeah, and the way compounding works, the way that snowball
effect really kicks in those early years when when I'm
speaking early retirement, right, there's different phases in life. Just
like the first dollar you put into your four oh
one k when you were in your twenties, that's the
most valuable dollar you'll ever own because it has spawned
many many more dollars over the forty years that it grew. Well,
you're in the same situation even if you're retired, because
we're still looking for twenty five thirty years for this
(16:15):
money to grow. So don't take a time out for
three years to decide what to do with that pile
of cash. Come up with a plan, prioritize your goals,
and then execute.
Speaker 1 (16:24):
And then the final risk we want to cover here
in this segment is just emotional decision making, making basic
financial decisions purely on emotion. And we see this sometimes
with families who have built a significant amount of wealth
or inherited a large amount of money. They get very,
very conservative after a market pullback or correction, say two
(16:46):
thousand and eight, or shoot even in twenty twenty two,
and they just stayed in cash. It's like, again, I
got this big pile of money. I never want to
see that dollar amount drop at any time for any reason.
And that's not be because of logic, it's because of fear.
And again, if your financial plan will support a boatload
of cash and everything's going to work out, fine, we're
(17:08):
not going to talk you into taking risk you don't
need to take. But oftentimes we find things Brian the
fine time that the opposite opposite is true. Sitting there,
you can feel comfortable in the short term, but when
you project that plan out long term without earning any
rate of return on that cash, you could see some
dangerous things happen later on in life.
Speaker 2 (17:29):
I'm gonna throw a baseball analogy at you know you're
a baseball fan, you're a huge baseball You know you're
watching a game and you're in between pitches or new
batter up to the plate and you see the outfielders
pull that little card out of their pocket.
Speaker 1 (17:43):
What are they doing.
Speaker 2 (17:44):
They are reading the notes that they have on that
batter so that they can anticipate what the play might be.
And they know if I get a fly ball, I
got to go to this base for this runner or
the guy on second is pretty quick, so I may
not be able to. They're thinking ahead of time. Financial
planning is absolutely no different. If I find myself with
an abundance of cash at some point, here are the
five things that I would like to do with it
in order that I will accomplish them. In other words, first,
(18:06):
my emergency fund is X amount of dollars. Once I've
got that goal, you know, check the box. That goal
is done.
Speaker 1 (18:10):
Now.
Speaker 2 (18:11):
Any dollar amount over that emergency fund amount can be
applied to anything else. Maybe it's the mortgage, it could
be roth conversions, it could be helping your kids, whatever.
But once, if you have a plan put in place first,
then you can easily execute on your goals because you
already prioritize them.
Speaker 1 (18:24):
Yeah, and in the few minutes we got less left
than this segment, there are some great alternatives that we
can use here to not take a bunch of risk
with that money sitting in cash, but still earn a healthy,
respectable rate of return. Things like ladder treasuries, you know,
where you're getting yields way above what you're going to
get in a checking account or save his account or
(18:45):
money market account. Things like buffer ETFs or structured notes
where you can get a piece of participation in the
market and have that downside covered. There's ways to blend
strategies to still kind of be in the game, get
a healthy ry to return, and not be subject to
you know, big market decline impacting your portfolio. Yeah.
Speaker 2 (19:06):
I think a lot of people get confused by the
term latter. What that means is you're spreading the time out,
so I'll have five bonds coming to one in one
year than two years, three years, four years, five years.
That way, you've kind of locked in an interest rate.
Always have fresh cash coming due to be reinvested.
Speaker 1 (19:20):
Yeah. In other words, you can be conservative without being
one hundred percent idle. Cash has its place, but you
know it's about where and when you deploy that. Here's
the all Worth advice. Holding too much cash without a
plan might feel safe, but over time you could be
just going broke safely. Coming up next some great advice
from our estate planning expert, Dan Perry from the law
(19:45):
firm of Wooden Lamping. You're listening to Simply Money presented
by all Worth Financial on fifty five KRC the talk station.
You're listening to Simply Money presented by all Worth Financial
Lumbops Funseller along with Brian James, joined tonight by our
state planning expert, Dan Perry from the law firm of
(20:09):
Wooden Lamping. Dan, first of all, thanks for making time
for us today and I know you want to talk
today about estate planning, the importance of having one, and
then maybe even debunking some of the more common myths
out there when it comes to estate planning.
Speaker 3 (20:24):
Yeah, that's right again, thanks for having me, happy to
be here. You know what I say is estate planning
is just real, simply is about making a plan for
what happens to your property, whether that's you know, your money,
your home, your car, even your pets after you pass
away or if you can't make decisions for yourself. It's
(20:45):
not just the wealthy, and it's really for everyone over
the age of eighteen who wants to protect their family
and ensure their wishes are followed, and I like to
think of estate planning encompassing four key pieces, the first
being a last will and estimate, and that's just a
document that says who gets your assets and who takes
(21:05):
care of your kids if they happen to be to
be minors at the time of your death, and without
a will, a court is going to decide, which can
of course lead to delays and disputes. Another key piece
is a trust, and I like to explain trust as
containers that hold your assets and are managed by someone
you choose to avoid a court process called probate. Trust
(21:28):
can also save on taxes or protect money for your kids.
A third key piece would be a power of attorney
and that names someone to handle your finances if you're incapacitated,
such as after an accident, for example. And a final
key piece would be a healthcare directive, and that says
who makes medical decisions for you and what care you
(21:50):
want if you can't speak for yourself, such as if
you're in a coma.
Speaker 1 (21:54):
Dan, thanks for breaking it down like that.
Speaker 2 (21:56):
That. Really this topic can get overwhelming and Bob and
I are of course not attorneys, so we don't draft
documents or anything like that. But as certify financial planners,
these topics come up all the time and we help
people understand exactly how to arrange it. I want to
drill into one comment you made about trust, because I
think every other day I have this conversation with people
who had a trust written up, and it would makes
(22:18):
logical sense. I have a trust, I paid money for
it to exist. I should now name it as the
beneficiary of everything or the owner of everything, and.
Speaker 1 (22:24):
So that the objectives of the trust to be carried out.
Speaker 2 (22:27):
Where this comes up as an issue sometimes is when
we kind of kneed jerk name the trust as the
beneficiary of iras or four oh one k's tax advantage money.
And that can sometimes make a mess in terms of denying,
in worst case scenario, denying beneficiaries their right to spread
that tax impact of liquidating that pre tax IRA or
four O one k over ten years.
Speaker 1 (22:48):
How do you address that?
Speaker 2 (22:50):
How can we safely make sure a trust can serve
its purpose as well as protect that benefit sure?
Speaker 3 (22:57):
Absolutely so. As you may know, as you probably know,
you know, the tax laws changed significantly in this regard
a few years ago, and a spouse named as a
beneficiary in IRA has the ability to stretch that benefit
out over their lifetime upon them reaching age seventy two,
(23:18):
but a non spouse beneficiary doesn't have that right. And
when a lot of clients want to name their trust
as a beneficiary, and the problem with that is if
it doesn't have special language in the trust documentself, what
we lawyers call it as see through language. If it's
not seen through the trust agreement to the specific name beneficiaries,
(23:41):
it can create a situation where the non spouse beneficiary
such as an adult child, can't withdraw that benefit over
a ten year period, and it can create a much
larger tax bull event when they inherit that account.
Speaker 1 (23:56):
So ce through is the keyword. I appreciate that. Is
there a way?
Speaker 2 (24:00):
Obviously, you know somebody who's concerned about this should check
with their the attorney who drafted the document. But is
there a are they literally looking for the words c
through in the document or is there a special section
where where is this language hidden?
Speaker 3 (24:11):
Usually so the language is usually hidden in a article
or a paragraph that describes that says retirement accounts, and
the language is going to usually reference a section of
the Internal Revenue Code on how the trustee is going
to view these retirement benefits. So if you're listening this
(24:33):
and wondering if there's c through language in your trust,
try to find a section titled retirement accounts and it
almost always will have the see through language and will
say see through to the individual beneficiaries something along those lines.
Speaker 1 (24:48):
Hey, Dan, I know you see all kinds of situations
come past your desk, you know, as part of your practice.
I know probably most of the listeners out there are
thinking of themselves, Hey, I've got some kind of a
state plan and way shape or form. I got this covered.
What are some of the things. There are situations you
come across every day in your practice, some of the
land minds out there that people might not be aware of,
(25:11):
you know, due to the fact that they just didn't
cross all the t's and dot all the ey's, you know,
in terms of actually implementing a good estate planning strategy.
Speaker 3 (25:21):
So the one I see the most is people that
believe that they're done when they complete their plan because
you know, as we all know, life changes. You know,
there's marriage, perhaps divorce, kids, starting a new business, and
your plan needs to keep up with those changes. You know,
for example, I had a client who wrote a will
in his thirties and he named his wife as a
(25:43):
beneficiary of that will, and after their divorce, he never
updated it. However, in Ohio, divorce operates as what's called
a revocation of any provision going to the X YF.
But it can also create a situation of ambiguity and
the will on who is to rest the property that
was to go to the wife when they were married,
(26:04):
and that can create some problems.
Speaker 2 (26:06):
So that would send it back through probate, then, wouldn't
it wouldn't that result in them saying there's no beneficiary.
Speaker 3 (26:11):
Therefore it would either get it would either go back
to there's no beneficiary or this falls through what's called
the residuary cause of the will. But again that's ambiguity
that a court has to has to weigh out.
Speaker 2 (26:24):
Hey, one more question that comes up very frequently. A
lot of times we have we have clients come in,
they bring, you know, there, they bring their their stack
of papers and statements and trust documents and they'll kind
of casually throw out, well, we set up this trust,
h you know, because it's going to protect us in
the event of long term care needs or if we
ever need to be on Medicaid or something like that.
Speaker 1 (26:41):
That's almost like the just just.
Speaker 2 (26:43):
Thrown out there, and I know it is not that
not nearly that simple, if it's even possible at all.
Can you weigh in a little bit on how a
trust and whether a trust can truly protect in a
situation like that.
Speaker 3 (26:53):
So trust can be designed to protect for medicaid Medicaid
planning purposes, in general, those trusts have to be what's
called irrevocable trusts, and the person who set up the trust,
such as a set lore is what they're called, cannot
act as the trustee of that trust. And more importantly,
(27:16):
for trust to really protect for medicaid planning purposes, the
trust has to be funded with the person's assets at
least five years prior to applying for Medicaid. So I
hear that a lot from clients as well, and I
always say, well, slow down, let's take a look at
what the trust actually says and what assets have you
funded to this trust?
Speaker 2 (27:37):
Okay, one more quick on in the last few seconds here,
what about nursing homes. What if it's not a case
where we're trying to impoverish to get to medicaid stage.
Speaker 3 (27:45):
If we're not trying to impoverish a person to get
to a medicaid stage, there's really no benefit for an
irrevocable trust for medicaid purposes. There could be a benefit
for irrevocabal trust for tax planning. It's their estate is
value to or thirteen point nine million, for example. But
if it's for if we're just if we're not looking
(28:07):
at those two issues or any kind of asset protection,
an ear vocal truss in my experience, just as in
providing that benefit.
Speaker 1 (28:15):
A lot of good things to think about and consider
as we review our estate plan, you know, and I
think the key point is is review it at a
minimum of every three to five years. Great stuff from
Dan Perry are a state planning expert with the law
firm of Wood and Lamping. You're listening to Simply Money
presented by all Worth Financial on fifty five KRC the
(28:36):
talk station. You're listening to Simply Money presented by all
Worth Financial on Bob Sponseller along with Brian James. If
you have a financial question you'd like for us to answer,
there's a red button you can click while you're listening
to the show right there. On the iHeart app. Simply
(28:56):
record your question and it will come straight to us.
Speaker 3 (29:00):
All right.
Speaker 1 (29:00):
When we talk to families who've done a great job
building wealth, one of the most common things we hear
is this something like, Hey, we don't want to spoil
the kids, but we do want to help them enter
the family mission statement, or what some like to call
a wealth letter. Brian, this is an excellent topic that
I want to get into, and I'm anxious to hear
(29:21):
your perspectives on this because I have some as well.
Speaker 2 (29:24):
So, yeah, the wealth letter is just really sitting down
and figuring out what does money mean to me? And
a lot of times it's most impactful in a situation
where maybe you are the first generation who had a
significant amount of wealth over and above what you needed
to pay the bills. Mom and dad might have done
a great job raising you and getting you off on
your feet and everything, such a great job that you
(29:45):
are in a position to have more than you need,
and therefore you have.
Speaker 1 (29:48):
To prioritize how you're going to spend it.
Speaker 2 (29:50):
Some people like the creature comforts and they choose to
spend on that, and then there's nothing wrong with that,
you know. Free Country Our only concern is that the
financial plan work. Other people think very differently about it.
I have obligate to families, to charities and other things
I have. I've been given so much. I need to
give back a little more. Lots of people are solidly
in the middle, and there's no right, wrong, or indifferent
to any of it. But those are the kind of
(30:11):
values that you would pass along, you know, via something
like a wealth letter, which essentially is just really documenting
here's what I believe, and here's how we got in
this position, and here's what I want to pass on
to you children, as opposed to, uh, here's a big
pile of money.
Speaker 1 (30:24):
I think this is an excellent idea to go through,
and a lot of families don't do this, and I
think it's a potential miss. Here's what we mean by
that wealth letter. Here's a couple questions that you could
just sit down think about with your spouse. And it
doesn't have to be a one time thing. This can
be a letter that evolves over over time. But here
are some of the big questions to write down, Answers
(30:46):
to what does money mean to our family? What are
our responsibilities with money as a family, What legacy do
we want to leave behind, not just in.
Speaker 2 (30:57):
Dollars, but in character, you know, Bobi, we often hear
about situations where a significant amount of wealth was passed
from one generation to the next, and you know, sometimes
that includes a business, for example, and a lot of
times that second and third generation, you know, maybe perfectly
well meaning people, but they did not have to put
in the same blood, sweat and tears and elbow grease
(31:17):
into building that business that the original generation did, and
that it's not their fault, but they tend to view
it a little bit differently, and it can be tough
to pass that to pass that drive on to someone
who didn't have to do it in order to survive.
So it can be very very important to make sure
that everybody knows the history of the family, where did
this come from, and what is their obligation in keeping
(31:37):
it moving forward. So let's talk about a local example here, Bob.
We know a family from Hyde Park. They put a
whole letter together that went all the way through their
entrepreneurial story and this starts with an old shoe store
down and over the rhine, and now they go through
it every Thanksgiving to remind to everybody of where it
all came from. And again this goes back four and
five generations. It's a great story, and I think that's
a great place to Thanksgiving. It's a great time to
(31:58):
come together not only be thanks full for the situation
that you're in, but also remind everybody how you got
there in.
Speaker 1 (32:03):
The first place. Well, and the key thing I love
about that story and that example from the family in
Cincinnati is they're not waiting for them to die to
leave a piece of paper behind. They're talking about it
at the Thanksgiving dinner table. In other words, they're living
it out now. They're talking about their family history and
their value now when everyone's seated at the table and
(32:26):
they can hear mom and dad and grandma and grandpa
talk about it today. That is a powerful way to
actually pass down these values and live them out instead
of just leaving a document behind that says basically, it
might be like, hey, do what I say, not what
I necessarily did. That tends to sometimes fall on deaf ears.
Speaker 2 (32:46):
Yeah, and a lot of you might be hearing this going, okay,
do I need another documentary? Got to worry about my
will and my trust and all these other things. Those
estate planning documents are about how those are the instruction
manual for how your assets are to be distributed according
to whatever you have, whatever the goals are, whatever. This
one is about the why. There is no legal requirement
that you put it together, but it will help your
(33:07):
descendants understand exactly why you made the decisions you did.
Speaker 1 (33:11):
You're listening to simply Money presented by all Worth Financial.
I'm Bob Sponseller along with Brian James. Brian talk about
what you've seen. Have you seen actual clients of yours
go through anything like this, either in written form or
conversation with family or both. You know, can you cite
maybe an example that you've seen your clients do that
(33:32):
have really warmed your heart and made you feel real
good about the future of a family based on this
kind of planning.
Speaker 2 (33:40):
You know, when you ask me that question, the one
that comes to mind immediately. I have a family who
every year they get together and they do they do
a state planning gifts. This is a fairly common type
of situation. If you know an elderly couple has more
than they need and what they're concerned about the state taxes,
then what they'll do is they'll use what's called the
annual gift exclusion. You can give anybody you know a
certain amount. I'm thinking of a family that does annual
(34:04):
gift exclusions, meaning they use the annually available mount that
they can give to their families without any repercussions for taxes,
gift taxes, anything like that. And a lot of families
do this, but a lot of times it's just a
check in the mail, which just means it's money that
falls from the sky and the recipients simply sticking the
bank or blow it on something or whatever and have
no appreciation for it. But the family I'm thinking of
makes a production in the Over the holidays, everybody sits
(34:27):
down for holiday Thanksgiving or possibly Christmas dinner, and they
will talk about again, as many do. They'll talk about
why they're thankful to their situation, what it is about
their situation that they're truly grateful for, and then what
they are going to do with that money that's coming
from the generations above. And that is a tradition that
will continue on in this family, it already has for
several generations.
Speaker 1 (34:47):
Great stuff. Here's the all Worth advice. A family mission
statement won't show up on a balance sheet, but it
may be the most valuable document you ever create. Coming
up next, we've got Brian's bottom Line. Brian going to
spend a few minutes talking to us about roth conversions
and he does a wonderful job counseling clients through this.
I'm excited to hear his take on the whole wroth
(35:10):
conversion topic. You're listening to Simply Money presented by all
Worth Financial on fifty five KRC the talk station.
Speaker 3 (35:20):
The thing moment.
Speaker 1 (35:22):
You're listening to Simply Money presented by all Worth Financial,
I'm Bob Sponseller along with Brian James, and it's time
for Brian's bottom line. Brian Philip give us some wisdom
about roth conversions as seen through the eyes of Brian
James rob Well.
Speaker 2 (35:38):
Roth conversions are an amazingly powerful tool that not a
lot of people understand. You know, the pros and cons too,
but what we're talking about, of course, for a long time,
if you have had a job with the last several
decades and you had a four O one, okay, most
likely that was a traditional or pre tax four O one, kay,
because it's just what you did. It was the only
choice for a very long time Roth came to be
(35:59):
in the early two thousands, literally the year two thousand
that was iras, and then eventually it found its way
into four to oh one case. Now WROTH, of course,
means that you are paying taxes upfront. This doesn't mean
more tax You're not gonna get an extra tax bill.
You're simply just not getting it deducted, getting it deducted
from your income at the payroll level. But you'll pay
(36:19):
taxes on it now, and you'll invest it in something
and it'll grow to whatever it grows to over time.
You're gonna pull it out completely tax free. That means
that there are no capital gains, no dividends, no kind
of ordinary income tax at all, and there are no
required minimum distributions. So when you are seventy three or
seventy five, depending on your year of birth, you're not
gonna have to deal with those kinds of things, with
(36:41):
being forced to take money out and pay taxes on it.
And most beneficially, your kids will inherit it tax free.
Speaker 1 (36:47):
Not only that, when they.
Speaker 2 (36:48):
Inherit wroth, iras or WROTH four oh one k's are
subject to the same ten year rule, meaning it has
to be completely liquidated. For anybody who passes after twenty twenty,
the airs have ten years to totally liquidate that roth
ira or four to one K. But what that means, though,
if you think about it, that means those errors can
let it grow an additional ten years, completely tax free,
(37:10):
because they don't have to empty that bucket until then.
Speaker 1 (37:12):
The benefits of all this are obviously, you know, many,
and it's lucrative. But walk us through how do you
actually guide somebody through this process of saying, Brian, this
all sounds great, How do I do this? How do
I decide the amount to do when to do it?
Speaker 2 (37:28):
Walk us through your So, first of all, acknowledge the
fact that you are voluntarily writing a fact check to
the irs that is often sometimes in the mid to
high five digits, depending on what we're trying to accomplish.
So I'm thinking of somebody who, of course, had you know,
had a lucrative career, maybe thirty four year, forty years
of work, the end of which was in the higher
tax brackets, and then they retire and we've got cash
(37:50):
set aside to pay the bills for a while, and
now all of a sudden they're in a really, really
low tax bracket because they literally have no income. This
is before you turn on social Security and other incomes dreams.
You know, maybe you can hold off as well if
there's a benefit to it. But take advantage of those
low tax brackets. Don't just be happy paying no taxes.
Turn that around. Pay low taxes, not no, but low
(38:10):
taxes to get those roth conversions done now, and then
you can turn the ship around. All the growth that
will happen inside the count from then on out will
be tax free. But again, you are definitely sacrificing a
good chunk upfront. That is a sacrifice. There's a break
even point out into the future. But in the right situation,
it can be an extremely powerful tool to control the
income taxation of your hard earned assets.
Speaker 1 (38:31):
Good stuff, Brian, thanks for listening. You've been listening to
Simply Money and presented by all Worth Financial on fifty
five KRCV talkstation.
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