Riding Record Highs, AI Investing Myths, and the Senior Housing Crunch
On this week’s Best of Simply Money podcast, Bob and Brian dig into what investors should—and shouldn’t—do when the stock market keeps hitting record highs. Should you cash out or lean in? Behavioral finance, loss aversion, and portfolio strategy all come into play. Plus, hear how tools like direct indexing, buffered ETFs, and structured notes can help high-net-worth investors stay smart amid the noise.
Then, a reality check on retirement: new data reveals more Americans tapping their 401(k)s early, and a growing crisis in senior housing—especially right here in Cincinnati. Are you making a dangerous assumption about what Medicare actually covers? We’ll walk through the risks of waiting too long to secure care solutions.
Also in this episode: the truth about AI and investing—why even the smartest machine learning tools can't consistently beat the market, and how to actually use AI without falling for hype.
Download and rate our podcast here.
Bob: Tonight, how to react to record high after record high in the stock market. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
All right, Brian, let's get into it. Record highs again. It feels like every week we're hearing about new record highs in the stock market. And that leaves investors asking themselves often, "Hey, is this the time to lean in, pile in, buy more, or is it time to get out before the next inevitable drop in the market?" And there's a lot of psychology behind these decisions and emotion, and a lot of that depends on what headlines you're looking at. It can leave investors feeling a multitude of different ways. Let's get into some of that, Brian.
Brian: Yeah, it's been a fun run here. If you're someone who's been paying attention to how things have just kept sneaking up a little bit by little bit by little bit these last several weeks. But the pessimist in us always says, "You know what? This is going to peter out, it's going to fall apart, and the world is going to end soon here." But, yes, it's kind of like watching somebody climb up a mountain. When you're halfway up, you just cheer them on, you say, "Go, go, go." But when they just get near the peak, you start to get a little more conservative and say, "You're so close to the end. Let's go ahead." You know, be a little more conservative here and kind of pull in the risk a little bit.
So, there's a whole field in our industry known as behavioral finance that fixates on this, and basically, how people react to financial decisions and particularly loss aversion, meaning that we tend to feel the pain of losses a lot more strongly than we do the pleasure of when we have gained. Losing 1,000 bucks feels worse than gaining $1,000 feels good, often almost by twice as much, Bob, because we just feel the pain of loss more than the benefit of a life-changing amount of money sometimes. So, it's just something to pay attention to, and this is the period of time in the market cycle when we start to feel it most.
Bob: Yeah, and I think that's psychology. I don't know about what you run into with your clients, but I've found over the years, these emotions change depending on where you are, what life stage you're in. For example, if you're done working and you're retiring, these 10% to 12% market corrections feel a whole lot different when you're no longer bringing that paycheck in than somebody in their 30s or 40s that can say, "Hey, the market always comes back, it always will, I can ride these out." On the other spectrum, for younger folks, greed can kick in, where you're getting too speculative and maybe buying things and over-allocating things that you shouldn't be in in the first place, or holding on to winning investments maybe longer than you should because, hey, it's gone up, I expect it's going to go up, and you tend to get over-allocated and over-concentrated in maybe one position. So, the psychology can differ tremendously, I find, depending on what stage of life people are in.
Brian: Yeah. And also, how much attention we're paying. So, younger people who are maybe busy with their careers and families and so forth, they kind of tend to know in the background a little bit that things are going okay, but they don't really have time to pay much attention to it. That's not a bad thing. I think some of those exhausting distractions are a good thing for our finances because they keep us from making crazy decisions that we might make if we had more time to think about it. But, yeah, on the other hand, for those who do have time are paying a lot of attention. It can actually be stressful, right, Bob? Because, all of a sudden, I've got more money than I've ever had, but I'm just paranoid that something's going to go wrong.
But let's look at the reality here. So, the idea that we hit a record high, that's not crazy. It happens all the time. Look at a chart of the S&P 500, the American stock market, look at it over the last 80 years of its entire existence, it goes up, not down. So, it's almost always at a record high. But let's put some numbers to that. So, just since 1950, the S&P 500 has hit a record peak over 1,500 times. That's if you do the average on that, work the math out, that's 21 times a year on average, or about 8% of trading days. So, on one hand, 8% doesn't sound like all that much, but the thing you have to remember is that, normally, the market does a bunch of nothing. It goes up a little bit, goes down a little bit. It's the few times, the few days and weeks out of the year where it makes its move that's, basically, going to define that year. But that's 8% of trading days where the market is actually sitting at a new high. So, it's not nearly as rare as it might seem. It feels like that's an all-time high, a world record, or whatever. Those don't happen very often. Well, happens, basically, every year in the S&P 500.
Bob: Yeah, I think some of those numbers are worth repeating. On average, again, since 1950, so we're talking about 75 years, the market, on average, hits 21 new highs per year. I think people are smart enough to know, Brian, in a healthy economy, we should be hitting record highs on a regular basis. It means the economy is growing like it should. Companies are worth more. I think people inherently know record highs should be the case, but I think sometimes buried deep in our psyche is that whole buy low, sell high mentality. And when we hear all time high, we think, "Hey, something bad is going to happen and we need to sell." And I think a good reminder here is new record highs doesn't necessarily equate to be the market being overvalued or overpriced.
I mean, studies show that returns following a record high are roughly the same as returns from any other time of the year, typically 10% per year annualized over the next three to five years. So, a record high is no reason to panic, it's a reason to look at the fundamentals of the holdings that you have and reevaluate your financial plan and just make sure your portfolio is stress tested and can withstand the inevitable pullback that will come. It always does. But you want to stay in the game here to be able to not miss out on the next three to five to seven years' worth of record highs.
Brian: Yeah. And I think it's an important point to make to say that whatever the market is doing right now should never impact your financial plan. You should never, ever, ever make decisions, major decisions that are lifelong decisions based off of what's happening today with the market, because it can go the opposite way just as easily. You need to be able to be flexible with your decision making.
But I'll even throw out there this year, Bob. So, I don't even know if we did this pre-research here for this particular point, but I just looked it up. We've actually had six of these so far in 2025. February 18th was an all-time high. And then we pulled back and we all panicked briefly about tariffs, and the market hit a bottom in April. But since then, we had three in June, and then several in July as well, again, hitting all-time highs. And technically, we're behind the average. We just said, 21 times a year is the average number of record peaks during a given year. And we're only about a third of the way there. So, that in itself does not indicate what the market's going to do in the future. But again, we've been on a good path so far. And I don't think there's anything necessarily set to derail that other than things we don't know.
Bob: Yeah, it's hard to get 21 record highs through seven months of the year when we clawed back from that tariff-caused major pullback in April. But anyway, hopefully, we're making the point here. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, we talked about some of the psychology around record highs and what not to do. Let's talk about what we should be doing in periods like this.
Brian: Yeah. Should we react to this? So, if we're talking about being at a record high, what should we do? So, first of all, as Bob already mentioned, understand what your plan was. This may or may not impact and it may not require you to do anything. But if it does feel like you do need to make some moves, there are some things you can do. When markets are this high, direct indexing can really kind of shine, meaning, if you're a fan of index funds, well, there are ways now where you can own the same types of holdings that track an index, but you own the individual securities, not just a mutual fund that truly lets you customize your exposure. And as tax losses arise, you can actually do some tax planning with those types of holdings differently than you can with a simple index fund.
I've got a new client we brought on that came on with a very significant pile of money in an index fund. And we're slowly going to work our way out of that to be able to take advantage of that for his coming 15 years of remaining work at a high-income bracket. No, but on the other hand, you might feel like this feels a little bit like little brittle here. Maybe even things could fall apart. So, if you if you truly are worried and you're waking up at night and you just can't get the thought out of your head that things are going to come down, that's where some tools such as Buffer ETFs or structured notes might play a role. They're not for everyone and they very much do leave money on the table when the markets continue to go up. However, their purpose is to put in a floor to kind of stabilize things to, basically, lock in the maximum amounts you could possibly lose in a given situation. That's very oversimplified. But again, if you find yourself losing sleep and just can't really kind of get over the idea of ignoring it, letting it roll, those are some tools that might help as well.
Bob: And if you're somebody that is sitting out there on a very large, concentrated position in any one stock, or if you just want protection from an overall market exposure, a responsible collar strategy can work here. That's where you buy some put protection, meaning you're buying downside protection, and you at the same time, sell a covered call on your large position. So, you are limiting your upside, but that premium you collect is going to pay for your insurance on the downside. And that's really what Buffer ETFs do, you know, with respect to protecting a large overall portfolio. But there's a lot of things you can do there again, depending on your financial situation and your financial plan.
And let's not forget about just good old rebalancing. You know, if you're somebody that wants to be 70% in stocks, 30% in bonds, and that 70% just morphs into 78%, you know, in an upmarket, well, do the responsible thing, trim off some of the gains, keep your overall risk tolerance and portfolio in balance. And a lot of times people don't want to do that when the market's up. But if we encourage them to do that, boy, are they thankful that they did after we experienced the next inevitable pullback that will come at some point in time?
Brian: Yeah, that's a very important point. Whenever the market's at a high, that means things have been going well, we like that. However, that almost always means that something in the pack has been running faster and farther than something else. That means your portfolio is probably out of whack just by its very nature. So, you want to take a look at that and see what sectors, what areas of the market that have gotten a little bigger than you intended, and take that chance to rebalance those down.
Bob: Here's the Allworth advice. Markets hitting record highs shouldn't change your plan. They should remind you to make sure you have one and that it's updated. Coming up next, can artificial intelligence help you beat the stock market? We're going to show you what the data suggests 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. If you can't listen to "Simply Money" live every night, subscribe to 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 going to explore the key factors that influence the right time to claim Social Security benefits. And I know that's a topic that is of interest to a lot of folks out there. All right, Brian, new data from Vanguard shows that a record number of Americans dipped into their 401(k) plans for emergency purposes during 2024. Thankfully, that record number though, is only 5% of all participants. Walk us through that Vanguard study, Brian.
Brian: Yes, fortunately, this is not a significant number of people. The point is that the percentage has slightly increased a little bit. So, Vanguard puts a study out every year called How America Saves. This is the 2025 version. So, what they do is they go through about 5 million participants in 401(k)s. Remember, Vanguard is one of the larger 401(k) providers in the world. So, they can report on exactly how people are thinking and how they're behaving in their 401(k)s.
So, 5 million people here among those who took withdrawals, right? So, this is a hardship withdrawal. Hardship withdrawal is where you have to make your case that, "Something has gone wrong in my life, and I have no other way to solve it than by tapping into my 401(k)." Now, if you are retired, you have rolled over your IRA, there's no such thing. You can pull out whatever you want, spend it on whatever you want. But this is for people who are still working and have gotten back into a corner where they can't handle some kind of financial issue. That's called a hardship withdrawal.
So, Vanguard says, about 35 to 40% of these hardship withdrawals went toward avoiding foreclosure, evictions, medical bills, things like that. The median was about $2,200. That's not that big of a pile of money. But if you think about that, remember that's a hardship withdrawal, meaning, I got no other choice. This is the only thing I can do to pay this bill, and it's only a $2,200 bill. That's how tight things are for people out there. And we're starting to see, you know, again, an uptick in people needing to do this because there are no other choices.
Now remember, hardship withdrawal doesn't get you out of anything. It's still taxed as ordinary income, assuming we're talking about the pre-tax side of your 401(k). But there's also a 10% penalty if you're under 59 and a half. So, you're still going to get taxed. You're still going to get penalized. The hardship withdrawal reference simply means that you're allowed to pull the money out to deal with the issue. And then on top of those taxes and penalties, you have to layer on the fact that that money that comes out now does not get the chance to continue to grow for the remainder of your working career until you would roll it over. So, Vanguard also points out that while balances have gone up overall, pulling those funds out, of course, weakens your longer-term outcomes in terms of what you can expect after it. So, the way to avoid this, make sure you got an emergency fund in place, and you'll be able to kind of avoid all these different, negative outcomes.
Bob: Yeah, I know just from dealing with... You know, my wife and I, we have three adult sons, young adult sons. And, you know, when you talk to them about building an emergency fund, that's no fun for them. They want to go to concerts and go out to eat with their friends and all that. And when I sit them down and make them...well, I can't make them, but strongly suggest building that emergency fund, that boring cash balance in a savings account to avoid these unexpected $2,200, you know, needs to withdraw from the retirement plan, they don't like it when we talk about it. But I'll just say it, it's just part of being an adult, being responsible. Get that emergency fund in place so you don't jeopardize, you know, the viability of your long-term retirement plan and pay a whole lot of taxes in the process.
All right, let's move on to AI. This is an interesting topic, Brian, and one that's just going to continue to evolve and grow as we move forward. And what we want to talk about is, there's been some studies out there about AI and machine learning being touted as this secret weapon or black box that we can use to beat the returns of the overall stock market. But new analysis from MarketWatch shows that even the smartest computers and AI models are not getting the job done. They are not outperforming the market. What do you see in there from that study from MarketWatch, Brian?
Brian: Yeah, so I think we all knew this was coming sooner or later, and somebody was going to come out with a study saying, "Here's the benefits of it with regard to the modern day alchemy." Remember what alchemy was in the Middle Ages when they would make gold out of nothing. Well, we still try to do that. We just do it now with trying to pick stocks and investments and so forth. So, of course, AI is no different. We've been trying to use that tool as well.
So, alternative or artificial intelligence rather, on occasion where the benefits do show up is in the short-term, occasionally, short-term strategies will come up when AI can show a little bit of outperformance there, but none of it is sustainable. So, there aren't any solutions out there using AI that are going to significantly beat the S&P 500. You know, it's the same as a lot of other strategies. So, that really hasn't changed in terms of, it's just hard to beat the overall market. And that applies to computers as well.
This is the same as we've heard for decades of academic research, basically, just showing the idea that any publicly available data makes consistent extra excess returns nearly impossible. You have to have an edge. You have to have information that nobody else does, which is usually a felony anyway, to really have an advantage in the markets. So, that AI has not shown that it has the ability to do anything better than human beings on a consistent basis with regard to market performance.
Bob: Yeah, this is a good time to throw in too, I mean, this data hasn't changed for the over 30 years I've been in this business. I mean, well over two thirds of professionally managed mutual funds and portfolios underperform their benchmark index net of fees. And that's why it's very important to keep those internal operating expenses low, and don't get too cute by picking strategies, either human-based strategies or alternative investment strategies that shout, "Hey, we can beat the market. We've got this model, this black box method." Brian, I know you've spent a lot of time on ChatGPT. I've been digging into it some, but I know you've built some actual models. Where do you find that alternative, you know, ChatGPT, and tools like that are actually adding value to our lives, currently?
Brian: And so, I don't use it at all for investment as a portfolio design, anything like that. That's not my problem, anyway. I rely on our Chief Investment Officer, Andy Stout and his great team of portfolio managers. That's not my thing. What I spend my time doing is handling more complex financial planning techniques and solutions and challenges, that kind of thing. And I do find ChatGPT enormously helpful in terms of... I call it Google on steroids, right? It's one thing to look up some magazine article or some research article or whatever. But ChatGPT can pull all of that together. And it can answer very specific, very direct questions. And it provides the resources from which it got the answer. So, you can always go back and verify. And it's a huge time saver, in terms of pulling together those kinds of things. That has been very, very helpful.
But it's not perfect, right? So, it's still it's, it's, it's artificial intelligence, which means it kind of acts like a human. Humans do stupid things from time to time. So, AI can struggle with context, it can't catch on to nuanced, you know, language, and occasionally, just make stuff up just like any other human being out there.
Bob: Yeah, why all this matters is, hey, if you're hearing in the media, or some advisor out there is trying to sell you on some secret AI algorithm that's "guaranteed to beat the market," really proceed with caution, focus on what works long-term, which is low cost investing in diversified broad market funds, you know, ETFs. Research over 100 years, shows that buy and hold, and just building and maintaining a responsible portfolio beats market timing, and funds with low fees and turnover tend to outperform. You know, don't rely on AI or any other black box secret weapon that's purported to be out there to get the job done. Here's the Allworth advice, don't let AI drive your portfolio, discipline and diversification will still win.
Coming up next, why securing senior housing now could be just as crucial as planning for long-term care, and how a costly assumption about Medicare might derail a lot of things in your financial plan. 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 on Bob Sponseller along with Brian James. Tonight, we're diving into the double reality check, even for affluent families preparing to age well. and that senior housing seems to be in scarce supply and getting scarcer. And most Americans are completely misinformed about long-term care coverage. So, if you dovetail and combine the whole conundrum of long-term care with, you know, needing to even find a place that you'd want to live in if you need this kind of care, it's a real challenging environment out there, Brian.
Brian: Yeah, it really is. And this is a situation, obviously, that all of us are going to face. And we know we're going to have about 19 million people out there, age 80 and older by 2030. And there just aren't enough senior housing units being built right now to keep up with that demand. There's a decent gap between how many people are going to need it and how many people are going to have it.
Cincinnati, unfortunately, is a little bit ahead of that curve, though. So, we've already got about 90% occupancy in our senior communities. So, we've got a lot of great facilities out there. But people are lining up and grabbing a hold of these things now. These spots are filling up fast, and they're being locked in before construction even finishes. So, if you feel like this is in your future in the next three, four, or five years, then you might want to start your research now and figure out what options are going to be available, what you want, rather than being forced into a situation where, "Now, I have to have something here in the next couple of months, and I'm just going to have to scramble and take whatever I can possibly get."
Bob: Yeah. And here's where the challenge comes in. And I'm seeing this right now with a couple of clients in particular. I could name them. I got their situations in my head right now. And I just had a conversation yesterday with this elderly lady spouse. And she was recently diagnosed with dementia and things are getting challenging, but yet she wants to stay in her home. And they've got people coming in to take care of her, but this... And I've seen this happen more times than I want to count, where things can start to rapidly decline. And, of course, everyone wants to stay in their home, but you got to get out in front of this to at least have an option where to go in case some things come off the rails from a health standpoint and then you're left scrambling.
And I've seen it happen both ways. I've seen where people were able and willing to plan ahead and get a reservation in a place that they'd really feel comfortable saying. And then I've seen the other thing happen where people just don't want to deal with it. And then you deal with a slip and a fall and an injury, sometimes severe injury that results in a hospital stay, and then things go down pretty quickly. So, I guess, Brian, and I'd love to hear your take on this based on your experience with clients. I think you got to get out in front of this and, at least, start to look at where you would be comfortable living if and when that need arises so you and your family members aren't left scrambling around when the time comes.
Brian: Yeah, and that's a very important thing to look at. And remember where the costs are going to come from, right? So, there's studies out there. People have a bit of a misunderstanding about how the cost of these things can be covered. So, Nationwide did a Retirement Institute long-term care survey. And according to that, about 5 in 10 Americans think Medicare is going to cover long-term care. That is not the case, Bob. Long-term care is situations that they refer to as activities of daily living, such as bathing, dressing, getting out of bed, managing medication, and preparing meals, that kind of stuff. If you can't do those, those are the triggers that you need long-term care help.
Unfortunately, Medicare does not cover it. They'll help you for about the first 30 days. After that, you'll be on your own to find a facility and pay for it. Medicare is intended to cover short-term rehab and actual medical treatments, not long-term, custodial care. There is a huge gap as we just determined there. Sixty percent of people think Medicare does cover long-term care. It does not. And that's something you want to be ahead of and plan for before you are too deep into some kind of crisis that requires you to seek that kind of care.
Bob: Yeah, and the cost gets significant and they jump pretty quickly. I mean, if you need the full blown nursing home care, we're talking about between $100,000, $127,000 a year on a national average. Home health care is a little over half of that. So, we're talking about significant money. And I think the other thing to remember, Brian, and I know you know this, but when you start to look at some of these facilities around town where you'd want to stay, not a Medicaid facility, but a nice place where you and your loved one would want to live, they financially underwrite you on the front end. They want to make sure you're going to be able to pay the bill before they allow you to move in.
So, it's another reason to sit down and stress test your overall financial plan to say, "Hey, what if you need this kind of long-term care for an average period of three to four years, let's say, and make sure that contingency is built into your plan." And then it's time to look at, well, how do we cover that cost? Can your portfolio handle it? Do you want to ensure that risk? Do you want to use life insurance that you might already own to backfill the spending that you might make? There's a lot of things that go into this.
And the important point we're trying to make up front here is get out in front of this sooner rather than later, and make sure you've got a plan in place and you've communicated that plan with your loved ones, because you're going to need your loved ones to help you coordinate getting you the care that you need. Here's the Allworth advice, lock in the location, then fund the care. Don't assume someone is just going to take care of all this for you.
Coming up next, some fresh insight on when it's the right time to take Social Security. 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. You have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us.
All right, if you were hoping for a simple one-size-fits-all answer to that question that comes up all the time, when should I take Social Security benefits? We do regret to inform you that this is not that kind of a segment. You've wandered into the land of the nuanced, trade-off discussions, and the ever-popular answer that we as professionals love to give out, and it's the answer, it depends. Brian, we talk about this all the time because it does depend. It's a very nuanced situation and that decision to take Social Security is not a one-size-fits-all answer despite what you might read in different articles and whatnot.
Brian: Yeah, I'm sure you go through this too, but I know my clients are frustrated sometimes with how many times I have to say, "Well it depends on..." There isn't a black and white answer. And that's truly the case with Social Security. It used to be, there used to be loopholes, right? So, I don't know how many people out there still remember this, but back in the day, if you were a married couple for example, you could do something called file and suspend, which means, the higher earning spouse would file, but suspend the benefit, which would enable the lower earning spouse to go ahead and turn on their increased benefit. Well, that loophole closed in 2016, doesn't exist anymore. So, it's now a decision that is based on every individual specific situation.
So, let's talk about the basics here. This is what applies to everybody. So, you can ask for, you can go ahead and apply and start taking your Social Security benefits as early as age 62. That's going to be the lowest amount you'll ever see on a monthly basis. Or you can go as late as age 70. Every year in between there, you'll get an 8% increase in your benefits. You can calculate that based off the statements you can pull off the Social Security website. You'll see how that works. It's 8%. That's written in stone. And then somewhere in the middle is something called your full retirement age, which is somewhere between 66 and 67 depending on the month and year that you were born. Full retirement age comes with some other benefits on the survivorship side and some things like that. But otherwise, the Social Security decision is primarily based on, what do you need and what are your other resources?
So, one of the questions we ask is, well, how much longer are you planning to work? If you enjoy what you're doing and you want to work a little bit longer and you're just not quite ready... Because a lot of these decisions, Bob, these are not financial decisions. My decision to not work anymore, I've only answered part of it when I realized that I've got the financial situation to successfully pull that off. Now, I need to start thinking about the psychological impact of, what will it mean when nobody cares that I've gotten out of bed today or not? So, there's a big hurdle to get over there. But that's where we want to start.
And if you're going to still be working in those early years prior to full retirement age, you will take a hit to your Social Security benefit if you earn a certain amount. In 2025, if you have filed for Social Security, you're at least 62, but not yet full retirement age, then if you earn more than $22,320, you're going to start to get some of your Social Security benefits withheld. $1 for every $2, you earn above that limit. So, if you're really going to be working that much to begin with, I would say, go ahead and let your Social Security increase by that 8%. Don't file for it and just continue to do what you do and wait to file until you actually are sure you want to back off the work situation.
Bob: Yeah. If you do get hit with that $1 haircut for every $2 of benefit that you lose, you do get some of that back, or you do get it back. Social Security recalculates your benefit to account for what was withheld, but they effectively give it back to you over time, which means you got to live long enough to get back that $0.50 on the dollar haircut. So, Brian makes a good point here. If you're going to continue to work, in most situations, it doesn't make sense to take Social Security and take that $0.50 on the dollar haircut.
The other thing people want to factor in and need to factor in is taxes. Up to 85% of Social Security benefits could be taxable, and I'd say, for most of our clients, it is taxable. The income threshold is pretty darn low. So, a lot of people forget that these benefits are taxable. And that's where you got to factor in Social Security with your overall income strategy. Where do you want to take your income each month from your different buckets of money? Social Security, pension if you have a pension, after-tax accounts, Roth IRA accounts, pre-tax IRA accounts. You want to blend an income strategy that keeps you in the lowest possible marginal tax rate, and still get the job done in terms of what you need coming in every month.
Brian: That's right too. And another factor that plays in here with regard to taxes is it's not exactly taxes, but there's something out there called IRMAA, which means the more income you have, the more likely you will be to see an increase in your Medicare premium. That's a little bit outside what we're talking about today with regard to Social Security. But the point is, you make one decision on one side, and that's going to have some unexpected impact on another side. IRMAA is something to learn about.
So, a third big one though getting back to Social Security is, what's the life expectancy? So, the longer we live, of course, the more we will benefit from those benefits we built up in Social Security over our working career. So, you want to take that into account. If your family tree has a lot of people who have, you know, some pretty big, tall trees out there with lots of branches, and you're healthy yourself, well, then delaying Social Security can pay off as long as you can pay the bills in the meantime. The longer you live, the more those larger, delayed benefits add up. If I'm going to wait till 70, that means I got eight years' worth of 8% increases. That's a 64% increase over my age 62 balance. So, that's something to think about as well. It's not all about money, but if you are inclined to get as much as you possibly can over the life expectancy, then that's something to think about.
Remember, if you're married, there's a second life involved here. So, one thing you could do if, you know, you can kind of split the difference here. Maybe the higher earning spouse delays their benefit as long as possible because those 8% increases will exponentially benefit both of you a little more. But if you need something in the short run, there's nothing wrong with the lower earning spouse going ahead and forgoing those 8% increases to go ahead and file now to get some income flowing into the household. That helps as well.
Bob: Yeah, that's another big reason for the older, higher earning spouse to delay. Because if your spouse is younger than you, chances are, they're going to live, obviously, longer than you, and locking in that higher joint benefit is a real, huge income benefit down the road, and you don't want to take that lightly. And that's another reason why it's important to model this out and look at all the pros and cons. We already talked about cash flow needs. You know, a lot of times you can take money. If you're looking at big RMDs coming at age 73 and 75, you know, it's not a sin to go ahead and just spend some of that IRA money even if you decide not to convert it to a Roth. If you just need it and you can access that money at a low tax rate, it's fine.
The other thing to remember here with all this planning is don't forget about Medicare. Medicare eligibility kicks in at 65. Even if you're not claiming Social Security, yet, you still need to proactively enroll in Medicare part A and B, because you will not automatically be enrolled, and you will be penalized if you forget to enroll. So, a lot to think about here. A good reason to sit down with a good advisor, a fiduciary advisor to help you plan through all of this. Here's the Allworth advice, when should you take Social Security? The answer is part of a broader, personalized, retirement income plan that works in conjunction with your investments, taxes, and lifestyle goals.
Coming up next, we've got Brian's bottom line, where he's gonna talk about the pros and cons of owning more than one home. 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. And Brian's got his bottom line advice today on the pros and cons of owning more than one home. I'm interested in your thoughts on this one Brian.
Brian: Yeah. So, the reason this came to mind Bob is because I've had several meetings with clients over the past couple weeks, where there's a second piece of real estate in the mix for whatever reason. A lot of times it's for what we normally think of, which, you know, a nice vacation home somewhere. Sometimes it's, "I have a home because I have loved ones, family members I want to support, and they can't do it on their own, so I'm going to take that responsibility on." And also, just some situations I know of with some friends of mine who own significant properties in the area that are both a family vacation home, as well as an investment property. So, I wanted to talk a little bit about the kind of stuff we don't think about.
I think we all fall in love with the idea of, "There's a place to go, and it's already got my underwear and my t-shirts," and all that kind of stuff, "And I can just roll down there and just show up and get a nice Allegiant plane ticket and show up and everything's all ready to roll." Well, what are we not thinking about? Well, remember you own two houses, so that's double the overhead. There might be two mortgage payments in the mix. Don't forget about utilities. You can't shut everything off on a house that's down in a humid area, of course. You've got insurance property taxes. And also, these fluctuate drastically based on where this location is.
If you have a second home for vacation purposes, I'm going to go ahead and guess, that's in a nice, resorty type area. Maybe it's near the beach, something like that. Well, that's where the hurricanes happen, and that's where floods and things happen. And there have been plenty of stories recently in the headlines about that. I know of some Allworth employees who had to cancel vacation so that they could go down to that home and make sure that the tarp was still on the roof from the recent storm that had occurred. So, things that, you know, think about there as well.
Remember, you've got taxes as well. If you're going to have rental property, for example, you've got to deal with the cash flow on that. Rental income is going to trigger taxes and, of course, that's not necessarily a bad thing. Rental properties tend to not be the greatest investments if you're just going to own one. If you are somebody who has figured out how the game works and you've figured out how to kind of expand that across several properties and you have property managers and fix-it guys and people who can help you out at a reasonable cost, then that can be useful.
But I don't know about you, Bob, but it's been a very long time since I heard somebody talk about, "Yeah, this is great. We have this beach property that we're going to use for vacations for the family. And nothing ever goes wrong. And it makes me a ton of money when I'm not using it because I rent it out." It seems like the best case scenario, those tend to be break evens. And that's not a bad thing itself. I mean, it's not all about money. But just go into this with a very open mind. Something else that will happen with those second properties, or for clients kind of complain about is, "Well, maybe we don't want to go down to that one beach that we've been to a bazillion times over and over and over again, but we feel like we have to because we feel like we're wasting money if we own a home down there that sits empty while we go off somewhere else that we want to see." So, have you had an experience with that?
Bob: Well, I had an experience owning a condo with CSU.
Brian: Yeah, that was a loaded question. It totally led you to that one.
Bob: I went through all the stuff that you just talked about. It was wonderful. And every situation it's different. Back to that, it depends scenario. But I just found over a six-year holding period that it was impossible to cash flow this place. I knew that going in. But I just determined after a six-year period of fixing it up, paying the taxes, paying the management fees, and all of that, my money was better invested elsewhere. And if I wanted to take a vacation to Florida, I'll just write the darn check, rent a place for a week, get in and out and not have to worry about it, and have my money grow elsewhere where it's more liquid and earns frankly a higher rate of return. So, good stuff, Brian.
Thanks for listening, everyone. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC THE Talk Station.
All right, Brian, let's get into it. Record highs again. It feels like every week we're hearing about new record highs in the stock market. And that leaves investors asking themselves often, "Hey, is this the time to lean in, pile in, buy more, or is it time to get out before the next inevitable drop in the market?" And there's a lot of psychology behind these decisions and emotion, and a lot of that depends on what headlines you're looking at. It can leave investors feeling a multitude of different ways. Let's get into some of that, Brian.
Brian: Yeah, it's been a fun run here. If you're someone who's been paying attention to how things have just kept sneaking up a little bit by little bit by little bit these last several weeks. But the pessimist in us always says, "You know what? This is going to peter out, it's going to fall apart, and the world is going to end soon here." But, yes, it's kind of like watching somebody climb up a mountain. When you're halfway up, you just cheer them on, you say, "Go, go, go." But when they just get near the peak, you start to get a little more conservative and say, "You're so close to the end. Let's go ahead." You know, be a little more conservative here and kind of pull in the risk a little bit.
So, there's a whole field in our industry known as behavioral finance that fixates on this, and basically, how people react to financial decisions and particularly loss aversion, meaning that we tend to feel the pain of losses a lot more strongly than we do the pleasure of when we have gained. Losing 1,000 bucks feels worse than gaining $1,000 feels good, often almost by twice as much, Bob, because we just feel the pain of loss more than the benefit of a life-changing amount of money sometimes. So, it's just something to pay attention to, and this is the period of time in the market cycle when we start to feel it most.
Bob: Yeah, and I think that's psychology. I don't know about what you run into with your clients, but I've found over the years, these emotions change depending on where you are, what life stage you're in. For example, if you're done working and you're retiring, these 10% to 12% market corrections feel a whole lot different when you're no longer bringing that paycheck in than somebody in their 30s or 40s that can say, "Hey, the market always comes back, it always will, I can ride these out." On the other spectrum, for younger folks, greed can kick in, where you're getting too speculative and maybe buying things and over-allocating things that you shouldn't be in in the first place, or holding on to winning investments maybe longer than you should because, hey, it's gone up, I expect it's going to go up, and you tend to get over-allocated and over-concentrated in maybe one position. So, the psychology can differ tremendously, I find, depending on what stage of life people are in.
Brian: Yeah. And also, how much attention we're paying. So, younger people who are maybe busy with their careers and families and so forth, they kind of tend to know in the background a little bit that things are going okay, but they don't really have time to pay much attention to it. That's not a bad thing. I think some of those exhausting distractions are a good thing for our finances because they keep us from making crazy decisions that we might make if we had more time to think about it. But, yeah, on the other hand, for those who do have time are paying a lot of attention. It can actually be stressful, right, Bob? Because, all of a sudden, I've got more money than I've ever had, but I'm just paranoid that something's going to go wrong.
But let's look at the reality here. So, the idea that we hit a record high, that's not crazy. It happens all the time. Look at a chart of the S&P 500, the American stock market, look at it over the last 80 years of its entire existence, it goes up, not down. So, it's almost always at a record high. But let's put some numbers to that. So, just since 1950, the S&P 500 has hit a record peak over 1,500 times. That's if you do the average on that, work the math out, that's 21 times a year on average, or about 8% of trading days. So, on one hand, 8% doesn't sound like all that much, but the thing you have to remember is that, normally, the market does a bunch of nothing. It goes up a little bit, goes down a little bit. It's the few times, the few days and weeks out of the year where it makes its move that's, basically, going to define that year. But that's 8% of trading days where the market is actually sitting at a new high. So, it's not nearly as rare as it might seem. It feels like that's an all-time high, a world record, or whatever. Those don't happen very often. Well, happens, basically, every year in the S&P 500.
Bob: Yeah, I think some of those numbers are worth repeating. On average, again, since 1950, so we're talking about 75 years, the market, on average, hits 21 new highs per year. I think people are smart enough to know, Brian, in a healthy economy, we should be hitting record highs on a regular basis. It means the economy is growing like it should. Companies are worth more. I think people inherently know record highs should be the case, but I think sometimes buried deep in our psyche is that whole buy low, sell high mentality. And when we hear all time high, we think, "Hey, something bad is going to happen and we need to sell." And I think a good reminder here is new record highs doesn't necessarily equate to be the market being overvalued or overpriced.
I mean, studies show that returns following a record high are roughly the same as returns from any other time of the year, typically 10% per year annualized over the next three to five years. So, a record high is no reason to panic, it's a reason to look at the fundamentals of the holdings that you have and reevaluate your financial plan and just make sure your portfolio is stress tested and can withstand the inevitable pullback that will come. It always does. But you want to stay in the game here to be able to not miss out on the next three to five to seven years' worth of record highs.
Brian: Yeah. And I think it's an important point to make to say that whatever the market is doing right now should never impact your financial plan. You should never, ever, ever make decisions, major decisions that are lifelong decisions based off of what's happening today with the market, because it can go the opposite way just as easily. You need to be able to be flexible with your decision making.
But I'll even throw out there this year, Bob. So, I don't even know if we did this pre-research here for this particular point, but I just looked it up. We've actually had six of these so far in 2025. February 18th was an all-time high. And then we pulled back and we all panicked briefly about tariffs, and the market hit a bottom in April. But since then, we had three in June, and then several in July as well, again, hitting all-time highs. And technically, we're behind the average. We just said, 21 times a year is the average number of record peaks during a given year. And we're only about a third of the way there. So, that in itself does not indicate what the market's going to do in the future. But again, we've been on a good path so far. And I don't think there's anything necessarily set to derail that other than things we don't know.
Bob: Yeah, it's hard to get 21 record highs through seven months of the year when we clawed back from that tariff-caused major pullback in April. But anyway, hopefully, we're making the point here. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, we talked about some of the psychology around record highs and what not to do. Let's talk about what we should be doing in periods like this.
Brian: Yeah. Should we react to this? So, if we're talking about being at a record high, what should we do? So, first of all, as Bob already mentioned, understand what your plan was. This may or may not impact and it may not require you to do anything. But if it does feel like you do need to make some moves, there are some things you can do. When markets are this high, direct indexing can really kind of shine, meaning, if you're a fan of index funds, well, there are ways now where you can own the same types of holdings that track an index, but you own the individual securities, not just a mutual fund that truly lets you customize your exposure. And as tax losses arise, you can actually do some tax planning with those types of holdings differently than you can with a simple index fund.
I've got a new client we brought on that came on with a very significant pile of money in an index fund. And we're slowly going to work our way out of that to be able to take advantage of that for his coming 15 years of remaining work at a high-income bracket. No, but on the other hand, you might feel like this feels a little bit like little brittle here. Maybe even things could fall apart. So, if you if you truly are worried and you're waking up at night and you just can't get the thought out of your head that things are going to come down, that's where some tools such as Buffer ETFs or structured notes might play a role. They're not for everyone and they very much do leave money on the table when the markets continue to go up. However, their purpose is to put in a floor to kind of stabilize things to, basically, lock in the maximum amounts you could possibly lose in a given situation. That's very oversimplified. But again, if you find yourself losing sleep and just can't really kind of get over the idea of ignoring it, letting it roll, those are some tools that might help as well.
Bob: And if you're somebody that is sitting out there on a very large, concentrated position in any one stock, or if you just want protection from an overall market exposure, a responsible collar strategy can work here. That's where you buy some put protection, meaning you're buying downside protection, and you at the same time, sell a covered call on your large position. So, you are limiting your upside, but that premium you collect is going to pay for your insurance on the downside. And that's really what Buffer ETFs do, you know, with respect to protecting a large overall portfolio. But there's a lot of things you can do there again, depending on your financial situation and your financial plan.
And let's not forget about just good old rebalancing. You know, if you're somebody that wants to be 70% in stocks, 30% in bonds, and that 70% just morphs into 78%, you know, in an upmarket, well, do the responsible thing, trim off some of the gains, keep your overall risk tolerance and portfolio in balance. And a lot of times people don't want to do that when the market's up. But if we encourage them to do that, boy, are they thankful that they did after we experienced the next inevitable pullback that will come at some point in time?
Brian: Yeah, that's a very important point. Whenever the market's at a high, that means things have been going well, we like that. However, that almost always means that something in the pack has been running faster and farther than something else. That means your portfolio is probably out of whack just by its very nature. So, you want to take a look at that and see what sectors, what areas of the market that have gotten a little bigger than you intended, and take that chance to rebalance those down.
Bob: Here's the Allworth advice. Markets hitting record highs shouldn't change your plan. They should remind you to make sure you have one and that it's updated. Coming up next, can artificial intelligence help you beat the stock market? We're going to show you what the data suggests 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. If you can't listen to "Simply Money" live every night, subscribe to 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 going to explore the key factors that influence the right time to claim Social Security benefits. And I know that's a topic that is of interest to a lot of folks out there. All right, Brian, new data from Vanguard shows that a record number of Americans dipped into their 401(k) plans for emergency purposes during 2024. Thankfully, that record number though, is only 5% of all participants. Walk us through that Vanguard study, Brian.
Brian: Yes, fortunately, this is not a significant number of people. The point is that the percentage has slightly increased a little bit. So, Vanguard puts a study out every year called How America Saves. This is the 2025 version. So, what they do is they go through about 5 million participants in 401(k)s. Remember, Vanguard is one of the larger 401(k) providers in the world. So, they can report on exactly how people are thinking and how they're behaving in their 401(k)s.
So, 5 million people here among those who took withdrawals, right? So, this is a hardship withdrawal. Hardship withdrawal is where you have to make your case that, "Something has gone wrong in my life, and I have no other way to solve it than by tapping into my 401(k)." Now, if you are retired, you have rolled over your IRA, there's no such thing. You can pull out whatever you want, spend it on whatever you want. But this is for people who are still working and have gotten back into a corner where they can't handle some kind of financial issue. That's called a hardship withdrawal.
So, Vanguard says, about 35 to 40% of these hardship withdrawals went toward avoiding foreclosure, evictions, medical bills, things like that. The median was about $2,200. That's not that big of a pile of money. But if you think about that, remember that's a hardship withdrawal, meaning, I got no other choice. This is the only thing I can do to pay this bill, and it's only a $2,200 bill. That's how tight things are for people out there. And we're starting to see, you know, again, an uptick in people needing to do this because there are no other choices.
Now remember, hardship withdrawal doesn't get you out of anything. It's still taxed as ordinary income, assuming we're talking about the pre-tax side of your 401(k). But there's also a 10% penalty if you're under 59 and a half. So, you're still going to get taxed. You're still going to get penalized. The hardship withdrawal reference simply means that you're allowed to pull the money out to deal with the issue. And then on top of those taxes and penalties, you have to layer on the fact that that money that comes out now does not get the chance to continue to grow for the remainder of your working career until you would roll it over. So, Vanguard also points out that while balances have gone up overall, pulling those funds out, of course, weakens your longer-term outcomes in terms of what you can expect after it. So, the way to avoid this, make sure you got an emergency fund in place, and you'll be able to kind of avoid all these different, negative outcomes.
Bob: Yeah, I know just from dealing with... You know, my wife and I, we have three adult sons, young adult sons. And, you know, when you talk to them about building an emergency fund, that's no fun for them. They want to go to concerts and go out to eat with their friends and all that. And when I sit them down and make them...well, I can't make them, but strongly suggest building that emergency fund, that boring cash balance in a savings account to avoid these unexpected $2,200, you know, needs to withdraw from the retirement plan, they don't like it when we talk about it. But I'll just say it, it's just part of being an adult, being responsible. Get that emergency fund in place so you don't jeopardize, you know, the viability of your long-term retirement plan and pay a whole lot of taxes in the process.
All right, let's move on to AI. This is an interesting topic, Brian, and one that's just going to continue to evolve and grow as we move forward. And what we want to talk about is, there's been some studies out there about AI and machine learning being touted as this secret weapon or black box that we can use to beat the returns of the overall stock market. But new analysis from MarketWatch shows that even the smartest computers and AI models are not getting the job done. They are not outperforming the market. What do you see in there from that study from MarketWatch, Brian?
Brian: Yeah, so I think we all knew this was coming sooner or later, and somebody was going to come out with a study saying, "Here's the benefits of it with regard to the modern day alchemy." Remember what alchemy was in the Middle Ages when they would make gold out of nothing. Well, we still try to do that. We just do it now with trying to pick stocks and investments and so forth. So, of course, AI is no different. We've been trying to use that tool as well.
So, alternative or artificial intelligence rather, on occasion where the benefits do show up is in the short-term, occasionally, short-term strategies will come up when AI can show a little bit of outperformance there, but none of it is sustainable. So, there aren't any solutions out there using AI that are going to significantly beat the S&P 500. You know, it's the same as a lot of other strategies. So, that really hasn't changed in terms of, it's just hard to beat the overall market. And that applies to computers as well.
This is the same as we've heard for decades of academic research, basically, just showing the idea that any publicly available data makes consistent extra excess returns nearly impossible. You have to have an edge. You have to have information that nobody else does, which is usually a felony anyway, to really have an advantage in the markets. So, that AI has not shown that it has the ability to do anything better than human beings on a consistent basis with regard to market performance.
Bob: Yeah, this is a good time to throw in too, I mean, this data hasn't changed for the over 30 years I've been in this business. I mean, well over two thirds of professionally managed mutual funds and portfolios underperform their benchmark index net of fees. And that's why it's very important to keep those internal operating expenses low, and don't get too cute by picking strategies, either human-based strategies or alternative investment strategies that shout, "Hey, we can beat the market. We've got this model, this black box method." Brian, I know you've spent a lot of time on ChatGPT. I've been digging into it some, but I know you've built some actual models. Where do you find that alternative, you know, ChatGPT, and tools like that are actually adding value to our lives, currently?
Brian: And so, I don't use it at all for investment as a portfolio design, anything like that. That's not my problem, anyway. I rely on our Chief Investment Officer, Andy Stout and his great team of portfolio managers. That's not my thing. What I spend my time doing is handling more complex financial planning techniques and solutions and challenges, that kind of thing. And I do find ChatGPT enormously helpful in terms of... I call it Google on steroids, right? It's one thing to look up some magazine article or some research article or whatever. But ChatGPT can pull all of that together. And it can answer very specific, very direct questions. And it provides the resources from which it got the answer. So, you can always go back and verify. And it's a huge time saver, in terms of pulling together those kinds of things. That has been very, very helpful.
But it's not perfect, right? So, it's still it's, it's, it's artificial intelligence, which means it kind of acts like a human. Humans do stupid things from time to time. So, AI can struggle with context, it can't catch on to nuanced, you know, language, and occasionally, just make stuff up just like any other human being out there.
Bob: Yeah, why all this matters is, hey, if you're hearing in the media, or some advisor out there is trying to sell you on some secret AI algorithm that's "guaranteed to beat the market," really proceed with caution, focus on what works long-term, which is low cost investing in diversified broad market funds, you know, ETFs. Research over 100 years, shows that buy and hold, and just building and maintaining a responsible portfolio beats market timing, and funds with low fees and turnover tend to outperform. You know, don't rely on AI or any other black box secret weapon that's purported to be out there to get the job done. Here's the Allworth advice, don't let AI drive your portfolio, discipline and diversification will still win.
Coming up next, why securing senior housing now could be just as crucial as planning for long-term care, and how a costly assumption about Medicare might derail a lot of things in your financial plan. 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 on Bob Sponseller along with Brian James. Tonight, we're diving into the double reality check, even for affluent families preparing to age well. and that senior housing seems to be in scarce supply and getting scarcer. And most Americans are completely misinformed about long-term care coverage. So, if you dovetail and combine the whole conundrum of long-term care with, you know, needing to even find a place that you'd want to live in if you need this kind of care, it's a real challenging environment out there, Brian.
Brian: Yeah, it really is. And this is a situation, obviously, that all of us are going to face. And we know we're going to have about 19 million people out there, age 80 and older by 2030. And there just aren't enough senior housing units being built right now to keep up with that demand. There's a decent gap between how many people are going to need it and how many people are going to have it.
Cincinnati, unfortunately, is a little bit ahead of that curve, though. So, we've already got about 90% occupancy in our senior communities. So, we've got a lot of great facilities out there. But people are lining up and grabbing a hold of these things now. These spots are filling up fast, and they're being locked in before construction even finishes. So, if you feel like this is in your future in the next three, four, or five years, then you might want to start your research now and figure out what options are going to be available, what you want, rather than being forced into a situation where, "Now, I have to have something here in the next couple of months, and I'm just going to have to scramble and take whatever I can possibly get."
Bob: Yeah. And here's where the challenge comes in. And I'm seeing this right now with a couple of clients in particular. I could name them. I got their situations in my head right now. And I just had a conversation yesterday with this elderly lady spouse. And she was recently diagnosed with dementia and things are getting challenging, but yet she wants to stay in her home. And they've got people coming in to take care of her, but this... And I've seen this happen more times than I want to count, where things can start to rapidly decline. And, of course, everyone wants to stay in their home, but you got to get out in front of this to at least have an option where to go in case some things come off the rails from a health standpoint and then you're left scrambling.
And I've seen it happen both ways. I've seen where people were able and willing to plan ahead and get a reservation in a place that they'd really feel comfortable saying. And then I've seen the other thing happen where people just don't want to deal with it. And then you deal with a slip and a fall and an injury, sometimes severe injury that results in a hospital stay, and then things go down pretty quickly. So, I guess, Brian, and I'd love to hear your take on this based on your experience with clients. I think you got to get out in front of this and, at least, start to look at where you would be comfortable living if and when that need arises so you and your family members aren't left scrambling around when the time comes.
Brian: Yeah, and that's a very important thing to look at. And remember where the costs are going to come from, right? So, there's studies out there. People have a bit of a misunderstanding about how the cost of these things can be covered. So, Nationwide did a Retirement Institute long-term care survey. And according to that, about 5 in 10 Americans think Medicare is going to cover long-term care. That is not the case, Bob. Long-term care is situations that they refer to as activities of daily living, such as bathing, dressing, getting out of bed, managing medication, and preparing meals, that kind of stuff. If you can't do those, those are the triggers that you need long-term care help.
Unfortunately, Medicare does not cover it. They'll help you for about the first 30 days. After that, you'll be on your own to find a facility and pay for it. Medicare is intended to cover short-term rehab and actual medical treatments, not long-term, custodial care. There is a huge gap as we just determined there. Sixty percent of people think Medicare does cover long-term care. It does not. And that's something you want to be ahead of and plan for before you are too deep into some kind of crisis that requires you to seek that kind of care.
Bob: Yeah, and the cost gets significant and they jump pretty quickly. I mean, if you need the full blown nursing home care, we're talking about between $100,000, $127,000 a year on a national average. Home health care is a little over half of that. So, we're talking about significant money. And I think the other thing to remember, Brian, and I know you know this, but when you start to look at some of these facilities around town where you'd want to stay, not a Medicaid facility, but a nice place where you and your loved one would want to live, they financially underwrite you on the front end. They want to make sure you're going to be able to pay the bill before they allow you to move in.
So, it's another reason to sit down and stress test your overall financial plan to say, "Hey, what if you need this kind of long-term care for an average period of three to four years, let's say, and make sure that contingency is built into your plan." And then it's time to look at, well, how do we cover that cost? Can your portfolio handle it? Do you want to ensure that risk? Do you want to use life insurance that you might already own to backfill the spending that you might make? There's a lot of things that go into this.
And the important point we're trying to make up front here is get out in front of this sooner rather than later, and make sure you've got a plan in place and you've communicated that plan with your loved ones, because you're going to need your loved ones to help you coordinate getting you the care that you need. Here's the Allworth advice, lock in the location, then fund the care. Don't assume someone is just going to take care of all this for you.
Coming up next, some fresh insight on when it's the right time to take Social Security. 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. You have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question and it will come straight to us.
All right, if you were hoping for a simple one-size-fits-all answer to that question that comes up all the time, when should I take Social Security benefits? We do regret to inform you that this is not that kind of a segment. You've wandered into the land of the nuanced, trade-off discussions, and the ever-popular answer that we as professionals love to give out, and it's the answer, it depends. Brian, we talk about this all the time because it does depend. It's a very nuanced situation and that decision to take Social Security is not a one-size-fits-all answer despite what you might read in different articles and whatnot.
Brian: Yeah, I'm sure you go through this too, but I know my clients are frustrated sometimes with how many times I have to say, "Well it depends on..." There isn't a black and white answer. And that's truly the case with Social Security. It used to be, there used to be loopholes, right? So, I don't know how many people out there still remember this, but back in the day, if you were a married couple for example, you could do something called file and suspend, which means, the higher earning spouse would file, but suspend the benefit, which would enable the lower earning spouse to go ahead and turn on their increased benefit. Well, that loophole closed in 2016, doesn't exist anymore. So, it's now a decision that is based on every individual specific situation.
So, let's talk about the basics here. This is what applies to everybody. So, you can ask for, you can go ahead and apply and start taking your Social Security benefits as early as age 62. That's going to be the lowest amount you'll ever see on a monthly basis. Or you can go as late as age 70. Every year in between there, you'll get an 8% increase in your benefits. You can calculate that based off the statements you can pull off the Social Security website. You'll see how that works. It's 8%. That's written in stone. And then somewhere in the middle is something called your full retirement age, which is somewhere between 66 and 67 depending on the month and year that you were born. Full retirement age comes with some other benefits on the survivorship side and some things like that. But otherwise, the Social Security decision is primarily based on, what do you need and what are your other resources?
So, one of the questions we ask is, well, how much longer are you planning to work? If you enjoy what you're doing and you want to work a little bit longer and you're just not quite ready... Because a lot of these decisions, Bob, these are not financial decisions. My decision to not work anymore, I've only answered part of it when I realized that I've got the financial situation to successfully pull that off. Now, I need to start thinking about the psychological impact of, what will it mean when nobody cares that I've gotten out of bed today or not? So, there's a big hurdle to get over there. But that's where we want to start.
And if you're going to still be working in those early years prior to full retirement age, you will take a hit to your Social Security benefit if you earn a certain amount. In 2025, if you have filed for Social Security, you're at least 62, but not yet full retirement age, then if you earn more than $22,320, you're going to start to get some of your Social Security benefits withheld. $1 for every $2, you earn above that limit. So, if you're really going to be working that much to begin with, I would say, go ahead and let your Social Security increase by that 8%. Don't file for it and just continue to do what you do and wait to file until you actually are sure you want to back off the work situation.
Bob: Yeah. If you do get hit with that $1 haircut for every $2 of benefit that you lose, you do get some of that back, or you do get it back. Social Security recalculates your benefit to account for what was withheld, but they effectively give it back to you over time, which means you got to live long enough to get back that $0.50 on the dollar haircut. So, Brian makes a good point here. If you're going to continue to work, in most situations, it doesn't make sense to take Social Security and take that $0.50 on the dollar haircut.
The other thing people want to factor in and need to factor in is taxes. Up to 85% of Social Security benefits could be taxable, and I'd say, for most of our clients, it is taxable. The income threshold is pretty darn low. So, a lot of people forget that these benefits are taxable. And that's where you got to factor in Social Security with your overall income strategy. Where do you want to take your income each month from your different buckets of money? Social Security, pension if you have a pension, after-tax accounts, Roth IRA accounts, pre-tax IRA accounts. You want to blend an income strategy that keeps you in the lowest possible marginal tax rate, and still get the job done in terms of what you need coming in every month.
Brian: That's right too. And another factor that plays in here with regard to taxes is it's not exactly taxes, but there's something out there called IRMAA, which means the more income you have, the more likely you will be to see an increase in your Medicare premium. That's a little bit outside what we're talking about today with regard to Social Security. But the point is, you make one decision on one side, and that's going to have some unexpected impact on another side. IRMAA is something to learn about.
So, a third big one though getting back to Social Security is, what's the life expectancy? So, the longer we live, of course, the more we will benefit from those benefits we built up in Social Security over our working career. So, you want to take that into account. If your family tree has a lot of people who have, you know, some pretty big, tall trees out there with lots of branches, and you're healthy yourself, well, then delaying Social Security can pay off as long as you can pay the bills in the meantime. The longer you live, the more those larger, delayed benefits add up. If I'm going to wait till 70, that means I got eight years' worth of 8% increases. That's a 64% increase over my age 62 balance. So, that's something to think about as well. It's not all about money, but if you are inclined to get as much as you possibly can over the life expectancy, then that's something to think about.
Remember, if you're married, there's a second life involved here. So, one thing you could do if, you know, you can kind of split the difference here. Maybe the higher earning spouse delays their benefit as long as possible because those 8% increases will exponentially benefit both of you a little more. But if you need something in the short run, there's nothing wrong with the lower earning spouse going ahead and forgoing those 8% increases to go ahead and file now to get some income flowing into the household. That helps as well.
Bob: Yeah, that's another big reason for the older, higher earning spouse to delay. Because if your spouse is younger than you, chances are, they're going to live, obviously, longer than you, and locking in that higher joint benefit is a real, huge income benefit down the road, and you don't want to take that lightly. And that's another reason why it's important to model this out and look at all the pros and cons. We already talked about cash flow needs. You know, a lot of times you can take money. If you're looking at big RMDs coming at age 73 and 75, you know, it's not a sin to go ahead and just spend some of that IRA money even if you decide not to convert it to a Roth. If you just need it and you can access that money at a low tax rate, it's fine.
The other thing to remember here with all this planning is don't forget about Medicare. Medicare eligibility kicks in at 65. Even if you're not claiming Social Security, yet, you still need to proactively enroll in Medicare part A and B, because you will not automatically be enrolled, and you will be penalized if you forget to enroll. So, a lot to think about here. A good reason to sit down with a good advisor, a fiduciary advisor to help you plan through all of this. Here's the Allworth advice, when should you take Social Security? The answer is part of a broader, personalized, retirement income plan that works in conjunction with your investments, taxes, and lifestyle goals.
Coming up next, we've got Brian's bottom line, where he's gonna talk about the pros and cons of owning more than one home. 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. And Brian's got his bottom line advice today on the pros and cons of owning more than one home. I'm interested in your thoughts on this one Brian.
Brian: Yeah. So, the reason this came to mind Bob is because I've had several meetings with clients over the past couple weeks, where there's a second piece of real estate in the mix for whatever reason. A lot of times it's for what we normally think of, which, you know, a nice vacation home somewhere. Sometimes it's, "I have a home because I have loved ones, family members I want to support, and they can't do it on their own, so I'm going to take that responsibility on." And also, just some situations I know of with some friends of mine who own significant properties in the area that are both a family vacation home, as well as an investment property. So, I wanted to talk a little bit about the kind of stuff we don't think about.
I think we all fall in love with the idea of, "There's a place to go, and it's already got my underwear and my t-shirts," and all that kind of stuff, "And I can just roll down there and just show up and get a nice Allegiant plane ticket and show up and everything's all ready to roll." Well, what are we not thinking about? Well, remember you own two houses, so that's double the overhead. There might be two mortgage payments in the mix. Don't forget about utilities. You can't shut everything off on a house that's down in a humid area, of course. You've got insurance property taxes. And also, these fluctuate drastically based on where this location is.
If you have a second home for vacation purposes, I'm going to go ahead and guess, that's in a nice, resorty type area. Maybe it's near the beach, something like that. Well, that's where the hurricanes happen, and that's where floods and things happen. And there have been plenty of stories recently in the headlines about that. I know of some Allworth employees who had to cancel vacation so that they could go down to that home and make sure that the tarp was still on the roof from the recent storm that had occurred. So, things that, you know, think about there as well.
Remember, you've got taxes as well. If you're going to have rental property, for example, you've got to deal with the cash flow on that. Rental income is going to trigger taxes and, of course, that's not necessarily a bad thing. Rental properties tend to not be the greatest investments if you're just going to own one. If you are somebody who has figured out how the game works and you've figured out how to kind of expand that across several properties and you have property managers and fix-it guys and people who can help you out at a reasonable cost, then that can be useful.
But I don't know about you, Bob, but it's been a very long time since I heard somebody talk about, "Yeah, this is great. We have this beach property that we're going to use for vacations for the family. And nothing ever goes wrong. And it makes me a ton of money when I'm not using it because I rent it out." It seems like the best case scenario, those tend to be break evens. And that's not a bad thing itself. I mean, it's not all about money. But just go into this with a very open mind. Something else that will happen with those second properties, or for clients kind of complain about is, "Well, maybe we don't want to go down to that one beach that we've been to a bazillion times over and over and over again, but we feel like we have to because we feel like we're wasting money if we own a home down there that sits empty while we go off somewhere else that we want to see." So, have you had an experience with that?
Bob: Well, I had an experience owning a condo with CSU.
Brian: Yeah, that was a loaded question. It totally led you to that one.
Bob: I went through all the stuff that you just talked about. It was wonderful. And every situation it's different. Back to that, it depends scenario. But I just found over a six-year holding period that it was impossible to cash flow this place. I knew that going in. But I just determined after a six-year period of fixing it up, paying the taxes, paying the management fees, and all of that, my money was better invested elsewhere. And if I wanted to take a vacation to Florida, I'll just write the darn check, rent a place for a week, get in and out and not have to worry about it, and have my money grow elsewhere where it's more liquid and earns frankly a higher rate of return. So, good stuff, Brian.
Thanks for listening, everyone. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC THE Talk Station.