- Dow vs. S&P vs. NASDAQ 0:00
- The Hardest Part of Retirement 12:24
- Cincinnati Housing Update 20:01
- 401(k)s, Trusts & Taxes 28:00
- Do You Need More Insurance? 35:09
What the Market Is Really Telling You—and Why Retirement Spending Is So Hard
On this episode of Simply Money presented by Allworth Financial, Bob and Brian explain what the Dow, S&P 500, and NASDAQ really measure—and why understanding the differences can make you a more informed investor. They also discuss why so many retirees struggle to shift from saving to spending, get the latest on the Greater Cincinnati housing market, and answer listener questions on making a $1 million 401(k) last, inherited stock, and when a trust may make more sense than a simple will.
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Bob: Tonight, how understanding the Dow, the S&P 500 and the NASDAQ can make you a more informed investor. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Well, every night on the news, we hear it. The Dow was up 400 points. The NASDAQ was down 200. The S&P 500 hit another record high. Most investors hear those numbers, but do they really know what they're looking at? Brian, I think this is a great opportunity to take us through yet another history lesson about how all this stuff got derived and when.
Brian: Financial pornography, Bob, that's what it's all about, right? Now we have ticker symbols on the bottom of our screens and we have alerts on our phones and all this telling us super important information that is maybe of dubious importance sometimes, but it's got to be in our faces at all times. It all started with a newspaper about 140 years ago. So, back in 1884, Charles Dow was a newspaper editor. You might recognize that name. That's the guy behind the Dow Jones index. His first name... It wasn't one guy named Dow Jones. It was one guy named Dow and another guy named Jones.
No CNBC tickers back in this day, no Bloomberg terminals, iPhones, anything like that. If you wanted to know anything about the market, you literally had to look stock by stock. Now, I remember this not that long ago that, you know, when my father was first starting to teach me how to invest in the market in the 80s, I remember waiting until the newspaper came out the next day and then going and finding that tiny ticker symbol in a phone book part of the back of the newspaper. So, that actually lasted pretty long. But Jones...
Bob: Brian, I can remember being in finance classes at Miami university, you know, a class on investments, and that's how we did it as well. We looked at "The Wall Street Journal" listing of stocks every day. So, I mean, this is in the mid-80s, so this is not that long ago. I guess I am getting old, but go ahead.
Brian: It might be longer than you're allowing yourself to believe, sure. But that goes for me, too. But, yeah...
Bob: At least the music was way better then, but go ahead.
Brian: There you go. That was the only way to get information. You were on a 24-hour delay. Stocks were doing something right now, but you weren't going to find out until you read the paper the next day. I can't even imagine that world at this point. But anyway, he decided there had to be a better way to figure out what the overall market was doing. Because remember what we just said, it was all just lists of ticker symbols. That was it. What did these stocks do? Period, end of story.
So, what he did was he averaged together a handful of these major companies that now we know as the Dow Jones Industrial Average. And the crazy part of that is it's still only contains 30 companies, just 30 out of thousands of publicly- traded companies. But it's the oldest index that we have out there that's been continually running, so we do rely on it a lot. The Dow Jones, it does contain 30 companies. It only recently, I'm going to mess the timing up, Bob, maybe you'll remember, maybe in the last 15 years, added technology. It used to be extremely industrial based. It really kind of looked like your grandparent's stock portfolio back in the day. Now it looks a little more modernized, but still only contains 30 companies.
And they're not weighted the way most people think. Most people think that... You know, you might assume that the biggest companies have the biggest influence, but that's the way the S&P 500 works because it's cap-weighted. That is not how the Dow works. The Dow is price-weighted. That means a company with a $350 stock price moves the Dow far more than one with a $45 stock price, even if that $45 company is actually worth a lot more. And this is why one of the recent headlines with regard to the Dow, Alphabet, the parent of Google, that just replaced Verizon. Verizon had one of the lowest stock prices in the Dow, and it was barely having an impact on the index at all. Alphabet, on the other hand, has got a much higher share price, so it will have a bigger influence on whether the Dow goes up and down. So, that's how those components find their way into the Dow, which is a little different. We usually talk about the S&P 500.
Bob: Yeah. And I think it's helpful for folks to just remember, or teach them for the first time if they don't know, the difference between price weighting and cap weighting. You did a great job just now of talking about price weighting. But what we're talking about when we mentioned cap weighting is the value of the company, the capital value of the company. Take the number of shares, you know, the float, the number of shares trading, multiplied by the stock price, and that's the hypothetical value of the company. That's what we mean by cap weighting.
So, let's fast forward to the S&P 500, which, you know, purportedly, fix the whole problem of having a meaningful index. People eventually realize, maybe stock price isn't the best way to measure how the "overall" market is doing along comes the S&P 500. Now, instead of 30 companies, attracts about 500. And as we just said, instead of waiting them simply by stock price, it weighs them by the actual market value, the price of the stock multiplied times the number of shares outstanding. It gives us a much more diversified view of the overall market.
But as we've talked about here, Brian, and recent weeks and months, if not a year and a half or so, you know, cap weighting can, you know, rear its ugly head in other ways too, when you get, you know, these Magnificent Seven stocks. You know, just seven companies making up more than more than 30%, approaching sometimes 40% of the value of the S&P 500. It could get a little overweighted, you know, toward a few companies as well. So, there is no perfect index out there.
Brian: Yeah, and at the end of the day, we just need something we can look at. And the goal is to have just something that is roughly the same from day-to-day so that we can make sure that we're tracking the same pile of stuff. That's why we need indices, but there's always going to be these different kinds of things. So, one thing I was thinking about as we explained the Dow and how the Dow is price weighted, but what happens when there's a split, if it's looking only at the price, and we get, you know, a 10 to 1 stock split, and all of a sudden, the price is a 10th what it was the day before. And of course, the Dow Jones deals with that. But these are the quirks of all the indices, the Dow just changes the divisor so that it doesn't have massive spikes up and down based on a split.
But if you understand the components about how all those things work, then now you can be a little clearer on why you're seeing the numbers that you are. These are all different types of things. As I mentioned, the Dow Jones is it tends to be a little more industrially focused. The S&P 500 is a lot broader based. The NASDAQ tends to be more technology focused. Each one of them, in its own right, gives you useful information to kind of compare to your portfolio. And recently, we've had with as far as the AI stocks and all those things have run the technology side, and they've also kind of hit the skids a little bit here for these last several weeks and months, we've actually seen days where the Dow Jones is up and the NASDAQ is down at least briefly during the day. That doesn't happen very often. Usually, stocks kind of at least go in the same direction. But we've gotten pretty specific about which segments of the market are moving back and forth. And that's just what happens when you get people concerned that there might be a bubble in places like technology. So...
Bob: All right, so Brian, let's get a little less wonky here and let's get down to brass tacks. Which one of these indices should investors actually pay attention to? And more importantly, I know when clients come into the office to talk to you, you know, a lot of people will say, "Hey, how's my portfolio doing? And how's my portfolio doing versus the market?" What should we really be paying attention to in terms of these indices we just covered, and how to evaluate how your portfolio is performing as an average investor out there?
Brian: Well, I mean, the thing that's going to be shoved in your face on a daily basis is the S&P 500 because it's got enough history behind it. It goes, you can get back into... You can sort of create a semblance of it into the like the late 30s, early 40s, maybe. That's a little bit of a stretch, but you can get close to it. So, there's plenty of history there and it's a broad-based index. Now, that said, it's just the U.S. large cap market. That's it. The S&P 500 is nothing more than the 500 largest United States companies. It's not weighted specifically, consciously in any one industry other than whatever the market does because it's cap weighted. So, yes, it's very heavily weighted on the technology side, but that's not by design. That's just how that industry has gone, of course. So, that's a good kind of a top-level, dip your toe in, and see what's going on.
I like to encourage people to look under the hood and see what's happening underneath the surface of the portfolio. Because recently, as we've talked about, as the world trading order is kind of shuffling things around, we've seen some movement in other areas that maybe have been neglected lately, and that's international stocks. So, there are other indices you can look at for international stocks. There's something called the Europe Asia Far East Index. Lots of places actually have an EAFE index. But I think it's good to know what are internationals doing.
And also, like we just said, the S&P 500 is a large cap index. So, pay attention to what the small and mid-caps are doing. That would be the more along the lines of, say, the Russell 3000, which isn't purely small cap, but it does contain enough of those smaller companies where you can see some differences. And there are other indices out there. I really think that's really... Understand that it's not just one pile of things. It's not one index fund that you need. You need a couple other things that are going to move around in different manners. And there's an index for each one of them.
Bob: Yeah, I think another thing to call out here is just the emotional impact of news headlines. And here's what I mean. Sometimes people will call us, Brian, and there'll be a little spooked when they hear, "Hey, the Dow was down 700 points today." That sounds terrifying until we remember that the Dow is valued at over 50,000. So, a 700 point move today is roughly just under 1.5%, certainly a down day. But back in the 1990s, a 700 point move would have felt really catastrophic. And it was. I mean, that's bear market territory. Today, you know, a 500, 600 point move in the Dow is kind of an ordinary trading day. And sometimes people forget about that just based on how large these indices, the values of gotten over the last several decades.
Brian: Absolutely. And then, again, so there was a thing to pay attention to here is, you know, just making sure we know exactly what the components are. I think we're beating a dead horse at this point. But financial planning is far more than just looking at one indicator, one index, just one piece of your financial situation. Everything comes together. The market performance is going to be what it is. Your portfolio probably is going to move in the same direction. Don't hang your hat on that.
When you get frustrated because the market is down or moving sideways, you're getting bored, don't give in to the urge to do something with it just because it feels like it should always be moving up. Use those times to learn about other things. There's much more to financial planning than what the investments are doing. Learn about tax planning. Learn about Roth conversions. Learn about all these other things, all these other components that can have a significant impact on the overall outcome of your financial plan. It is not only about what the market's doing. That's the one you can control. The things you can control is your level of knowledge about the various techniques that may be beneficial to you in accomplishing your financial goals.
Bob: Here's the Allworth advice, don't let a big point move fool you or cause you to take unnecessary action. Focus on percentages, understand what each index is measuring, and remember that your long-term financial plan matters far more than today's market headlines. Will you spend 30 or 40 years building your retirement nest egg, but what happens when it's finally time to use your money? New research says that's where many retirees are getting stuck, and ironically, it could be costing them the retirement or the enjoyment of the retirement they've worked so hard to build. We're going to talk about all of that next. 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" live every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your favorite podcast. How do you make a million dollar 401(k) account last your entire 30-plus years of retirement? And is it time to sell inherited stock with huge embedded capital gains? And when do trusts make more sense than just having a simple will? We'll cover all of those straight ahead. We spend so much time on this show talking about how to save for retirement. Max out your 401(k), invest consistently, stay diversified, keep your emotions in check. But there's another side of retirement planning that doesn't get nearly enough attention for a lot of folks, Brian. How do you actually spend all this money you've spent years building?
Brian: You know, our new favorite thing to talk about, Bob, these last few months is piles of money versus streams of income. As we're making this sort of societal shift away from retiring off of streams of income, meaning pensions and Social Security, which may or may not be changing here in the next few decades, and shifting toward retiring off piles of money. Now, most people, that's all you have, is a pile, right? You guys have got Social Security, something in the mix, but it's not going to be the core of your income streams like it was for your past, your forebears, your grandparents and parents. It's going to be more you're drawing off a pile of money.
And this is a massive, you and I both know this because we talk about it all the time, it's one of the hardest things for people to get over, is the notion of shifting out of accumulation mode, growing my pile, and into distribution mode. "I'm now retired and I need to draw these dollars off it." Because people who are successful in accumulating often have convinced themselves that every last nickel is for a rainy day and their brains want them to die with it in place, you know, just in case. And it is a massive psychological shift to go ahead and start drawing on those dollars.
And so, we've got a survey here from TIAA and Nuveen. Only about 2 in 10 workers say they've given serious thought to how they're going to withdraw that money from their retirement accounts. A little bit more, about 3 in 10 say they're comfortable watching their retirement savings actually decline to pay for everyday living expenses. Now, sometimes these headlines or these survey results are useful if we kind of rephrase from the other point of view. In other words, 70% are uncomfortable watching those savings decline while they pay for their everyday living expenses. Now, hopefully, you're in a situation, and this is where a financial plan comes in, right? We need to model this stuff out. Hopefully, you're in a situation where your nest egg is large enough that it won't decline, that it can still, the growth can still outpace whatever withdrawals you need to take out of it and ride the waves of the ups and downs of the market as that occurs.
But again, that has everything to do with starting off with knowing where you are in the first place. And that's another survey question out of this same study. About half the respondents associate retirement spending with uncertainty. Now, about 44% think about it with anxiety and all this. In other words, one out of two people are completely scared to death even though they've been saving their dollars. Nobody knows how to de-accumulate it because we don't teach that in this country, and frankly, that's job security for me and you, Bob, and lots of other advisors out there. But this is a major, major shift that lots of people go through. Some people focus a lot on, "I'm going to retire. I'm no longer going to be the important smart guy in the room. And that is my identity, my job." We worry much more about that than we do about the psychological shift of spending our savings to live life without having to go to work.
Bob: Yeah, and I think for the clients you and I deal with and the discussions we have about this all day, every day, Brian, it really is much more psychological than financial. I mean, most people we work with are pretty smart folks, they understand how math works, they understand how to build and grow their pile of money, but I think it is a paradigm shift. When you go from just focusing on saving more, increasing that 401(k) balance, never touch your retirement money, we talk about that all the time, delay gratification. These are all the things "successful" people have done and done well until they're in their mid-60s. And then one day, people retire and it's like, "Congratulations. Now, start spending." And it's like, "Spend?"
That's something new. They never thought about it. And that's the reason to have a financial, this plan flush out based on individual goals and needs and wants. That tends to let that emotional guard down, at least somewhat. Now, it is a paradigm shift to get over the fact that, "Hey, I was just earning in a lot of cases a very high paycheck. Now that paycheck is gone. And now," as you said, "my pile of money has got to take care of me for the rest of my life." That's a tough one to get over for some people, too, especially in those early years of retirement. And as you said, that's why having a financial plan or retirement income strategy is so, so important because it gives people the peace of mind they need to actually enjoy this money.
Brian: And I think that let's not overshoot that psychological impact, right? That's another thing people don't tend to think about. We worry a lot about, "What do I got to tell HR? And what do I got to do? How do I file for Social Security?" And all this other stuff. But eventually, the dust is going to settle, you're going to have a successful financial plan. And then the question is, have you thought about what it's going to feel like to not have anywhere to go that day, right? That's heaven for the first six, eight weeks, something like that, depending on when you retire. Maybe if you retire in February, the walls close in a little sooner.
But eventually, you're going to get to a point where you're just wondering, you know, it's you and your spouse sitting on either end of the couch drinking the fourth cup of coffee of the day and it's 10 o'clock on a Tuesday and nobody has any idea what's on the agenda. This is when the world gets so small that one doctor's appointment feels like the entire agenda, and you can't plan anything else around that day. And so, honestly, I want to encourage people to really set the money aside, at least for one of your retirement discussions, and talk about the time. Retirement is all about money and time. Those are the two variables that we need to be thinking about. Lots of questions in there, but those are the ones that we need to get comfortable with.
Bob: Well, and when it comes to some of those other goals, too, like helping out kids or grandkids or taking that extra cruise or not feeling like you have to drive a 20-year-old car around anymore that's breaking down, these are the things that a good financial plan, again, can give people the emotional or psychological permission, if you will, to actually spend some of this money. Brian, you and I do meetings together from time to time and we watch people. Literally, the people have this sigh of relief when you stress test, "Hey, let's try to jump this spending up by an additional $10,000, $20,000 a year or more, you could still do some of these things you've always wanted to do." And people breathe that sigh of relief. It's almost like giving people permission to spend their own money.
Anyway, here's the Allworth advice, a retirement income plan, an actual plan, can give you that emotional permission to enjoy the money, actually enjoy the money you've spent a lifetime earning. Well, temperatures out there are certainly heating up. What about the housing market? What buyers and sellers should be considering coming up next. 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 good friend of the show, our real estate expert, Michelle Sloan. Michelle, thank you as always for carving out some time for us tonight. Well, temperatures are up. We're in the middle of summer. Tell us about how the real estate market in greater Cincinnati is heating up right now.
Michelle: Oh, it's hot, absolutely. You know, July is typically one of the busiest months of the year. And the greater Cincinnati market is definitely following in that pattern. We are seeing much more of a balanced market than the frenzied market of years past. So, that's a good thing. But there are still homes that are selling on the first or second day. If they're priced right and they're staged and they're perfect for a buyer who's been looking for a while, the buyer is ready to write that offer immediately. And so, that means that sellers also have to be ready if they want that offer in the first couple of days. You can't just put anything on the market. I mean, in 2020, 2021, you could put a home on the market that was dirty, not staged, and as long as that house had a heartbeat.
Bob: Had orange shag carpeting in the bedrooms.
Michelle: Yeah, pretty much. I mean, it didn't matter the house, everything was selling like hotcakes. And now, we're definitely... Again, it's a little bit more temperate and balanced, which is a really good thing, I think, for all parties involved. So, sellers have to do their due diligence, buyers have to as well.
Brian: So, the buyers are still there, they're just a little choosier. It's not as easy. You're not just throwing the hook in the water without a worm on it and pulling them out anymore. Is that what I'm hearing you say?
Michelle: That's absolutely right. But the bigger picture is the inventory is improving in our area. We have more active listings, more than 20% more than we did just a year ago, giving buyers more choices. So, you know, I'm not just having to look at one or two properties, I can actually show... And, you know, after being in the business for 20 years, back in the day 20 years ago, I would show people, you know, a whole showing day of looking at properties because there were so many homes on the market. I could look at 5 to 10 homes at any one given day. Today, I can actually show two or three homes at a time. And so, that is really showing me that the inventory is improving. So, there are choices and buyers are still stuck just a little bit because of the higher interest rates. So, that's what's sort of keeping everything calm. And there's not a frenzy because interest rates, mortgage interest rates for a 30-year fixed on average is a little over 6.5%, which is still in my opinion pretty good. But for some people who have seen the threes and the fours, they think that's high, which is not.
Brian: We got spoiled, didn't we? Yeah.
Michelle: Yeah.
Bob: Hey, Michelle, speaking of inventory, and I'm going to do something I probably shouldn't do here, you know, I'm going to rely on a social media post. I saw something come across the other day, and it contained a graph within it showing the inventory of homes around the country. And that graph showed that the inventory supply of homes in the western states and the southern states is actually really starting to go up where prices are starting to come down a little bit. Whereas in the Midwest and the Northeast, things are still kind of hovering around where they were. Could that, in any way, shape, or form be driving the decision for some local people to start putting their home on the market. Because if they want to move out west or move down south, things are starting to break in those markets a little bit. Could that in any way, shape, or form be driving some of this inventory movement?
Michelle: I think so. I think a lot of people just have felt stuck in their home and maybe stayed longer because maybe they have that rate of 3%. And so, they felt like, "Boy, I really don't want to make a move now." But if they are... You know, I also had a few clients who are moving to Florida, and there's a lot of inventory right now in Florida. And so, they're like, "Oh, this is my opportunity to get back into that market." In the Cincinnati, the home values here, we have median sales prices still going up about 5% year-over-year. So, it's not going up 10% to 15% percent like it did in 2020, but it's going up still steadily and not too crazy, which is good. We're not seeing the need for most buyers to go over this price like we did. You definitely, if you're a buyer and you're out there, listen to your real estate agent. Because honestly, if you're just going in as sort of blindly and doing whatever you want to do because you think it feels right, that's not the kind of knowledge you want to use to buy a home today.
Bob: Sounds like the same thing we tell people to do when they manage their investment portfolio. Listen to your advisor and don't let emotion drive the decisions. Go ahead, Brian.
Brian: Sounds familiar. Hey, Michelle I want to understand a little more about the inventory that's out there. So, is it a bunch of the same types of houses, or is there a wide swath of different house types out there? And the reason I ask is because we've talked frequently about the lack of starter home type places. There just aren't as many of those to choose from. And I would also sort of equate those with the types of homes that empty nesters want to move into. Something a little simpler, a little smaller. But when I hear from people talking about looking for something smaller later in their lives, there's just not a lot out there. So, what would you say the inventory consists of right now?
Michelle: We are seeing a lot of the bigger homes, the more expensive homes that are on the market. Again, not everybody's going to be able to afford that. So, a big two-story home isn't what everybody is looking for, but there are quite a number of those properties available. The ranch-style homes, as we are getting older and the population is getting older, we are seeing certainly a real need for ranch-style homes. People who don't want to deal with the stairs and that sort of thing. And like you said, the starter homes are still a challenge. And I believe that they will be a challenge for many years to come. And so, we still have a little bit of a disconnect on the types of housing that is available. And the new construction out there, don't believe the sign that's in front of the neighborhood that says, "Starting in the 300s." Yes, that is a starting price, and when you're all said and done, if you put any extras in that home at all, you're looking at 450 or above that, to be very honest.
Brian: "Oh, you wanted doors and windows, did you? Well, you should have said."
Michelle: Exactly.
Bob: "And you wanted a concrete driveway instead of gravel. You need to specify these things up front sir."
Michelle: Absolutely.
Bob: All right. Hey, we're going to have to leave it there for this one, Michelle. Thank you as always for joining us tonight. Great, great insights on what's going on in the housing market right now as we speak. 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's a red button you could click while you're listening to the show if you're listening on the iHeart app. Simply record your question there after hitting that big, red button, and your question will come straight to us. All right, Brian, Roger in blue ash leads us off tonight. He says, "We've accumulated over a million dollars in our 401(k) plan. What's the most tax efficient way to withdraw that money over, say, a 30 year period of retirement?"
Brian: Yeah, well, this is one of the most important retirement questions out there because this is... You know, we spend 30 years of our lives not really worrying about taxes and because it's all sheltered. I got to put my money in there. I kind of sort of don't have a choice about it. I know I need to save. There's not much to think about once I've set up the investments. But all that money is now sheltered in some way. Maybe it's probably a lot of it is still pre-tax. But there's maybe some Roth out there. But I'm going to go ahead and guess that maybe a lot of this million hasn't ever been taxed. So, the question is, you know, what it should be is, where do I withdraw it from?
If you've got more than a million bucks, obviously, Uncle Sam is in the mix and he's going to share in your the proceeds there. So, the way to be thinking about this you might be paying taxes at 12%, maybe 22%, instead of 28% or 32% or even higher later, right? That's the concern, is if you've built up a significant amount of money, that money is going to continue to grow. We're going to go ahead and guess maybe you're in a year... And I don't think we know an age here, but you're probably early retirement-ish or close to it. And what you're looking at is the Required Minimum Distributions that will kick in at 73 or 75 depending on your age. Whatever that dollar amount has grown to by that point, that's when you are permanently in a higher bracket for the rest of your life.
There's nothing you can do about it at that time, or at least, it's not very efficient to wait until that time to react to it. The time is now, and this is where Roth conversions come in in terms of making sure that we've got some of this money to spread that tax hit. It's not a benefit to be paying 10% taxes now and waiting for a 32% bracket later. I would argue, let's look at some Roth conversions, at least in the short run here, and maybe put you in the 20% bracket now so that you can stay in the 20% bracket.
So, again, all we know about this person is that he's got a million dollars in 401(k)s. We don't know other income streams, Social Security, perhaps there's a spouse in the mix that has their own sources of income, that kind of thing. So, hopefully that helps. Give us a call and we'll give you some more information with some more details about your situation. So, we'll move on to John and Fort Thomas. John has got an inheritance. He inherited some appreciated stock and he says it's done very well. This is interesting. "Should we hold it for the long term or diversify it even if it means paying capital gains taxes?" Bob?
Bob: Well, first of all John, what likely happened here, I can't confirm this for sure, but when you mention the word inherited, it probably means you got a stepped up cost basis when you inherited the stock. Meaning you got a new basis based on the date of death of the person you inherited the stock from. So, there might not be as many embedded capital gains here as you might think. So, the question I typically ask someone in this situation... And I realize the stock's done very well, and there might be some emotional attachment to both the past return on the stock and the person you inherited it from. But the question is, when we look at your entire portfolio, let's say this stock is maybe 20%, 30%, 40% of your overall portfolio, the first question I always ask somebody is, hey, if you were starting fresh today with a bunch of cash, would you put 40% of your portfolio in company X, Y, or Z? Most of the time people say no. And if that's the case, well, then why would we want to have that allocation now if we can diversify and diversify on a tax efficient basis?
So, again, we first got to define if we even have a problem, what the capital gain taxes are. And if we've got some gains taxes to pay, we come up with a strategy through protecting that concentrated positions, maybe with a foot protection, a collar strategy, or something like a direct indexing strategy where we can, over a reasonable period of time, diversify out of that concentrated stock position, not have you pay a ton of money in capital gains, and get this portfolio set up the way it should be for the long term to provide for the needs you and your family have moving forward. That's the way I would approach this. Anything to add, Brian?
Brian: No, I think you pretty much captured it all there. We just need to be making sure you look at all the details, and there are a lot of details. There are almost more details than you're thinking of, and it's definitely peeling an onion.
Bob: All right, we've got time for one more tonight here. Andrew in Kenwood says, "We've accumulated around $3 million. At what point do trusts become beneficial instead of just having a will?" Brian, is that decision made solely on the value of someone's net worth, or are there other considerations at play here?
Brian: Yeah, no, I would say the value, it's an important component, but it's nowhere near the most important. It's not the dollar amount. It's usually what you're wanting to do with it in the first place. A lot of people assume trusts are only for the ultra-wealthy. It sounds like the thing only fancy people do. But we hear the word trust and we picture billionaires trying to avoid estate taxes, things like that. But for many families, the biggest benefits of a trust have nothing to do with taxes at all.
So, let's start with what a will actually does for you. A will tells the court who gets your assets when you die, who serves as the executor, you have minor children, who's the guardian, all that kind of stuff. But a will has to be read. The process of reading a will is called probate. The county is involved, there are expenses. And since you have to involve the government through that process, it's slow. So, a revocable living trust is a little different. You transfer the assets into the trust while you're alive, but because it's revocable, you still control everything. It's just like an individual account or a joint account, if it's a joint trust, it can buy and sell investments, you can change beneficiaries on it, amend the trust, or even revoke it entirely.
You've lost no control, but the advantage comes when something happens. If you're incapacitated, now you've got somebody identified who's going to take care of your affairs for you. Again, that's not driven by the dollar amount, it's driven by the type of assets you have and what you need to happen with them. We need Paul Schwartz on for this particular question. We'll have him address this, I think, the next time he's with us.
Bob: All right, coming up next, we've got people come in oftentimes, Brian, as investment portfolios continue to grow, real estate values continue to go up, and we get this question from time to time, how much liability protection is enough liability protection? Brian and I will kick that question around coming up next. 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. Brian, we seem to be getting this question more often these days as far as liability protection as people's investment portfolios and real estate portfolios continue to grow. How much liability umbrella protection is the right amount? I'll give you my take on this and I'd love your thoughts.
I think there's two ways to look at this. Option one is you can just kind of add up your total net worth if you want to try to protect the whole thing from lawsuits. And I'm a big fan of umbrella liability protection because it's not that expensive on a relative basis. Certainly, when compared to getting involved in a lawsuit where you've got to go hire legal counsel to defend yourself if somebody slips and falls in your backyard or the kids get hit in the head with a wiffle ball bat or something like that.
An option two is just, you know, as you do your financial plan, I think everybody's kind of got a number, how much money do I really need to have in order to make sure I'm good for the long haul? And, you know, sometimes that number is a little less than your overall net worth. You know, that's another way to zero into this. I don't think there's any exact science to this, but I'm a big fan of upping that liability umbrella protection, you know, to that amount that really protects you and gives you peace of mind. And as I said before, it's really not that expensive on a relative basis to work with your property and casualty insurance agent and get that liability umbrella protection up there to a nice healthy amount. You know, it's built in lawsuit protection in my mind. What are your thoughts on this topic?
Brian: Yeah, so it's been about 10 years since this was brought to my attention, and the 10 years coincides exactly with when my oldest started driving. So, that's when my PNC guy reached out and said, "Hey, you've got these kids. I see we've added another one to the liability side of things. That means you've got young drivers in the house and I know there's more coming. So, let's maybe talk about an umbrella policy." And I said, "What's that?" Because I wasn't... You know, even given what I do for a living, it was a blind spot for me. I simply hadn't put it in place.
But as I've learned about it from my own situation, the conclusion I've drawn is umbrella coverage is so cheap and it is so unlikely that you're ever going to use it, but that's what makes it so cheap. However, if you ever do use it... These are the stories you hear at cocktail parties about so-and-so got sued by somebody, "My brother-in-law's former roommate or whatever, got sued by somebody, completely wiped him out." A lot of times those stories would have been protected by umbrella policies. So, that's what you're paying a little bit of money to protect from a lot of risk.
Bob: Yep. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Well, every night on the news, we hear it. The Dow was up 400 points. The NASDAQ was down 200. The S&P 500 hit another record high. Most investors hear those numbers, but do they really know what they're looking at? Brian, I think this is a great opportunity to take us through yet another history lesson about how all this stuff got derived and when.
Brian: Financial pornography, Bob, that's what it's all about, right? Now we have ticker symbols on the bottom of our screens and we have alerts on our phones and all this telling us super important information that is maybe of dubious importance sometimes, but it's got to be in our faces at all times. It all started with a newspaper about 140 years ago. So, back in 1884, Charles Dow was a newspaper editor. You might recognize that name. That's the guy behind the Dow Jones index. His first name... It wasn't one guy named Dow Jones. It was one guy named Dow and another guy named Jones.
No CNBC tickers back in this day, no Bloomberg terminals, iPhones, anything like that. If you wanted to know anything about the market, you literally had to look stock by stock. Now, I remember this not that long ago that, you know, when my father was first starting to teach me how to invest in the market in the 80s, I remember waiting until the newspaper came out the next day and then going and finding that tiny ticker symbol in a phone book part of the back of the newspaper. So, that actually lasted pretty long. But Jones...
Bob: Brian, I can remember being in finance classes at Miami university, you know, a class on investments, and that's how we did it as well. We looked at "The Wall Street Journal" listing of stocks every day. So, I mean, this is in the mid-80s, so this is not that long ago. I guess I am getting old, but go ahead.
Brian: It might be longer than you're allowing yourself to believe, sure. But that goes for me, too. But, yeah...
Bob: At least the music was way better then, but go ahead.
Brian: There you go. That was the only way to get information. You were on a 24-hour delay. Stocks were doing something right now, but you weren't going to find out until you read the paper the next day. I can't even imagine that world at this point. But anyway, he decided there had to be a better way to figure out what the overall market was doing. Because remember what we just said, it was all just lists of ticker symbols. That was it. What did these stocks do? Period, end of story.
So, what he did was he averaged together a handful of these major companies that now we know as the Dow Jones Industrial Average. And the crazy part of that is it's still only contains 30 companies, just 30 out of thousands of publicly- traded companies. But it's the oldest index that we have out there that's been continually running, so we do rely on it a lot. The Dow Jones, it does contain 30 companies. It only recently, I'm going to mess the timing up, Bob, maybe you'll remember, maybe in the last 15 years, added technology. It used to be extremely industrial based. It really kind of looked like your grandparent's stock portfolio back in the day. Now it looks a little more modernized, but still only contains 30 companies.
And they're not weighted the way most people think. Most people think that... You know, you might assume that the biggest companies have the biggest influence, but that's the way the S&P 500 works because it's cap-weighted. That is not how the Dow works. The Dow is price-weighted. That means a company with a $350 stock price moves the Dow far more than one with a $45 stock price, even if that $45 company is actually worth a lot more. And this is why one of the recent headlines with regard to the Dow, Alphabet, the parent of Google, that just replaced Verizon. Verizon had one of the lowest stock prices in the Dow, and it was barely having an impact on the index at all. Alphabet, on the other hand, has got a much higher share price, so it will have a bigger influence on whether the Dow goes up and down. So, that's how those components find their way into the Dow, which is a little different. We usually talk about the S&P 500.
Bob: Yeah. And I think it's helpful for folks to just remember, or teach them for the first time if they don't know, the difference between price weighting and cap weighting. You did a great job just now of talking about price weighting. But what we're talking about when we mentioned cap weighting is the value of the company, the capital value of the company. Take the number of shares, you know, the float, the number of shares trading, multiplied by the stock price, and that's the hypothetical value of the company. That's what we mean by cap weighting.
So, let's fast forward to the S&P 500, which, you know, purportedly, fix the whole problem of having a meaningful index. People eventually realize, maybe stock price isn't the best way to measure how the "overall" market is doing along comes the S&P 500. Now, instead of 30 companies, attracts about 500. And as we just said, instead of waiting them simply by stock price, it weighs them by the actual market value, the price of the stock multiplied times the number of shares outstanding. It gives us a much more diversified view of the overall market.
But as we've talked about here, Brian, and recent weeks and months, if not a year and a half or so, you know, cap weighting can, you know, rear its ugly head in other ways too, when you get, you know, these Magnificent Seven stocks. You know, just seven companies making up more than more than 30%, approaching sometimes 40% of the value of the S&P 500. It could get a little overweighted, you know, toward a few companies as well. So, there is no perfect index out there.
Brian: Yeah, and at the end of the day, we just need something we can look at. And the goal is to have just something that is roughly the same from day-to-day so that we can make sure that we're tracking the same pile of stuff. That's why we need indices, but there's always going to be these different kinds of things. So, one thing I was thinking about as we explained the Dow and how the Dow is price weighted, but what happens when there's a split, if it's looking only at the price, and we get, you know, a 10 to 1 stock split, and all of a sudden, the price is a 10th what it was the day before. And of course, the Dow Jones deals with that. But these are the quirks of all the indices, the Dow just changes the divisor so that it doesn't have massive spikes up and down based on a split.
But if you understand the components about how all those things work, then now you can be a little clearer on why you're seeing the numbers that you are. These are all different types of things. As I mentioned, the Dow Jones is it tends to be a little more industrially focused. The S&P 500 is a lot broader based. The NASDAQ tends to be more technology focused. Each one of them, in its own right, gives you useful information to kind of compare to your portfolio. And recently, we've had with as far as the AI stocks and all those things have run the technology side, and they've also kind of hit the skids a little bit here for these last several weeks and months, we've actually seen days where the Dow Jones is up and the NASDAQ is down at least briefly during the day. That doesn't happen very often. Usually, stocks kind of at least go in the same direction. But we've gotten pretty specific about which segments of the market are moving back and forth. And that's just what happens when you get people concerned that there might be a bubble in places like technology. So...
Bob: All right, so Brian, let's get a little less wonky here and let's get down to brass tacks. Which one of these indices should investors actually pay attention to? And more importantly, I know when clients come into the office to talk to you, you know, a lot of people will say, "Hey, how's my portfolio doing? And how's my portfolio doing versus the market?" What should we really be paying attention to in terms of these indices we just covered, and how to evaluate how your portfolio is performing as an average investor out there?
Brian: Well, I mean, the thing that's going to be shoved in your face on a daily basis is the S&P 500 because it's got enough history behind it. It goes, you can get back into... You can sort of create a semblance of it into the like the late 30s, early 40s, maybe. That's a little bit of a stretch, but you can get close to it. So, there's plenty of history there and it's a broad-based index. Now, that said, it's just the U.S. large cap market. That's it. The S&P 500 is nothing more than the 500 largest United States companies. It's not weighted specifically, consciously in any one industry other than whatever the market does because it's cap weighted. So, yes, it's very heavily weighted on the technology side, but that's not by design. That's just how that industry has gone, of course. So, that's a good kind of a top-level, dip your toe in, and see what's going on.
I like to encourage people to look under the hood and see what's happening underneath the surface of the portfolio. Because recently, as we've talked about, as the world trading order is kind of shuffling things around, we've seen some movement in other areas that maybe have been neglected lately, and that's international stocks. So, there are other indices you can look at for international stocks. There's something called the Europe Asia Far East Index. Lots of places actually have an EAFE index. But I think it's good to know what are internationals doing.
And also, like we just said, the S&P 500 is a large cap index. So, pay attention to what the small and mid-caps are doing. That would be the more along the lines of, say, the Russell 3000, which isn't purely small cap, but it does contain enough of those smaller companies where you can see some differences. And there are other indices out there. I really think that's really... Understand that it's not just one pile of things. It's not one index fund that you need. You need a couple other things that are going to move around in different manners. And there's an index for each one of them.
Bob: Yeah, I think another thing to call out here is just the emotional impact of news headlines. And here's what I mean. Sometimes people will call us, Brian, and there'll be a little spooked when they hear, "Hey, the Dow was down 700 points today." That sounds terrifying until we remember that the Dow is valued at over 50,000. So, a 700 point move today is roughly just under 1.5%, certainly a down day. But back in the 1990s, a 700 point move would have felt really catastrophic. And it was. I mean, that's bear market territory. Today, you know, a 500, 600 point move in the Dow is kind of an ordinary trading day. And sometimes people forget about that just based on how large these indices, the values of gotten over the last several decades.
Brian: Absolutely. And then, again, so there was a thing to pay attention to here is, you know, just making sure we know exactly what the components are. I think we're beating a dead horse at this point. But financial planning is far more than just looking at one indicator, one index, just one piece of your financial situation. Everything comes together. The market performance is going to be what it is. Your portfolio probably is going to move in the same direction. Don't hang your hat on that.
When you get frustrated because the market is down or moving sideways, you're getting bored, don't give in to the urge to do something with it just because it feels like it should always be moving up. Use those times to learn about other things. There's much more to financial planning than what the investments are doing. Learn about tax planning. Learn about Roth conversions. Learn about all these other things, all these other components that can have a significant impact on the overall outcome of your financial plan. It is not only about what the market's doing. That's the one you can control. The things you can control is your level of knowledge about the various techniques that may be beneficial to you in accomplishing your financial goals.
Bob: Here's the Allworth advice, don't let a big point move fool you or cause you to take unnecessary action. Focus on percentages, understand what each index is measuring, and remember that your long-term financial plan matters far more than today's market headlines. Will you spend 30 or 40 years building your retirement nest egg, but what happens when it's finally time to use your money? New research says that's where many retirees are getting stuck, and ironically, it could be costing them the retirement or the enjoyment of the retirement they've worked so hard to build. We're going to talk about all of that next. 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" live every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your favorite podcast. How do you make a million dollar 401(k) account last your entire 30-plus years of retirement? And is it time to sell inherited stock with huge embedded capital gains? And when do trusts make more sense than just having a simple will? We'll cover all of those straight ahead. We spend so much time on this show talking about how to save for retirement. Max out your 401(k), invest consistently, stay diversified, keep your emotions in check. But there's another side of retirement planning that doesn't get nearly enough attention for a lot of folks, Brian. How do you actually spend all this money you've spent years building?
Brian: You know, our new favorite thing to talk about, Bob, these last few months is piles of money versus streams of income. As we're making this sort of societal shift away from retiring off of streams of income, meaning pensions and Social Security, which may or may not be changing here in the next few decades, and shifting toward retiring off piles of money. Now, most people, that's all you have, is a pile, right? You guys have got Social Security, something in the mix, but it's not going to be the core of your income streams like it was for your past, your forebears, your grandparents and parents. It's going to be more you're drawing off a pile of money.
And this is a massive, you and I both know this because we talk about it all the time, it's one of the hardest things for people to get over, is the notion of shifting out of accumulation mode, growing my pile, and into distribution mode. "I'm now retired and I need to draw these dollars off it." Because people who are successful in accumulating often have convinced themselves that every last nickel is for a rainy day and their brains want them to die with it in place, you know, just in case. And it is a massive psychological shift to go ahead and start drawing on those dollars.
And so, we've got a survey here from TIAA and Nuveen. Only about 2 in 10 workers say they've given serious thought to how they're going to withdraw that money from their retirement accounts. A little bit more, about 3 in 10 say they're comfortable watching their retirement savings actually decline to pay for everyday living expenses. Now, sometimes these headlines or these survey results are useful if we kind of rephrase from the other point of view. In other words, 70% are uncomfortable watching those savings decline while they pay for their everyday living expenses. Now, hopefully, you're in a situation, and this is where a financial plan comes in, right? We need to model this stuff out. Hopefully, you're in a situation where your nest egg is large enough that it won't decline, that it can still, the growth can still outpace whatever withdrawals you need to take out of it and ride the waves of the ups and downs of the market as that occurs.
But again, that has everything to do with starting off with knowing where you are in the first place. And that's another survey question out of this same study. About half the respondents associate retirement spending with uncertainty. Now, about 44% think about it with anxiety and all this. In other words, one out of two people are completely scared to death even though they've been saving their dollars. Nobody knows how to de-accumulate it because we don't teach that in this country, and frankly, that's job security for me and you, Bob, and lots of other advisors out there. But this is a major, major shift that lots of people go through. Some people focus a lot on, "I'm going to retire. I'm no longer going to be the important smart guy in the room. And that is my identity, my job." We worry much more about that than we do about the psychological shift of spending our savings to live life without having to go to work.
Bob: Yeah, and I think for the clients you and I deal with and the discussions we have about this all day, every day, Brian, it really is much more psychological than financial. I mean, most people we work with are pretty smart folks, they understand how math works, they understand how to build and grow their pile of money, but I think it is a paradigm shift. When you go from just focusing on saving more, increasing that 401(k) balance, never touch your retirement money, we talk about that all the time, delay gratification. These are all the things "successful" people have done and done well until they're in their mid-60s. And then one day, people retire and it's like, "Congratulations. Now, start spending." And it's like, "Spend?"
That's something new. They never thought about it. And that's the reason to have a financial, this plan flush out based on individual goals and needs and wants. That tends to let that emotional guard down, at least somewhat. Now, it is a paradigm shift to get over the fact that, "Hey, I was just earning in a lot of cases a very high paycheck. Now that paycheck is gone. And now," as you said, "my pile of money has got to take care of me for the rest of my life." That's a tough one to get over for some people, too, especially in those early years of retirement. And as you said, that's why having a financial plan or retirement income strategy is so, so important because it gives people the peace of mind they need to actually enjoy this money.
Brian: And I think that let's not overshoot that psychological impact, right? That's another thing people don't tend to think about. We worry a lot about, "What do I got to tell HR? And what do I got to do? How do I file for Social Security?" And all this other stuff. But eventually, the dust is going to settle, you're going to have a successful financial plan. And then the question is, have you thought about what it's going to feel like to not have anywhere to go that day, right? That's heaven for the first six, eight weeks, something like that, depending on when you retire. Maybe if you retire in February, the walls close in a little sooner.
But eventually, you're going to get to a point where you're just wondering, you know, it's you and your spouse sitting on either end of the couch drinking the fourth cup of coffee of the day and it's 10 o'clock on a Tuesday and nobody has any idea what's on the agenda. This is when the world gets so small that one doctor's appointment feels like the entire agenda, and you can't plan anything else around that day. And so, honestly, I want to encourage people to really set the money aside, at least for one of your retirement discussions, and talk about the time. Retirement is all about money and time. Those are the two variables that we need to be thinking about. Lots of questions in there, but those are the ones that we need to get comfortable with.
Bob: Well, and when it comes to some of those other goals, too, like helping out kids or grandkids or taking that extra cruise or not feeling like you have to drive a 20-year-old car around anymore that's breaking down, these are the things that a good financial plan, again, can give people the emotional or psychological permission, if you will, to actually spend some of this money. Brian, you and I do meetings together from time to time and we watch people. Literally, the people have this sigh of relief when you stress test, "Hey, let's try to jump this spending up by an additional $10,000, $20,000 a year or more, you could still do some of these things you've always wanted to do." And people breathe that sigh of relief. It's almost like giving people permission to spend their own money.
Anyway, here's the Allworth advice, a retirement income plan, an actual plan, can give you that emotional permission to enjoy the money, actually enjoy the money you've spent a lifetime earning. Well, temperatures out there are certainly heating up. What about the housing market? What buyers and sellers should be considering coming up next. 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 good friend of the show, our real estate expert, Michelle Sloan. Michelle, thank you as always for carving out some time for us tonight. Well, temperatures are up. We're in the middle of summer. Tell us about how the real estate market in greater Cincinnati is heating up right now.
Michelle: Oh, it's hot, absolutely. You know, July is typically one of the busiest months of the year. And the greater Cincinnati market is definitely following in that pattern. We are seeing much more of a balanced market than the frenzied market of years past. So, that's a good thing. But there are still homes that are selling on the first or second day. If they're priced right and they're staged and they're perfect for a buyer who's been looking for a while, the buyer is ready to write that offer immediately. And so, that means that sellers also have to be ready if they want that offer in the first couple of days. You can't just put anything on the market. I mean, in 2020, 2021, you could put a home on the market that was dirty, not staged, and as long as that house had a heartbeat.
Bob: Had orange shag carpeting in the bedrooms.
Michelle: Yeah, pretty much. I mean, it didn't matter the house, everything was selling like hotcakes. And now, we're definitely... Again, it's a little bit more temperate and balanced, which is a really good thing, I think, for all parties involved. So, sellers have to do their due diligence, buyers have to as well.
Brian: So, the buyers are still there, they're just a little choosier. It's not as easy. You're not just throwing the hook in the water without a worm on it and pulling them out anymore. Is that what I'm hearing you say?
Michelle: That's absolutely right. But the bigger picture is the inventory is improving in our area. We have more active listings, more than 20% more than we did just a year ago, giving buyers more choices. So, you know, I'm not just having to look at one or two properties, I can actually show... And, you know, after being in the business for 20 years, back in the day 20 years ago, I would show people, you know, a whole showing day of looking at properties because there were so many homes on the market. I could look at 5 to 10 homes at any one given day. Today, I can actually show two or three homes at a time. And so, that is really showing me that the inventory is improving. So, there are choices and buyers are still stuck just a little bit because of the higher interest rates. So, that's what's sort of keeping everything calm. And there's not a frenzy because interest rates, mortgage interest rates for a 30-year fixed on average is a little over 6.5%, which is still in my opinion pretty good. But for some people who have seen the threes and the fours, they think that's high, which is not.
Brian: We got spoiled, didn't we? Yeah.
Michelle: Yeah.
Bob: Hey, Michelle, speaking of inventory, and I'm going to do something I probably shouldn't do here, you know, I'm going to rely on a social media post. I saw something come across the other day, and it contained a graph within it showing the inventory of homes around the country. And that graph showed that the inventory supply of homes in the western states and the southern states is actually really starting to go up where prices are starting to come down a little bit. Whereas in the Midwest and the Northeast, things are still kind of hovering around where they were. Could that, in any way, shape, or form be driving the decision for some local people to start putting their home on the market. Because if they want to move out west or move down south, things are starting to break in those markets a little bit. Could that in any way, shape, or form be driving some of this inventory movement?
Michelle: I think so. I think a lot of people just have felt stuck in their home and maybe stayed longer because maybe they have that rate of 3%. And so, they felt like, "Boy, I really don't want to make a move now." But if they are... You know, I also had a few clients who are moving to Florida, and there's a lot of inventory right now in Florida. And so, they're like, "Oh, this is my opportunity to get back into that market." In the Cincinnati, the home values here, we have median sales prices still going up about 5% year-over-year. So, it's not going up 10% to 15% percent like it did in 2020, but it's going up still steadily and not too crazy, which is good. We're not seeing the need for most buyers to go over this price like we did. You definitely, if you're a buyer and you're out there, listen to your real estate agent. Because honestly, if you're just going in as sort of blindly and doing whatever you want to do because you think it feels right, that's not the kind of knowledge you want to use to buy a home today.
Bob: Sounds like the same thing we tell people to do when they manage their investment portfolio. Listen to your advisor and don't let emotion drive the decisions. Go ahead, Brian.
Brian: Sounds familiar. Hey, Michelle I want to understand a little more about the inventory that's out there. So, is it a bunch of the same types of houses, or is there a wide swath of different house types out there? And the reason I ask is because we've talked frequently about the lack of starter home type places. There just aren't as many of those to choose from. And I would also sort of equate those with the types of homes that empty nesters want to move into. Something a little simpler, a little smaller. But when I hear from people talking about looking for something smaller later in their lives, there's just not a lot out there. So, what would you say the inventory consists of right now?
Michelle: We are seeing a lot of the bigger homes, the more expensive homes that are on the market. Again, not everybody's going to be able to afford that. So, a big two-story home isn't what everybody is looking for, but there are quite a number of those properties available. The ranch-style homes, as we are getting older and the population is getting older, we are seeing certainly a real need for ranch-style homes. People who don't want to deal with the stairs and that sort of thing. And like you said, the starter homes are still a challenge. And I believe that they will be a challenge for many years to come. And so, we still have a little bit of a disconnect on the types of housing that is available. And the new construction out there, don't believe the sign that's in front of the neighborhood that says, "Starting in the 300s." Yes, that is a starting price, and when you're all said and done, if you put any extras in that home at all, you're looking at 450 or above that, to be very honest.
Brian: "Oh, you wanted doors and windows, did you? Well, you should have said."
Michelle: Exactly.
Bob: "And you wanted a concrete driveway instead of gravel. You need to specify these things up front sir."
Michelle: Absolutely.
Bob: All right. Hey, we're going to have to leave it there for this one, Michelle. Thank you as always for joining us tonight. Great, great insights on what's going on in the housing market right now as we speak. 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's a red button you could click while you're listening to the show if you're listening on the iHeart app. Simply record your question there after hitting that big, red button, and your question will come straight to us. All right, Brian, Roger in blue ash leads us off tonight. He says, "We've accumulated over a million dollars in our 401(k) plan. What's the most tax efficient way to withdraw that money over, say, a 30 year period of retirement?"
Brian: Yeah, well, this is one of the most important retirement questions out there because this is... You know, we spend 30 years of our lives not really worrying about taxes and because it's all sheltered. I got to put my money in there. I kind of sort of don't have a choice about it. I know I need to save. There's not much to think about once I've set up the investments. But all that money is now sheltered in some way. Maybe it's probably a lot of it is still pre-tax. But there's maybe some Roth out there. But I'm going to go ahead and guess that maybe a lot of this million hasn't ever been taxed. So, the question is, you know, what it should be is, where do I withdraw it from?
If you've got more than a million bucks, obviously, Uncle Sam is in the mix and he's going to share in your the proceeds there. So, the way to be thinking about this you might be paying taxes at 12%, maybe 22%, instead of 28% or 32% or even higher later, right? That's the concern, is if you've built up a significant amount of money, that money is going to continue to grow. We're going to go ahead and guess maybe you're in a year... And I don't think we know an age here, but you're probably early retirement-ish or close to it. And what you're looking at is the Required Minimum Distributions that will kick in at 73 or 75 depending on your age. Whatever that dollar amount has grown to by that point, that's when you are permanently in a higher bracket for the rest of your life.
There's nothing you can do about it at that time, or at least, it's not very efficient to wait until that time to react to it. The time is now, and this is where Roth conversions come in in terms of making sure that we've got some of this money to spread that tax hit. It's not a benefit to be paying 10% taxes now and waiting for a 32% bracket later. I would argue, let's look at some Roth conversions, at least in the short run here, and maybe put you in the 20% bracket now so that you can stay in the 20% bracket.
So, again, all we know about this person is that he's got a million dollars in 401(k)s. We don't know other income streams, Social Security, perhaps there's a spouse in the mix that has their own sources of income, that kind of thing. So, hopefully that helps. Give us a call and we'll give you some more information with some more details about your situation. So, we'll move on to John and Fort Thomas. John has got an inheritance. He inherited some appreciated stock and he says it's done very well. This is interesting. "Should we hold it for the long term or diversify it even if it means paying capital gains taxes?" Bob?
Bob: Well, first of all John, what likely happened here, I can't confirm this for sure, but when you mention the word inherited, it probably means you got a stepped up cost basis when you inherited the stock. Meaning you got a new basis based on the date of death of the person you inherited the stock from. So, there might not be as many embedded capital gains here as you might think. So, the question I typically ask someone in this situation... And I realize the stock's done very well, and there might be some emotional attachment to both the past return on the stock and the person you inherited it from. But the question is, when we look at your entire portfolio, let's say this stock is maybe 20%, 30%, 40% of your overall portfolio, the first question I always ask somebody is, hey, if you were starting fresh today with a bunch of cash, would you put 40% of your portfolio in company X, Y, or Z? Most of the time people say no. And if that's the case, well, then why would we want to have that allocation now if we can diversify and diversify on a tax efficient basis?
So, again, we first got to define if we even have a problem, what the capital gain taxes are. And if we've got some gains taxes to pay, we come up with a strategy through protecting that concentrated positions, maybe with a foot protection, a collar strategy, or something like a direct indexing strategy where we can, over a reasonable period of time, diversify out of that concentrated stock position, not have you pay a ton of money in capital gains, and get this portfolio set up the way it should be for the long term to provide for the needs you and your family have moving forward. That's the way I would approach this. Anything to add, Brian?
Brian: No, I think you pretty much captured it all there. We just need to be making sure you look at all the details, and there are a lot of details. There are almost more details than you're thinking of, and it's definitely peeling an onion.
Bob: All right, we've got time for one more tonight here. Andrew in Kenwood says, "We've accumulated around $3 million. At what point do trusts become beneficial instead of just having a will?" Brian, is that decision made solely on the value of someone's net worth, or are there other considerations at play here?
Brian: Yeah, no, I would say the value, it's an important component, but it's nowhere near the most important. It's not the dollar amount. It's usually what you're wanting to do with it in the first place. A lot of people assume trusts are only for the ultra-wealthy. It sounds like the thing only fancy people do. But we hear the word trust and we picture billionaires trying to avoid estate taxes, things like that. But for many families, the biggest benefits of a trust have nothing to do with taxes at all.
So, let's start with what a will actually does for you. A will tells the court who gets your assets when you die, who serves as the executor, you have minor children, who's the guardian, all that kind of stuff. But a will has to be read. The process of reading a will is called probate. The county is involved, there are expenses. And since you have to involve the government through that process, it's slow. So, a revocable living trust is a little different. You transfer the assets into the trust while you're alive, but because it's revocable, you still control everything. It's just like an individual account or a joint account, if it's a joint trust, it can buy and sell investments, you can change beneficiaries on it, amend the trust, or even revoke it entirely.
You've lost no control, but the advantage comes when something happens. If you're incapacitated, now you've got somebody identified who's going to take care of your affairs for you. Again, that's not driven by the dollar amount, it's driven by the type of assets you have and what you need to happen with them. We need Paul Schwartz on for this particular question. We'll have him address this, I think, the next time he's with us.
Bob: All right, coming up next, we've got people come in oftentimes, Brian, as investment portfolios continue to grow, real estate values continue to go up, and we get this question from time to time, how much liability protection is enough liability protection? Brian and I will kick that question around coming up next. 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. Brian, we seem to be getting this question more often these days as far as liability protection as people's investment portfolios and real estate portfolios continue to grow. How much liability umbrella protection is the right amount? I'll give you my take on this and I'd love your thoughts.
I think there's two ways to look at this. Option one is you can just kind of add up your total net worth if you want to try to protect the whole thing from lawsuits. And I'm a big fan of umbrella liability protection because it's not that expensive on a relative basis. Certainly, when compared to getting involved in a lawsuit where you've got to go hire legal counsel to defend yourself if somebody slips and falls in your backyard or the kids get hit in the head with a wiffle ball bat or something like that.
An option two is just, you know, as you do your financial plan, I think everybody's kind of got a number, how much money do I really need to have in order to make sure I'm good for the long haul? And, you know, sometimes that number is a little less than your overall net worth. You know, that's another way to zero into this. I don't think there's any exact science to this, but I'm a big fan of upping that liability umbrella protection, you know, to that amount that really protects you and gives you peace of mind. And as I said before, it's really not that expensive on a relative basis to work with your property and casualty insurance agent and get that liability umbrella protection up there to a nice healthy amount. You know, it's built in lawsuit protection in my mind. What are your thoughts on this topic?
Brian: Yeah, so it's been about 10 years since this was brought to my attention, and the 10 years coincides exactly with when my oldest started driving. So, that's when my PNC guy reached out and said, "Hey, you've got these kids. I see we've added another one to the liability side of things. That means you've got young drivers in the house and I know there's more coming. So, let's maybe talk about an umbrella policy." And I said, "What's that?" Because I wasn't... You know, even given what I do for a living, it was a blind spot for me. I simply hadn't put it in place.
But as I've learned about it from my own situation, the conclusion I've drawn is umbrella coverage is so cheap and it is so unlikely that you're ever going to use it, but that's what makes it so cheap. However, if you ever do use it... These are the stories you hear at cocktail parties about so-and-so got sued by somebody, "My brother-in-law's former roommate or whatever, got sued by somebody, completely wiped him out." A lot of times those stories would have been protected by umbrella policies. So, that's what you're paying a little bit of money to protect from a lot of risk.
Bob: Yep. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.