Is This the Calm Before the Rate Cut? CPI, Cash Moves, and Smarter Investing Decisions
On this week’s Best of Simply Money podcast, Bob and Brian break down the latest July inflation report and explain why the Fed might finally be ready to cut rates in September. They also dissect investor fears of stagflation and clarify why today's market isn't the 1970s all over again. Later, they dig into why now might be the right time to lock in short-term yields for your cash, whether direct indexing makes sense for higher-net-worth investors, and how to think about pulling money in retirement. Plus, Bob shares how he’s handling the long-term care funding puzzle in his own financial plan.
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Bob: Tonight, a highly anticipated economic report has been released. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Well, the eyes of the financial world were on the July inflation report, which came out before the opening bell this morning at around 8:30. And let's break it down, what the numbers actually are and what they could possibly mean, Brian.
Brian: What are those numbers, Bob? Headline CPI, Consumer Price Index, or as we commonly know, our favorite thing to look at to see how inflation is coming along. So, what was the result? Two point seven percent year over year. That means we're paying 2.7% more than we were paying about this time of year a year ago.
Now, we always talk about on these airwaves, and Andy Stout's favorite thing to talk about, is the Fed generally cares more about the core inflation number, that strips out gas and food prices. And ironically, this is a little different than what we're accustomed to, but gas and food usually are the things that push things up. But the core figure is at 3.1%. So, on those items, we're paying 3.1% more than we were a year ago. But if you put gas and food back in, it's only 2.7%. That's Bizarro World for me. For the last couple of decades, it's been the opposite. Gas has been the problem.
But in any case, what was the main driver behind this? Shelter, so rent, mortgage, that kind of stuff. That was the main overall driver of inflation. Go figure what's in the headlines. This very listening area, those of you out there hearing this, hearing our voices in the Cincinnati area, you live right in ground zero of the most growth-oriented rental rate area in the country, so not too surprising to hear that that's driving it.
Bob: Yeah. This whole rent thing, it's interesting. Some folks are starting to wonder how this data is actually gathered. But the one thing we do know, we've got a shortage of shelter for multi-residential homes across the country, in Cincinnati and across the country. And it's an issue.
I don't know how much of that will be able to be addressed by interest rates potentially dropping, people move out of their starter homes, or whether we just got to build more apartment buildings. And then you get into regulation issues, where to find the land to do it. People in private industry that want to build those places, you know, they want to make a profit on building them. We got a real pent-up need for low-income, or even in some cases subsidized, housing. That's what's driving these rents up. I don't see this as a short-term fix that anybody can come along and make that problem go away overnight. And that's why this inflation number, this core inflation, just continues to linger there. It's slightly that over 3% rate, Brian.
Brian: Yeah, if you are somebody or if somebody you care deeply about is in a situation where they're trying to buy a home, you know, the starter homes for young families, that kind of thing, the supply is just not there. And I think you kind of hit the nail on the head, Bob.
I live up in Liberty Township. Everywhere, the cornfields are again getting turned over with houses, and none of these are multifamily-type houses. These aren't starter homes. They're nice looking, I don't know, starting probably in the $400,000 or $500,000 range, actually probably a little higher than that. And again, that's got everything to do with where can a builder make the most profit. It is their God-given right as a business in the United States to try to make as much money as possible. However, that means that we aren't making anything, nobody is building anything, that will make them less money. Therefore, there just isn't the supply. And at some point, we're going to hit a breaking point here.
I do hear older folks sometimes criticizing their younger relatives because they haven't bought a house yet. They haven't settled down. Well, the numbers are not the same. Look way under the hood and understand what it was like in the '70s and '80s versus what it's like now. You've got high prices of housing in general. You've got high interest rates, high insurance rates based on all the crazy that's going on out there. It is not the 1970s all over again with regard to inflation.
Bob: Yeah, the futures were up on this news, which is interesting. I think the way the markets at least interpreted this right after the announcement came down, and who knows, we all know things can fly around at 8:30 in the morning, and by 4:00, we can move in all kinds of ways.
Brian: We've learned that once or twice, haven't we, Bob?
Bob: But I think this news, I think the markets liked it because it's just stable and it's not surprising. And it's as expected, in line with expectations. And I think you're now starting to see, you know, we talked about it yesterday, we're already pricing in about a 90% probability of at least a quarter-point rate cut in September. And I think these numbers today confirm that that's probably what we're going to get. The markets like cheaper money, interest rates falling. And that's why you saw futures up today. You know, we live to fight another day.
Brian: Yeah, exactly. Like you said, the market likes stability. It can handle slightly bad news. This is a small tick up in inflation. You know, stuff moves around, not that big of a deal. But at the same time, the market just wants to know the answer. That's all.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
An interesting article came across our desk from MarketWatch. Brian, I'm interested in your thoughts on this because I'm just going to put my cards on the table right now. I think this kind of stuff is ridiculous. Stupid. But we're going to talk about this article, and I want to hear what you think.
People are talking about stagflation again. A record number of investors say U.S. stocks are overvalued, as 7 in 10 investors say the economy is headed for stagflation, even though their investment choices are not really lining up with that expected mix of higher inflation and low growth. That's what stagflation means. You've got periods of really high inflation and then low growth, or even negative growth, or a recession. The latest Bank of America Global Fund Manager, you know, research found 70% of those polled said stagflation would be the best way to describe global expectations for the economy over the next 12 months.
Brian: Yeah. And, you know, we should make a better habit, Bob, of going back to go see the survey we talked about six months ago. "Three out of four dentists blah blah blah blah blah." Well, what actually came of that stuff? Were they right? Were they wrong? This is just what the herd thought at a given moment in time.
So, at this point, and we can speak anecdotally from conversations we have every single day at our tables here, doing financial plans for people. I don't have a lot of panicky clients, other than the ones who read the headlines too deeply, such as this one. So that doesn't mean that there are... We don't know what we don't know. But at the same time, we don't have the same situation that we had in the 1970s.
There are similarities, I think, and probably the more interesting one is the political pressure that's being put on Jerome Powell to make interest rate cuts, which is a little different than what the Federal Reserve would normally want to do. That did play a role in the 1970s when President Nixon did the same thing to Arthur...what is his name? Whatever, it doesn't matter. Anyway, he pressured the then-chair to go ahead and reduce interest rates. That led to stagflation in a roundabout way. But that's the only one of the few things that's a similarity I can see. Otherwise, businesses are doing okay.
One thing that is interesting to me is if you're looking at how the market is reacting to this, it's not bailing out of any and all for-profit ventures. The stock market has just rotated around into a diversified portfolio, because you are looking at global stocks, right? That's where the money is moving. It's moving out of the United States currently and into global stocks. The international markets are up almost 20%, while the S&P is up about 8% or 9% so far this year. So it's just an interesting move where I think people are saying, "All right, the United States is a little bit bumpy, so maybe we'll put our money somewhere else." But at the same time, I don't see cracks in the foundation like are being held out in some of these articles.
Bob: Yes, same. You want to start throwing around the 1970s. I looked at the average inflation rate during the 1970s. It was 7.1%, Brian. We're at less than half of that right now. You know, interest rates aren't terribly high. We're at relatively full employment. Corporate earnings are growing at 8%, 9% a year. I mean, things are way better than they were in the 1970s.
But I do think some of these surveys, and I'm not making light of it at all, it comes back to what we've talked about before. It depends on who you ask. I think for people with jobs, and good incomes, and healthy stock portfolios, and real estate holdings, things are pretty good. But, to the point you brought up a few minutes ago, for younger folks trying to get started here in this inflationary environment, with student loans and tough to find a place to live and all that, things are not that great right now. And it's getting a little harder to find a job.
To me, that's the only sense I can make out of a survey like this. You know, are you talking to the haves or the have-nots? And if that gets skewed in either direction, things can sound a little too bearish in some of these articles or a little too bullish. Do you agree with that?
Brian: Oh, absolutely. Remember, at the end of the day, all the media that we're reading and all the politicians that we listen to have got to keep our attention so they can make money and stay in power. You know, all these online articles, they're trying to sell the ads that are in front of your face and politicians who are trying to get reelected, they have to keep us terrified, keep our attention for the long haul.
But I want to go off script here a little bit, Bob. This is something we were talking about just before we started setting this all up today. So the reason that we've been at this inflation figure of somewhere between 2.5% to 3% for, I don't know, a year, a year and a half, it feels like. We've just been kind of stuck here for a while. That's not that bad. This is not like you said, "The average of the '70s was 7%." It peaked around 14%, right before President Reagan was swept into office, because people were kind of annoyed with that over the long haul. But the Fed...
Bob: We had an oil embargo back there. I mean, the price of oil keeps coming down this year, not up.
Brian: Right. So that's why it's not the 1970s. There are differences.
Bob: I didn't mean to interrupt. Sorry for that.
Brian: No, no, no. So just a little bit of history, so Ben Bernanke, remember that name from a decade or so ago, basically came out and said, "The Federal Reserve has a target of 2%, and it has had that for a long time through the '80s, in the early 2000s, but it was kind of a secret." And then it became big news, and it was very confusing as to why it had been a secret for so long. Well, all of a sudden, that has become gospel. We've got to get it down to 2%. And I think Jerome Powell still subscribes to that, which is why he hasn't been really quick to continue... He wants inflation down just a little bit more before he's comfortable with it. But I think the pressure is starting to get to him, so we're going to see that here, maybe in September.
Bob: Yeah. And I hope I'm wrong. But I think it's going to be a long time before we see 2% again. It would take a major recession to get us back there, but it's just one guy's opinion.
Here's the Allworth advice. Always remember, don't chase returns or panic. Focus on quality diversification and tax-smart financial planning to protect your purchasing power. It all comes back to your financial plan.
All right. If you've parked a pile of cash in a high-yield savings account, should you move it or stay put? Let's talk through your next smart move relative to cash. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcast.
Straight ahead at 6:43, we're answering your toughest financial questions in this edition of Ask the Advisor.
Just last week, we were talking about people who were so bullish on gold. And well, guess what happened? The price of gold dropped by the largest amount in three months last week. Why? There are reports that the U.S. is clarifying its tariff plans on gold bullion. And this is why we preach over and over again that gold's worth and value is just like anything else, supply and demand, what willing buyers and willing sellers are willing to pay for it.
Brian, you know, I did hear early this morning and I know when the President talks about tariff policy and this is a probably a good time to mention they did extend, I think to no one's surprise, another 90 days on the negotiations with China and it sounds like President Trump and President Xi will probably get in a room together somewhere in the next 90 days. But relative to gold, the President did come out and say, "Hey, we are not going to tariff gold. We're not going to put tariffs on transferring gold in between countries around the world," and we'll wait to see how that impacts the price of gold today or this week. But that should at least calm people down a little bit on the fears of the President putting tariffs on gold.
Brian: Unless you own gold, you're probably not real happy right now. So yeah, that's a common question we get whenever the... And it's just people have been trained to do that throughout their lives because grandma and grandpa had a pile of gold or something in the jewelry drawer or whatever. It's kind of like the standard that people go to. "Well, things are getting a little bumpy. Should I put some of my assets in gold?" And I cannot remember the last time, I mean, I don't think I've ever told anybody that, "Yes, that's a good idea," because, you know, let's say that the things that impact the price of anything, most types of your more traditional investments have the ability to react to it. A business will adjust. It will adjust its expenses to account for the fact that they now have to pay tariffs or something like that. They'll adjust prices. Gold can't do any of that. It just sits there waiting for somebody to buy it and tell it what its price is, so there is no way for it to react. So therefore, it is not the greatest thing to own when you can't control all the variables around it.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Brian, let's get into the topic we really wanted to talk about in this segment, and that's good old cash. And let's face it, cash has done well the last couple of years. You know, for the first time in decades, we've been able to park money in treasuries, high-yield money market accounts, even CDs, and, you know, savings accounts down at the corner bank, and sit there and make, you know, around 3.8%, 4%, 4.25%. It's been great. I think a thing to remember is cash is always pegged to short-term rates and inflation, and you do have to pay taxes on the yield on cash. So, it's always going to move up and down based on inflation and short-term rates. The question right now with Fed policy, you know, we're going to have the Fed meet in September. I think it's safe to say we're going to at least get a quarter-point reduction in rates. Is now the time to do something different with your cash or stay the course, and why? What should we be thinking about?
Brian: Now is the time to learn about these things, right? So, we have been in a rising rate environment for several years now. We had been in a declining and flat rate for decades, which meant nobody was paying attention to interest rate cycles because there weren't any. They went down on the floor and they stayed there. We just basically forgot that it was even an option to earn money on cash. But the cash decision, Bob, this is not a decision of, "Should I be in cash versus stocks, or bonds, or whatever?" That's a timing decision, and that's a terrible thing to be thinking about, regardless of what cash is paying.
Cash is something that is...its job is to be there. Its job is not to be the best earning asset in your portfolio. That will happen in over very short-term time frames, but it's not going to last for a long time. That is not the core of a financial plan. Its job is to be there to smooth the bumps for when the engine falls out the bottom of the car, or somebody loses a job, or there's a health scare, or something like that. That's what the emergency fund is for. You absolutely should be getting 3%, 4% on your emergency fund, and don't be heartbroken if a month from now, it drops to maybe 2.5% or low 3%, because we're starting to see these rate hike, or rate cuts rather.
So the answer right now might be to do nothing. If you're already in a position where you've got an emergency fund that's covered, then good. On the other hand, if you felt like you've had too much cash, that's its own argument, because a lot of times, we have people who inherited a lot more money than they'll ever need for an emergency fund, but they just can't pull the trigger. Somehow, that becomes the vault that is untouchable. If you have that situation, this would be a good time to lock it in. This isn't anything exotic. Look at CDs, Treasury bonds, Treasury bills, things like that, and lock the rates in now. This is a great time to be thinking about that if you've got too much cash.
Bob: Now, I think we're singing off the same sheet of music here, Brian. I'm looking at U.S. Treasuries right now. I'm looking at one-month yields all the way down in increments up to 10 years. And what's fascinating to me is the one-month yield is higher than the 10-year yield on treasuries right now, Brian.
Brian: Inverted yield curve is what that is.
Bob: It's slightly inverted. So I think, to your point, depending on what your cash needs are, and I have these conversations...I'm having them with several clients right now. They know that they're going to buy a house or close on a house in 60 days, or 120 days, or whatever. They're building a home. You can get strategic here with the yield curve on locking in a really nice short-term yield. I mean, you can get three-month money here, two-month money, a little over 4.3%. That's a great way to just park some cash and get that nice yield between now and when you need the money.
But, I think to your point, now is not the time to get cute here on trying to time the Fed and move in and out. You think time in the stock market's hard? Timing the movement of short-term interest rates and the effect on the bond market is darn near impossible. And so, that's not something we want to be doing.
Brian: One other point I want to throw out there because if people are sniffing around interest rates on depository-type things, I would include Treasury bills in that kind of discussion. One thing you might notice is that the banks aren't going to pay you more for locking it in for five years than they'll pay you for locking it in for two years.
Bob: Exactly.
Brian: That's slight inversion. And the reason is the banks know that interest rates are coming down. So they're not going to lock their money up in a negative position any more than you are. But that's why you're seeing that right now.
Bob: Here's the Allworth advice. If your cash has a job to do in the short term, don't worry about chasing higher returns or getting cute here. Sometimes the smartest move is to stay where you are.
Is now the time to pull the trigger on buying a home or selling it? Our real estate expert, Michelle Sloan, is in next to discuss the state of the local real estate market.
You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James, joined tonight by our real estate guru, Mrs. Michelle Sloan, owner of RE/MAX Time. And Michelle, we've been through, I think, for you, has been a very busy summer and a very active real estate market. Update us on where things stand here as the summers come into a close and we're starting to get back to school. Tell us how things are looking out there.
Michelle: Well, you are absolutely right. It has been a very, very busy summer. May, June, July, super busy. It seems like all of the people that were on the fence jumped off and got into the real estate market. The trends that I was seeing personally were a lot of people who were in their 60s, maybe close to retirement or already retired, looking for ways to sell and buy. So definitely, we're seeing a busy real estate market, especially in Cincinnati. But things are changing. It is the end of a season when kids go back to school, and usually August is that slower time of year. And we are definitely seeing that.
So right now, the market itself is moderating. I think that's a word that you guys could use, meaning that it's becoming more balanced, meaning that sellers are not seeing homes sell as quickly because there aren't as many buyers out there looking right now. So, a little more moderate, a little more patience is needed on both sides of the transaction. The mortgage rates have not changed a whole lot. So, we're still looking at 6.7%, 6.8%, close to 7%, so I think we're not seeing any changes whatsoever in the mortgage interest rates.
Brian: Michelle, I've got a question for you. It's a little bit off the beaten path here, kind of from a different point of view. So, I live up in Liberty Township, and every other week, there's a cornfield that's obviously been turned over, and it's got basements going into it. And those are all lovely homes, but they are definitely not starter homes up there. And I don't feel like I see a lot of that out there. Also, in my family situation right now, we've got kids in college. Athens, Ohio happens to be my happy place, and it's looking like there's a decent chance I might have a second one going there. So, we've kicked around the idea, "Let's buy a multifamily and put somebody in one, and then we'll go kind of use the other." Anyway, my point is...
Bob: Brian, you're just looking for an excuse to buy a place to go party at Ohio U.
Michelle: There you go. Let's go.
Bob: Don't mislead Michelle.
Brian: If that wasn't clear, then we've never met, Bob.
Michelle: There you go. Let's go.
Brian: I was there last weekend. I'll be there this week. Anywho. But even out there, I mean, if you want to buy like a multifamily, so I'm thinking... My point of view is that now, I'm thinking as a real estate investor. If I'm looking at that, where can I even find that stuff? Nobody's building that kind of thing anymore. Am I missing something?
Michelle: You're not missing anything. Absolutely. So, starter homes, homes in the price range of, and I'm going to say $250,000 and less, are really hard to find. And if you do find something in that price point, usually, it's not as "livable" as most people would like. So, there is a challenge. And again, that's part of the fact that anything you build new is going to be at a higher price point. There's absolutely no doubt about it.
Now there are, and I'm going to kind of jump around just a little bit, too. There are some new construction properties in the $300,000 range. Condos outside of the 275 loop, Lebanon, and out in Batavia, Amelia, on the west side of town, a little bit farther out. You are seeing some new construction, but most often, the new construction that I see that is "affordable" is going to be your condos. So, you're going to have monthly fees on top of that.
Now, I will switch real quick to your question regarding multifamilies. Unless you're going to build one, they're not a lot of those in the marketplace today, and that would be a wonderful, wonderful opportunity if you could find it.
Bob: All right, Michelle, just to follow up on Brian's question, because it was similar to the one I wanted to ask you. You know, if we move...
Brian: Beat you.
Bob: Well, no, it's good. If we move inside the 275 beltway, you know, we hear in the news and other media sources how there's just this shortage of lower-income starter homes. If we move inside the 275 beltway, Hamilton County toward downtown, is the lack of supply driven by interest rates, meaning that people that are currently living in these less expensive homes don't want to move and upgrade their home because of where rates are, or do we just simply not have enough of these dwellings, and we need more of this stuff built, and we're just not getting any movement in as far as new construction? What's your opinion on that as you survey the market?
Michelle: Yeah, I think it's a combination of things because there are properties available that are affordable. But if you're inside the 275 loop, a lot of those properties were built in the 1950s and '60s, maybe '70s. They're older, and they have some structural issues, maybe.
I mean, there was one young person who I was trying to help, and they found a gorgeous, just really cool place, really different, not your cookie-cutter home in Mount Adams, and it was affordable for her. But when we got in and looked at it, there was mold. There were structural issues because it was built on the side of a hill. So if it's too good to be true, and I hate to say this, but it is true, it really is. If it's too good to be true, it probably is.
So, inside the 275 loop, I don't know, because if you build new, the prices are going to go up. The most affordable inside the 275 loop is to buy something that is an older home and then invest in it. You have to be prepared to put money into a property if you are finding something that's affordable inside the 275 loop that is 20, 30, 40, or 50 years old.
Brian: Michelle, something else occurred to me as we're talking about multifamily: duplexes, quads, that kind of thing. I don't feel like I hear people talk about house hacking anymore, right? So, there was a big movement over the last several decades where people, for whom the living space itself wasn't quite as important, maybe a single person or married, no kids, that kind of thing, would buy a duplex, rent out the other side, and basically, have their housing covered. Their mortgage payment will be covered by the rent. I don't hear people talking about that anymore, and I'm going to go ahead and guess it's because there's just nothing out there to buy to put yourself in that situation, like you said. Do you ever hear about that anymore?
Michelle: Yeah, you're correct. There are just very few. There are some, and Norwood has quite a few dual-family homes. There are definitely, but a lot of those homes that were two families have been turned into one family, and that extra access has been taken away. So, to move it back into a two-family, again, it takes a little bit of cash, a little bit of thought, and not a lot of people want to put that much energy into buying a home.
Bob: Very interesting conversation, as always, with our real estate expert, Michelle Sloan, owner of RE/MAX Time. Thank you, Michelle.
You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Do you have a financial question you'd like for us to answer? There is a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question, and it will come straight to us. Speaking of questions, Brian, you know we're going to get into our Ask the Advisor segment. Brad in Fort Wright asks, "Is now a good time to ladder CDs or should I wait until the Fed actually starts cutting rates?" We just kind of talked about this, but give Brad some advice.
Brian: Brad got here quick with that question during the commercial break. Brad's on his toes. All right. So, is now a good time to ladder CDs?
First, I'm going to assume, Brad, that you've somehow decided that in the grand scheme of your financial plan, here is the calculated, educated decision on how much I need to have in cash, and therefore, here's what I'm going to deploy that cash in. So multi-step, I wouldn't rush out and buy a bunch of CDs just because of the interest rate situation, but for the cash you've got sitting there, it's a good thing to think about. Yeah, and I would say if you've decided that CDs are a part, or Treasury bills, something like that, are a part of your picture, then whenever we're facing rate cuts, which it's starting to look more and more like we are over the next month, that's the time to do it. There's no sense in waiting till they actually cut rates because, believe me, those rates on the board at the bank are going to come down instantaneously. The bank doesn't want to have to pay any more than it needs to stay competitive, and they'll still be able to maintain their profit margin because of the way they borrow money from the federal government, which will have just lowered its rates.
So, I would say, "Yeah, now is a good time to make that ladder." I wouldn't worry about, you know, you're not going to see much more yield on the longer-term ones than you're going to see on the short... Yeah, again, this is déjà vu. We just talked about this, because of the way the curve is slightly inverted right now. So don't be surprised when you look at the three-year versus the five-year, and you don't see a huge difference.
Let's go to Robert in Fort Mitchell, who's got a question for Bob. Bob, Robert would like to know if direct indexing makes sense for his portfolio because he has always just used ETFs. When do you make that decision?
Bob: Well, Robert, I'm going to give you my favorite answer, which covers me in all circumstances.
Bob and Brian: It depends.
Bob: Thank you, Brian.
Brian: We should rename the show, "It Depends Financial Advice."
Bob: Here's my take on direct indexing. I think the larger your portfolio gets in a taxable account, the more the tax loss harvesting feature, you know, embedded in these direct indexing strategies can make sense. Let's face it. You've got to pay a little more in fees to have a direct indexing strategy versus just a plain vanilla ETF. But, I will say, first of all, it's good that you're in ETFs. It remains to be seen, because we don't know whether you've got any tax loss harvesting going on with your ETF portfolio, but direct indexing makes the most sense. It's kind of tax loss harvesting on steroids the larger that portfolio becomes.
And then the other thing I would add is, if you have a concentrated position in any stock that you're just trying to get that allocation down responsibly, you know, over a period of time, to avoid capital gains taxes and not be over-allocated to any one company or industry, a direct indexing strategy can make a lot of sense in that situation.
Brian: Yeah, Bob, and I would throw on top of that, real quick, just a situation, if you've got a significant portfolio in your IRA 401(k), direct indexing can still be beneficial, but there is zero tax benefit there. You can fine-tune a portfolio, maybe that's a benefit, but don't look for tax help.
Bob: All right, Brian. Randy in Mason asks. He says, "Hey, we've built up a seven-figure portfolio, but how do I make sure we're not taking too much out too early in retirement?"
Brian: Well, Randy, it depends. It doesn't matter how big your pile is. It matters how big your stream of income is that is flowing out from it. How quick is the snow pile melting? That's what matters.
So, the figures that are out there...there's an old test out there, something called the 4% rule. And that's basically, somebody went through 30-year periods, which is roughly the expected life expectancy during retirement. So, let's say 1931 to 1961, '32 to '62, and on, all the way through, you know, present day. And the answer to that was about 4%. That's where you hear that 4% rule coming from, meaning that there are no 30-year time periods where, if I took out 4%, I would have run out of money. There are scary ones, to be sure, but there weren't any where you actually ran out.
So, over time, given the ups and downs of the market through the best of times and the worst of times, that's a good enough figure to think about. That is not a financial plan. The 4% rule is not a financial plan. It's just licking your thumb and holding it up to the wind, just to get a starting point. You still should dig deep into "What do I need to spend now at this weird period of my life? What do I need to spend later in retirement? And how should I arrange my finances so that it all works?" That's a plan.
Susan in Madeira would like to know about...she's got some charitable inclinations. She wants to know, Bob, what if she donates appreciated stock? Can she give it directly to a charity and avoid capital gains? Does that work?
Bob: It absolutely works, Susan. The only caveat here is you have to have owned the stock for over a year. You can avoid long-term capital gains, not short-term. So, you've got to check and see what your cost basis is and the time horizon that you've owned the stock, and make sure you've owned that for over a year. And then at that point, yep. The great thing about donating stock is you avoid the capital gains taxes, and you still get the deduction if you can qualify for that deduction based on your standard deduction. So, it is a wonderful strategy to avoid taxes and help out your favorite charity.
All right, Brian. Ron in Sycamore Township asks, "I'm selling a rental property. Should a 1031 exchange fit into my life, or should I just pay the taxes and simplify things? Is adding a 1031 just complicating things and muddying the water?"
Brian: All this stuff complicates things and muddies the water. That doesn't make it a bad thing, but these are obviously more complicated financial transactions. 1031 exchanges, along with, I would say, annual deductions on depreciation of property, are some of the little secrets that real estate investors enjoy and why they like to do that. So, for those of you who may not be familiar, if you own a piece of property, some investment property, and you want to sell it and reinvest in something else, you can actually do that without paying any taxes. That's a 1031 exchange.
So I guess, Ron, I'd have a bigger question for you. You've owned rental property. You see what it's like. Are you selling this because you don't want to plumb toilets on Christmas Eve anymore? Is that why it is, or is it simply a better investment decision? So yes, you could. If you want to simplify your life and you're tired of dealing with the taxes, or I'm sorry, with all the extra work that comes along with that, then yeah, you need to. I would bail out of that and be done with it. The 1031 exchange plays a role if you want to continue, and you get some more efficient investments, something like that. Now, I want to make sure you know that you can't take that 1031 and go buy your own vacation home or something like that. It has to be a like-kind investment-oriented property.
Bob: All right. Coming up next, I've got my two cents on how I'm funding a potential long-term care need. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
I want to get in, Brian. We did a segment on how to pay for and fund, you know, a potential long-term care need, I don't know, late last week or something like that. And, you know, while we were talking through that topic, if I'm just an average listener listening to us go through all these variety of gobbledygook options, I'm sitting there thinking, "What the hell are you guys talking about?"
You know, there are so many moving parts. Insurance companies change the premiums at will. It can get extremely confusing. So, I thought I would just share what I'm doing, what my wife and I are doing, in terms of funding this potential need. And I respect the hell out of you as a financial advisor, so, you know, you're going to hear my thoughts live here. Feel free to poke holes in it and tell me I'm stupid and why.
Brian: And back at you. And I'm 10 years younger than you, so write down all the mistakes you make so I don't have to make them.
Bob: All right. Here's what I'm doing. I've got a permanent life insurance policy that I funded for years. It's got a healthy cash value in it. And this is the way my little pea brain works. Okay. I know that there's a 100% probability that I'm going to die someday, right? We can agree on that. You look at the actuarial numbers on long-term care for an average married couple. The odds are about 50% that somebody is going to need long-term care insurance. So, if you buy this traditional long-term care insurance, there's a 50% chance that you're just throwing the money down a rat hole. And the other thing is companies have done a horrible job pricing the product in the 40-some years it's been around, so the prices move all over the place.
So, the way I'm looking at this, and I've told my wife this, "I'm going to keep this insurance policy. So, if you got to throw me in a room somewhere at a nursing home, just make sure I've got a TV, internet, and a remote so I can watch football and baseball, and that they come feed me, you know, at least once a day."
Brian: Make sure your socks match. There's no bargaining there.
Bob: And then we can spend what we need to spend, and then you're going to have this policy come through on the back end and backfill what we need to spend. By the way, my wife is six years younger than me. She's super healthy, so I want to make sure that she's taken care of on the financial... But that's what I'm doing.
Brian: So, I want to be clear, you're not talking about 1035 exchanging into a policy that actually has a long-term care, right?
Bob: No, no.
Brian: Just talking about straight up. "I'm going to spend our money, and then when I kick it, 'Here, Carrie. Here's a pile of death benefit that drops out of the sky.'"
Bob: Absolutely.
Brian: Okay.
Bob: Because I know my family has a 100% chance of getting that check someday.
Brian: Okay. So, have you actually run the numbers, because to me, I at least would be looking at one of those newer policies with one of those writers, just to see what it looks like? Have you done that?
Bob: Not recently. I mean, you know, full disclosure, I'm 60 years old. This policy I've got, I got super preferred rates, so it's very cheap life insurance. I don't know if I could go out at 60 and get, you know, ultra preferred, so I haven't looked at the rates. Are you recommending that's what I do?
Brian: I think everybody ought to educate themselves in these types of decisions. What are the alternatives I have actually in front of me, and what does it look like? And if the answer is stick with it, then stick with it. That beats the heck out of regret.
Bob: All right. Good stuff. Hey, this is the benefit of having two people that do this stuff, you know, on the show, going at it. I will follow your advice, Brian, and I appreciate it.
Thanks for listening tonight. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Well, the eyes of the financial world were on the July inflation report, which came out before the opening bell this morning at around 8:30. And let's break it down, what the numbers actually are and what they could possibly mean, Brian.
Brian: What are those numbers, Bob? Headline CPI, Consumer Price Index, or as we commonly know, our favorite thing to look at to see how inflation is coming along. So, what was the result? Two point seven percent year over year. That means we're paying 2.7% more than we were paying about this time of year a year ago.
Now, we always talk about on these airwaves, and Andy Stout's favorite thing to talk about, is the Fed generally cares more about the core inflation number, that strips out gas and food prices. And ironically, this is a little different than what we're accustomed to, but gas and food usually are the things that push things up. But the core figure is at 3.1%. So, on those items, we're paying 3.1% more than we were a year ago. But if you put gas and food back in, it's only 2.7%. That's Bizarro World for me. For the last couple of decades, it's been the opposite. Gas has been the problem.
But in any case, what was the main driver behind this? Shelter, so rent, mortgage, that kind of stuff. That was the main overall driver of inflation. Go figure what's in the headlines. This very listening area, those of you out there hearing this, hearing our voices in the Cincinnati area, you live right in ground zero of the most growth-oriented rental rate area in the country, so not too surprising to hear that that's driving it.
Bob: Yeah. This whole rent thing, it's interesting. Some folks are starting to wonder how this data is actually gathered. But the one thing we do know, we've got a shortage of shelter for multi-residential homes across the country, in Cincinnati and across the country. And it's an issue.
I don't know how much of that will be able to be addressed by interest rates potentially dropping, people move out of their starter homes, or whether we just got to build more apartment buildings. And then you get into regulation issues, where to find the land to do it. People in private industry that want to build those places, you know, they want to make a profit on building them. We got a real pent-up need for low-income, or even in some cases subsidized, housing. That's what's driving these rents up. I don't see this as a short-term fix that anybody can come along and make that problem go away overnight. And that's why this inflation number, this core inflation, just continues to linger there. It's slightly that over 3% rate, Brian.
Brian: Yeah, if you are somebody or if somebody you care deeply about is in a situation where they're trying to buy a home, you know, the starter homes for young families, that kind of thing, the supply is just not there. And I think you kind of hit the nail on the head, Bob.
I live up in Liberty Township. Everywhere, the cornfields are again getting turned over with houses, and none of these are multifamily-type houses. These aren't starter homes. They're nice looking, I don't know, starting probably in the $400,000 or $500,000 range, actually probably a little higher than that. And again, that's got everything to do with where can a builder make the most profit. It is their God-given right as a business in the United States to try to make as much money as possible. However, that means that we aren't making anything, nobody is building anything, that will make them less money. Therefore, there just isn't the supply. And at some point, we're going to hit a breaking point here.
I do hear older folks sometimes criticizing their younger relatives because they haven't bought a house yet. They haven't settled down. Well, the numbers are not the same. Look way under the hood and understand what it was like in the '70s and '80s versus what it's like now. You've got high prices of housing in general. You've got high interest rates, high insurance rates based on all the crazy that's going on out there. It is not the 1970s all over again with regard to inflation.
Bob: Yeah, the futures were up on this news, which is interesting. I think the way the markets at least interpreted this right after the announcement came down, and who knows, we all know things can fly around at 8:30 in the morning, and by 4:00, we can move in all kinds of ways.
Brian: We've learned that once or twice, haven't we, Bob?
Bob: But I think this news, I think the markets liked it because it's just stable and it's not surprising. And it's as expected, in line with expectations. And I think you're now starting to see, you know, we talked about it yesterday, we're already pricing in about a 90% probability of at least a quarter-point rate cut in September. And I think these numbers today confirm that that's probably what we're going to get. The markets like cheaper money, interest rates falling. And that's why you saw futures up today. You know, we live to fight another day.
Brian: Yeah, exactly. Like you said, the market likes stability. It can handle slightly bad news. This is a small tick up in inflation. You know, stuff moves around, not that big of a deal. But at the same time, the market just wants to know the answer. That's all.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
An interesting article came across our desk from MarketWatch. Brian, I'm interested in your thoughts on this because I'm just going to put my cards on the table right now. I think this kind of stuff is ridiculous. Stupid. But we're going to talk about this article, and I want to hear what you think.
People are talking about stagflation again. A record number of investors say U.S. stocks are overvalued, as 7 in 10 investors say the economy is headed for stagflation, even though their investment choices are not really lining up with that expected mix of higher inflation and low growth. That's what stagflation means. You've got periods of really high inflation and then low growth, or even negative growth, or a recession. The latest Bank of America Global Fund Manager, you know, research found 70% of those polled said stagflation would be the best way to describe global expectations for the economy over the next 12 months.
Brian: Yeah. And, you know, we should make a better habit, Bob, of going back to go see the survey we talked about six months ago. "Three out of four dentists blah blah blah blah blah." Well, what actually came of that stuff? Were they right? Were they wrong? This is just what the herd thought at a given moment in time.
So, at this point, and we can speak anecdotally from conversations we have every single day at our tables here, doing financial plans for people. I don't have a lot of panicky clients, other than the ones who read the headlines too deeply, such as this one. So that doesn't mean that there are... We don't know what we don't know. But at the same time, we don't have the same situation that we had in the 1970s.
There are similarities, I think, and probably the more interesting one is the political pressure that's being put on Jerome Powell to make interest rate cuts, which is a little different than what the Federal Reserve would normally want to do. That did play a role in the 1970s when President Nixon did the same thing to Arthur...what is his name? Whatever, it doesn't matter. Anyway, he pressured the then-chair to go ahead and reduce interest rates. That led to stagflation in a roundabout way. But that's the only one of the few things that's a similarity I can see. Otherwise, businesses are doing okay.
One thing that is interesting to me is if you're looking at how the market is reacting to this, it's not bailing out of any and all for-profit ventures. The stock market has just rotated around into a diversified portfolio, because you are looking at global stocks, right? That's where the money is moving. It's moving out of the United States currently and into global stocks. The international markets are up almost 20%, while the S&P is up about 8% or 9% so far this year. So it's just an interesting move where I think people are saying, "All right, the United States is a little bit bumpy, so maybe we'll put our money somewhere else." But at the same time, I don't see cracks in the foundation like are being held out in some of these articles.
Bob: Yes, same. You want to start throwing around the 1970s. I looked at the average inflation rate during the 1970s. It was 7.1%, Brian. We're at less than half of that right now. You know, interest rates aren't terribly high. We're at relatively full employment. Corporate earnings are growing at 8%, 9% a year. I mean, things are way better than they were in the 1970s.
But I do think some of these surveys, and I'm not making light of it at all, it comes back to what we've talked about before. It depends on who you ask. I think for people with jobs, and good incomes, and healthy stock portfolios, and real estate holdings, things are pretty good. But, to the point you brought up a few minutes ago, for younger folks trying to get started here in this inflationary environment, with student loans and tough to find a place to live and all that, things are not that great right now. And it's getting a little harder to find a job.
To me, that's the only sense I can make out of a survey like this. You know, are you talking to the haves or the have-nots? And if that gets skewed in either direction, things can sound a little too bearish in some of these articles or a little too bullish. Do you agree with that?
Brian: Oh, absolutely. Remember, at the end of the day, all the media that we're reading and all the politicians that we listen to have got to keep our attention so they can make money and stay in power. You know, all these online articles, they're trying to sell the ads that are in front of your face and politicians who are trying to get reelected, they have to keep us terrified, keep our attention for the long haul.
But I want to go off script here a little bit, Bob. This is something we were talking about just before we started setting this all up today. So the reason that we've been at this inflation figure of somewhere between 2.5% to 3% for, I don't know, a year, a year and a half, it feels like. We've just been kind of stuck here for a while. That's not that bad. This is not like you said, "The average of the '70s was 7%." It peaked around 14%, right before President Reagan was swept into office, because people were kind of annoyed with that over the long haul. But the Fed...
Bob: We had an oil embargo back there. I mean, the price of oil keeps coming down this year, not up.
Brian: Right. So that's why it's not the 1970s. There are differences.
Bob: I didn't mean to interrupt. Sorry for that.
Brian: No, no, no. So just a little bit of history, so Ben Bernanke, remember that name from a decade or so ago, basically came out and said, "The Federal Reserve has a target of 2%, and it has had that for a long time through the '80s, in the early 2000s, but it was kind of a secret." And then it became big news, and it was very confusing as to why it had been a secret for so long. Well, all of a sudden, that has become gospel. We've got to get it down to 2%. And I think Jerome Powell still subscribes to that, which is why he hasn't been really quick to continue... He wants inflation down just a little bit more before he's comfortable with it. But I think the pressure is starting to get to him, so we're going to see that here, maybe in September.
Bob: Yeah. And I hope I'm wrong. But I think it's going to be a long time before we see 2% again. It would take a major recession to get us back there, but it's just one guy's opinion.
Here's the Allworth advice. Always remember, don't chase returns or panic. Focus on quality diversification and tax-smart financial planning to protect your purchasing power. It all comes back to your financial plan.
All right. If you've parked a pile of cash in a high-yield savings account, should you move it or stay put? Let's talk through your next smart move relative to cash. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your podcast.
Straight ahead at 6:43, we're answering your toughest financial questions in this edition of Ask the Advisor.
Just last week, we were talking about people who were so bullish on gold. And well, guess what happened? The price of gold dropped by the largest amount in three months last week. Why? There are reports that the U.S. is clarifying its tariff plans on gold bullion. And this is why we preach over and over again that gold's worth and value is just like anything else, supply and demand, what willing buyers and willing sellers are willing to pay for it.
Brian, you know, I did hear early this morning and I know when the President talks about tariff policy and this is a probably a good time to mention they did extend, I think to no one's surprise, another 90 days on the negotiations with China and it sounds like President Trump and President Xi will probably get in a room together somewhere in the next 90 days. But relative to gold, the President did come out and say, "Hey, we are not going to tariff gold. We're not going to put tariffs on transferring gold in between countries around the world," and we'll wait to see how that impacts the price of gold today or this week. But that should at least calm people down a little bit on the fears of the President putting tariffs on gold.
Brian: Unless you own gold, you're probably not real happy right now. So yeah, that's a common question we get whenever the... And it's just people have been trained to do that throughout their lives because grandma and grandpa had a pile of gold or something in the jewelry drawer or whatever. It's kind of like the standard that people go to. "Well, things are getting a little bumpy. Should I put some of my assets in gold?" And I cannot remember the last time, I mean, I don't think I've ever told anybody that, "Yes, that's a good idea," because, you know, let's say that the things that impact the price of anything, most types of your more traditional investments have the ability to react to it. A business will adjust. It will adjust its expenses to account for the fact that they now have to pay tariffs or something like that. They'll adjust prices. Gold can't do any of that. It just sits there waiting for somebody to buy it and tell it what its price is, so there is no way for it to react. So therefore, it is not the greatest thing to own when you can't control all the variables around it.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Brian, let's get into the topic we really wanted to talk about in this segment, and that's good old cash. And let's face it, cash has done well the last couple of years. You know, for the first time in decades, we've been able to park money in treasuries, high-yield money market accounts, even CDs, and, you know, savings accounts down at the corner bank, and sit there and make, you know, around 3.8%, 4%, 4.25%. It's been great. I think a thing to remember is cash is always pegged to short-term rates and inflation, and you do have to pay taxes on the yield on cash. So, it's always going to move up and down based on inflation and short-term rates. The question right now with Fed policy, you know, we're going to have the Fed meet in September. I think it's safe to say we're going to at least get a quarter-point reduction in rates. Is now the time to do something different with your cash or stay the course, and why? What should we be thinking about?
Brian: Now is the time to learn about these things, right? So, we have been in a rising rate environment for several years now. We had been in a declining and flat rate for decades, which meant nobody was paying attention to interest rate cycles because there weren't any. They went down on the floor and they stayed there. We just basically forgot that it was even an option to earn money on cash. But the cash decision, Bob, this is not a decision of, "Should I be in cash versus stocks, or bonds, or whatever?" That's a timing decision, and that's a terrible thing to be thinking about, regardless of what cash is paying.
Cash is something that is...its job is to be there. Its job is not to be the best earning asset in your portfolio. That will happen in over very short-term time frames, but it's not going to last for a long time. That is not the core of a financial plan. Its job is to be there to smooth the bumps for when the engine falls out the bottom of the car, or somebody loses a job, or there's a health scare, or something like that. That's what the emergency fund is for. You absolutely should be getting 3%, 4% on your emergency fund, and don't be heartbroken if a month from now, it drops to maybe 2.5% or low 3%, because we're starting to see these rate hike, or rate cuts rather.
So the answer right now might be to do nothing. If you're already in a position where you've got an emergency fund that's covered, then good. On the other hand, if you felt like you've had too much cash, that's its own argument, because a lot of times, we have people who inherited a lot more money than they'll ever need for an emergency fund, but they just can't pull the trigger. Somehow, that becomes the vault that is untouchable. If you have that situation, this would be a good time to lock it in. This isn't anything exotic. Look at CDs, Treasury bonds, Treasury bills, things like that, and lock the rates in now. This is a great time to be thinking about that if you've got too much cash.
Bob: Now, I think we're singing off the same sheet of music here, Brian. I'm looking at U.S. Treasuries right now. I'm looking at one-month yields all the way down in increments up to 10 years. And what's fascinating to me is the one-month yield is higher than the 10-year yield on treasuries right now, Brian.
Brian: Inverted yield curve is what that is.
Bob: It's slightly inverted. So I think, to your point, depending on what your cash needs are, and I have these conversations...I'm having them with several clients right now. They know that they're going to buy a house or close on a house in 60 days, or 120 days, or whatever. They're building a home. You can get strategic here with the yield curve on locking in a really nice short-term yield. I mean, you can get three-month money here, two-month money, a little over 4.3%. That's a great way to just park some cash and get that nice yield between now and when you need the money.
But, I think to your point, now is not the time to get cute here on trying to time the Fed and move in and out. You think time in the stock market's hard? Timing the movement of short-term interest rates and the effect on the bond market is darn near impossible. And so, that's not something we want to be doing.
Brian: One other point I want to throw out there because if people are sniffing around interest rates on depository-type things, I would include Treasury bills in that kind of discussion. One thing you might notice is that the banks aren't going to pay you more for locking it in for five years than they'll pay you for locking it in for two years.
Bob: Exactly.
Brian: That's slight inversion. And the reason is the banks know that interest rates are coming down. So they're not going to lock their money up in a negative position any more than you are. But that's why you're seeing that right now.
Bob: Here's the Allworth advice. If your cash has a job to do in the short term, don't worry about chasing higher returns or getting cute here. Sometimes the smartest move is to stay where you are.
Is now the time to pull the trigger on buying a home or selling it? Our real estate expert, Michelle Sloan, is in next to discuss the state of the local real estate market.
You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James, joined tonight by our real estate guru, Mrs. Michelle Sloan, owner of RE/MAX Time. And Michelle, we've been through, I think, for you, has been a very busy summer and a very active real estate market. Update us on where things stand here as the summers come into a close and we're starting to get back to school. Tell us how things are looking out there.
Michelle: Well, you are absolutely right. It has been a very, very busy summer. May, June, July, super busy. It seems like all of the people that were on the fence jumped off and got into the real estate market. The trends that I was seeing personally were a lot of people who were in their 60s, maybe close to retirement or already retired, looking for ways to sell and buy. So definitely, we're seeing a busy real estate market, especially in Cincinnati. But things are changing. It is the end of a season when kids go back to school, and usually August is that slower time of year. And we are definitely seeing that.
So right now, the market itself is moderating. I think that's a word that you guys could use, meaning that it's becoming more balanced, meaning that sellers are not seeing homes sell as quickly because there aren't as many buyers out there looking right now. So, a little more moderate, a little more patience is needed on both sides of the transaction. The mortgage rates have not changed a whole lot. So, we're still looking at 6.7%, 6.8%, close to 7%, so I think we're not seeing any changes whatsoever in the mortgage interest rates.
Brian: Michelle, I've got a question for you. It's a little bit off the beaten path here, kind of from a different point of view. So, I live up in Liberty Township, and every other week, there's a cornfield that's obviously been turned over, and it's got basements going into it. And those are all lovely homes, but they are definitely not starter homes up there. And I don't feel like I see a lot of that out there. Also, in my family situation right now, we've got kids in college. Athens, Ohio happens to be my happy place, and it's looking like there's a decent chance I might have a second one going there. So, we've kicked around the idea, "Let's buy a multifamily and put somebody in one, and then we'll go kind of use the other." Anyway, my point is...
Bob: Brian, you're just looking for an excuse to buy a place to go party at Ohio U.
Michelle: There you go. Let's go.
Bob: Don't mislead Michelle.
Brian: If that wasn't clear, then we've never met, Bob.
Michelle: There you go. Let's go.
Brian: I was there last weekend. I'll be there this week. Anywho. But even out there, I mean, if you want to buy like a multifamily, so I'm thinking... My point of view is that now, I'm thinking as a real estate investor. If I'm looking at that, where can I even find that stuff? Nobody's building that kind of thing anymore. Am I missing something?
Michelle: You're not missing anything. Absolutely. So, starter homes, homes in the price range of, and I'm going to say $250,000 and less, are really hard to find. And if you do find something in that price point, usually, it's not as "livable" as most people would like. So, there is a challenge. And again, that's part of the fact that anything you build new is going to be at a higher price point. There's absolutely no doubt about it.
Now there are, and I'm going to kind of jump around just a little bit, too. There are some new construction properties in the $300,000 range. Condos outside of the 275 loop, Lebanon, and out in Batavia, Amelia, on the west side of town, a little bit farther out. You are seeing some new construction, but most often, the new construction that I see that is "affordable" is going to be your condos. So, you're going to have monthly fees on top of that.
Now, I will switch real quick to your question regarding multifamilies. Unless you're going to build one, they're not a lot of those in the marketplace today, and that would be a wonderful, wonderful opportunity if you could find it.
Bob: All right, Michelle, just to follow up on Brian's question, because it was similar to the one I wanted to ask you. You know, if we move...
Brian: Beat you.
Bob: Well, no, it's good. If we move inside the 275 beltway, you know, we hear in the news and other media sources how there's just this shortage of lower-income starter homes. If we move inside the 275 beltway, Hamilton County toward downtown, is the lack of supply driven by interest rates, meaning that people that are currently living in these less expensive homes don't want to move and upgrade their home because of where rates are, or do we just simply not have enough of these dwellings, and we need more of this stuff built, and we're just not getting any movement in as far as new construction? What's your opinion on that as you survey the market?
Michelle: Yeah, I think it's a combination of things because there are properties available that are affordable. But if you're inside the 275 loop, a lot of those properties were built in the 1950s and '60s, maybe '70s. They're older, and they have some structural issues, maybe.
I mean, there was one young person who I was trying to help, and they found a gorgeous, just really cool place, really different, not your cookie-cutter home in Mount Adams, and it was affordable for her. But when we got in and looked at it, there was mold. There were structural issues because it was built on the side of a hill. So if it's too good to be true, and I hate to say this, but it is true, it really is. If it's too good to be true, it probably is.
So, inside the 275 loop, I don't know, because if you build new, the prices are going to go up. The most affordable inside the 275 loop is to buy something that is an older home and then invest in it. You have to be prepared to put money into a property if you are finding something that's affordable inside the 275 loop that is 20, 30, 40, or 50 years old.
Brian: Michelle, something else occurred to me as we're talking about multifamily: duplexes, quads, that kind of thing. I don't feel like I hear people talk about house hacking anymore, right? So, there was a big movement over the last several decades where people, for whom the living space itself wasn't quite as important, maybe a single person or married, no kids, that kind of thing, would buy a duplex, rent out the other side, and basically, have their housing covered. Their mortgage payment will be covered by the rent. I don't hear people talking about that anymore, and I'm going to go ahead and guess it's because there's just nothing out there to buy to put yourself in that situation, like you said. Do you ever hear about that anymore?
Michelle: Yeah, you're correct. There are just very few. There are some, and Norwood has quite a few dual-family homes. There are definitely, but a lot of those homes that were two families have been turned into one family, and that extra access has been taken away. So, to move it back into a two-family, again, it takes a little bit of cash, a little bit of thought, and not a lot of people want to put that much energy into buying a home.
Bob: Very interesting conversation, as always, with our real estate expert, Michelle Sloan, owner of RE/MAX Time. Thank you, Michelle.
You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
Do you have a financial question you'd like for us to answer? There is a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question, and it will come straight to us. Speaking of questions, Brian, you know we're going to get into our Ask the Advisor segment. Brad in Fort Wright asks, "Is now a good time to ladder CDs or should I wait until the Fed actually starts cutting rates?" We just kind of talked about this, but give Brad some advice.
Brian: Brad got here quick with that question during the commercial break. Brad's on his toes. All right. So, is now a good time to ladder CDs?
First, I'm going to assume, Brad, that you've somehow decided that in the grand scheme of your financial plan, here is the calculated, educated decision on how much I need to have in cash, and therefore, here's what I'm going to deploy that cash in. So multi-step, I wouldn't rush out and buy a bunch of CDs just because of the interest rate situation, but for the cash you've got sitting there, it's a good thing to think about. Yeah, and I would say if you've decided that CDs are a part, or Treasury bills, something like that, are a part of your picture, then whenever we're facing rate cuts, which it's starting to look more and more like we are over the next month, that's the time to do it. There's no sense in waiting till they actually cut rates because, believe me, those rates on the board at the bank are going to come down instantaneously. The bank doesn't want to have to pay any more than it needs to stay competitive, and they'll still be able to maintain their profit margin because of the way they borrow money from the federal government, which will have just lowered its rates.
So, I would say, "Yeah, now is a good time to make that ladder." I wouldn't worry about, you know, you're not going to see much more yield on the longer-term ones than you're going to see on the short... Yeah, again, this is déjà vu. We just talked about this, because of the way the curve is slightly inverted right now. So don't be surprised when you look at the three-year versus the five-year, and you don't see a huge difference.
Let's go to Robert in Fort Mitchell, who's got a question for Bob. Bob, Robert would like to know if direct indexing makes sense for his portfolio because he has always just used ETFs. When do you make that decision?
Bob: Well, Robert, I'm going to give you my favorite answer, which covers me in all circumstances.
Bob and Brian: It depends.
Bob: Thank you, Brian.
Brian: We should rename the show, "It Depends Financial Advice."
Bob: Here's my take on direct indexing. I think the larger your portfolio gets in a taxable account, the more the tax loss harvesting feature, you know, embedded in these direct indexing strategies can make sense. Let's face it. You've got to pay a little more in fees to have a direct indexing strategy versus just a plain vanilla ETF. But, I will say, first of all, it's good that you're in ETFs. It remains to be seen, because we don't know whether you've got any tax loss harvesting going on with your ETF portfolio, but direct indexing makes the most sense. It's kind of tax loss harvesting on steroids the larger that portfolio becomes.
And then the other thing I would add is, if you have a concentrated position in any stock that you're just trying to get that allocation down responsibly, you know, over a period of time, to avoid capital gains taxes and not be over-allocated to any one company or industry, a direct indexing strategy can make a lot of sense in that situation.
Brian: Yeah, Bob, and I would throw on top of that, real quick, just a situation, if you've got a significant portfolio in your IRA 401(k), direct indexing can still be beneficial, but there is zero tax benefit there. You can fine-tune a portfolio, maybe that's a benefit, but don't look for tax help.
Bob: All right, Brian. Randy in Mason asks. He says, "Hey, we've built up a seven-figure portfolio, but how do I make sure we're not taking too much out too early in retirement?"
Brian: Well, Randy, it depends. It doesn't matter how big your pile is. It matters how big your stream of income is that is flowing out from it. How quick is the snow pile melting? That's what matters.
So, the figures that are out there...there's an old test out there, something called the 4% rule. And that's basically, somebody went through 30-year periods, which is roughly the expected life expectancy during retirement. So, let's say 1931 to 1961, '32 to '62, and on, all the way through, you know, present day. And the answer to that was about 4%. That's where you hear that 4% rule coming from, meaning that there are no 30-year time periods where, if I took out 4%, I would have run out of money. There are scary ones, to be sure, but there weren't any where you actually ran out.
So, over time, given the ups and downs of the market through the best of times and the worst of times, that's a good enough figure to think about. That is not a financial plan. The 4% rule is not a financial plan. It's just licking your thumb and holding it up to the wind, just to get a starting point. You still should dig deep into "What do I need to spend now at this weird period of my life? What do I need to spend later in retirement? And how should I arrange my finances so that it all works?" That's a plan.
Susan in Madeira would like to know about...she's got some charitable inclinations. She wants to know, Bob, what if she donates appreciated stock? Can she give it directly to a charity and avoid capital gains? Does that work?
Bob: It absolutely works, Susan. The only caveat here is you have to have owned the stock for over a year. You can avoid long-term capital gains, not short-term. So, you've got to check and see what your cost basis is and the time horizon that you've owned the stock, and make sure you've owned that for over a year. And then at that point, yep. The great thing about donating stock is you avoid the capital gains taxes, and you still get the deduction if you can qualify for that deduction based on your standard deduction. So, it is a wonderful strategy to avoid taxes and help out your favorite charity.
All right, Brian. Ron in Sycamore Township asks, "I'm selling a rental property. Should a 1031 exchange fit into my life, or should I just pay the taxes and simplify things? Is adding a 1031 just complicating things and muddying the water?"
Brian: All this stuff complicates things and muddies the water. That doesn't make it a bad thing, but these are obviously more complicated financial transactions. 1031 exchanges, along with, I would say, annual deductions on depreciation of property, are some of the little secrets that real estate investors enjoy and why they like to do that. So, for those of you who may not be familiar, if you own a piece of property, some investment property, and you want to sell it and reinvest in something else, you can actually do that without paying any taxes. That's a 1031 exchange.
So I guess, Ron, I'd have a bigger question for you. You've owned rental property. You see what it's like. Are you selling this because you don't want to plumb toilets on Christmas Eve anymore? Is that why it is, or is it simply a better investment decision? So yes, you could. If you want to simplify your life and you're tired of dealing with the taxes, or I'm sorry, with all the extra work that comes along with that, then yeah, you need to. I would bail out of that and be done with it. The 1031 exchange plays a role if you want to continue, and you get some more efficient investments, something like that. Now, I want to make sure you know that you can't take that 1031 and go buy your own vacation home or something like that. It has to be a like-kind investment-oriented property.
Bob: All right. Coming up next, I've got my two cents on how I'm funding a potential long-term care need. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James.
I want to get in, Brian. We did a segment on how to pay for and fund, you know, a potential long-term care need, I don't know, late last week or something like that. And, you know, while we were talking through that topic, if I'm just an average listener listening to us go through all these variety of gobbledygook options, I'm sitting there thinking, "What the hell are you guys talking about?"
You know, there are so many moving parts. Insurance companies change the premiums at will. It can get extremely confusing. So, I thought I would just share what I'm doing, what my wife and I are doing, in terms of funding this potential need. And I respect the hell out of you as a financial advisor, so, you know, you're going to hear my thoughts live here. Feel free to poke holes in it and tell me I'm stupid and why.
Brian: And back at you. And I'm 10 years younger than you, so write down all the mistakes you make so I don't have to make them.
Bob: All right. Here's what I'm doing. I've got a permanent life insurance policy that I funded for years. It's got a healthy cash value in it. And this is the way my little pea brain works. Okay. I know that there's a 100% probability that I'm going to die someday, right? We can agree on that. You look at the actuarial numbers on long-term care for an average married couple. The odds are about 50% that somebody is going to need long-term care insurance. So, if you buy this traditional long-term care insurance, there's a 50% chance that you're just throwing the money down a rat hole. And the other thing is companies have done a horrible job pricing the product in the 40-some years it's been around, so the prices move all over the place.
So, the way I'm looking at this, and I've told my wife this, "I'm going to keep this insurance policy. So, if you got to throw me in a room somewhere at a nursing home, just make sure I've got a TV, internet, and a remote so I can watch football and baseball, and that they come feed me, you know, at least once a day."
Brian: Make sure your socks match. There's no bargaining there.
Bob: And then we can spend what we need to spend, and then you're going to have this policy come through on the back end and backfill what we need to spend. By the way, my wife is six years younger than me. She's super healthy, so I want to make sure that she's taken care of on the financial... But that's what I'm doing.
Brian: So, I want to be clear, you're not talking about 1035 exchanging into a policy that actually has a long-term care, right?
Bob: No, no.
Brian: Just talking about straight up. "I'm going to spend our money, and then when I kick it, 'Here, Carrie. Here's a pile of death benefit that drops out of the sky.'"
Bob: Absolutely.
Brian: Okay.
Bob: Because I know my family has a 100% chance of getting that check someday.
Brian: Okay. So, have you actually run the numbers, because to me, I at least would be looking at one of those newer policies with one of those writers, just to see what it looks like? Have you done that?
Bob: Not recently. I mean, you know, full disclosure, I'm 60 years old. This policy I've got, I got super preferred rates, so it's very cheap life insurance. I don't know if I could go out at 60 and get, you know, ultra preferred, so I haven't looked at the rates. Are you recommending that's what I do?
Brian: I think everybody ought to educate themselves in these types of decisions. What are the alternatives I have actually in front of me, and what does it look like? And if the answer is stick with it, then stick with it. That beats the heck out of regret.
Bob: All right. Good stuff. Hey, this is the benefit of having two people that do this stuff, you know, on the show, going at it. I will follow your advice, Brian, and I appreciate it.
Thanks for listening tonight. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.