Amy: Tonight, as we talk about interest rate cuts on the horizon, what does that mean for you and your money? Plus, the massive money mistake many of you are making with your 401(k), and we are playing some retirement fact or fiction. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Andy Shafer, who's in for Steve Hruby tonight.

This has been quite an interesting path that we have been on coming out of this pandemic, Andy, and I think that's kind of where we need to start with things coming out of the pandemic. The Fed funds rate was at about zero, and there's really nowhere you can go down from there. And that's the main tool that the Federal Reserve, our nation's Central Bank, has to try to control inflation. So when we saw inflation spike, all they could do was raise interest rates to try to keep inflation under control. It's so interesting. You and I are about the same age. Never in my life have I really thought about, worried about seeing the impact of inflation on my daily life until the past couple of years. And then, man, it hit hard.

Andy: Well, think about, you know, 2008, you know, since the Great Recession, interest rates have been very, very low. And so for a lot of our adulthood, Amy, we really haven't had to deal with a lot of increased interest rates. You know, I'm 48 years old. You know, when you start to look at buying houses lately and buying cars, and all of a sudden the cost of borrowing is high, it can be very daunting.

And I remember getting real comfortable with interest rates being very low. And it was just, you know, what we were used to. And then all of a sudden the pandemic hits. And, you know, Fed Chairman Powell came out and said, "Well, you know, prices are starting to go up, but it's transitory." And he continued to use that word. And what that meant is that it was...he thought it was gonna be temporary, and so did the Federal Reserve. And we all obviously know that's not what occurred. And all of a sudden the Fed started panicking and said, "Okay, we really need to get out in front of this." And that's when we started cutting rates 11 times since. And I also wanna bring up the point that, you know, during...

Amy: Raising rates, right? We've been raising rates.

Andy: Oh, I'm sorry. Yeah, we've been raising rates during that period of time. And because of those 11 instances, you know, we're looking at sometimes 0.5% or 0.75% increase on those increases. And, you know, they weren't just 0.25% increases. So it's been a very accelerated move with the Fed to get inflation under control. And that's really been the purpose.

And finally, we are starting to see some [inaudible 00:02:32.170]. And, you know, as you said, Amy, we've been talking about this for so long, and it finally feels like, yeah, maybe we're starting to get to the point where maybe we can start to cut rates again and stimulate the economy to some degree.

Amy: Yeah. What a long, strange trip it's been, right? We've had 11 interest rate hikes, and the last one was almost to the day, one year ago. And since then, the Fed has hit pause and said, "Okay, we think this is maybe as high as we need to get. Let's let the dominoes fall from here when it comes to the economy, and then we will see kind of where things sort out from there." And now we have a meeting this month and we have a meeting later this month. Nothing really expected, right? We talked to our Chief Investment Officer Andy Stout. He's like, "Listen, there's, like, a 2.5% chance of a cut this month, but next month there is a huge chance that we will finally start this cycle of, or pivoting, I guess, from the cycle of raising rates to then decreasing them to start making these cuts."

Andy: Yeah. Sometimes it is tough to get your mind around all of this, what's going on.

Amy: It's a lot.

Andy: The reason that the Fed paused to some degree is that when the Fed makes a move, whether it's an interest rate increase or an interest rate cut, it takes about eight months or so for those to actually weave their way through the economy. So that's why they wanted to wait and see, well, you know, the last cut that we made, we think that it might have a chance to do some good. We don't want to continue to raise rates even more because that might push us into recession at that time.

So, you know, come September when we have the next Fed decision, we're looking at probably more like a 98% chance of that happening because we're starting to see inflation get under control. Now we'll see what it looks like. We have PCE coming out on Friday. That's going to tell us a lot about how the Fed feels about the decisions that they're gonna make. So we'll see how it plays out, but right now it looks like September is gonna be the next chance.

Amy: You know, Andy, you talked about the lag time between the Fed raising interest rates and then the impact that we all feel here on Main Street, right? And you played college football. I think a great way to put that, and this is really kind of delicate dance that the Federal Reserve has had, it's like being the quarterback and going out on the field and calling a play when you have no idea what the results of the last 10 plays were. You literally don't know where you are. You don't know what's happened to this point. You don't know how many downs you have left. Like, you are out there throwing that ball or passing that ball blindly not knowing the impact of the last 10 plays, right? I mean, that's what the Federal Reserve has had to do. So they kind of paused midfield and said, "We're gonna call a time out and kind of catch up here, catch our breath, and then we're gonna go from there."

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Andy Shafer as we talk about the fact, man, it has been an interesting ride coming out of this pandemic. We have had record high inflation, the Federal Reserve, our nation's Central Bank, hiking interest rates 11 times over the past few years trying to bring that inflation under control. And maybe now, maybe now we are on the precipice of a pivot to rate cuts. And this has been a much-anticipated thing on Wall Street, on Main Street, all over the place because there's a real-world impact on our daily lives on what this means.

You know, I think back to last December, Andy, the markets were pricing in, I think it was seven rate cuts this year. We've come nowhere close to that. Why? Well, because the data didn't pan out the way that the Fed was hoping. It took longer, so they were still kind of in the middle of that field in the time out, waiting to see where things are. Now maybe we're going to resume play.

Andy: Well, to continue with the analogy, I think what the Fed is doing, just like any good football coach would do, is gather as much information as possible. You know, what do we like to do on third down? What happens if, you know, it's 4th and 10? And so what the Fed is doing is trying to gather as much data as possible, whether it's PCE or whether it's PPI. You know, there are so many different things that they're looking at.

Amy: Different readings on inflation.

Andy: Yeah, and how they impact. You know, a lot of times they wanna look at, you know, core readings, which excludes food and energy. Well, why would that be? Well, it's because the Fed doesn't feel like they have much of an impact on food and energy crisis.

Amy: Yeah. They can control that.

Andy: So they're looking at things that they can control and continuing to gather as much data so that they make a very informed and intelligent decision. And I do think that they've done a pretty good job lately. You know, at the beginning of the year, Amy, you know, when you were saying that we were looking at maybe seven potential cuts this year, and that's come down to one or two. You know, I think that they've been very patient about how they've approached this. And during that period of time, there was an elevated level of the chance of recession, and that level of chance of recession has also diminished to some degree. Now we're still probably, I would say, at medium levels at this point, but it was fairly high at the beginning of the year. So I do think the Fed has done a pretty good job, but there's still a little bit more work to do.

Amy: Yeah. It remains to be seen whether the Fed actually wins the Super Bowl, right?

Andy: Well, not.

Amy: We shall see. But in the meantime, let's talk about this, the fact that we are likely on the verge of cutting rates, right? What does this mean to us? What should we do differently in our lives? First of all, if you have had your long-term money, your emergency fund, your reserves that you keep in cash at a brick-and-mortar bank, that's, you know, getting very, very little interest. You know, until the past couple of years, 0.0001% was the interest you were likely earning on that money that was sitting there on the sidelines. Over the past couple of years, you could make serious money, like maybe 5% interest.

So if you have not done the research, if you have not found a bank, and many of them, the online banks, right, have been giving much higher interest rates, they just don't have to pay for the overhead that those brick-and-mortar banks do, please do your research now. Move that money. And Andy, I would say the one thing I would caution about is because we're kind of at that 4.5%, 5% that you can make on just really, really safe right, money on the sidelines, you have to make sure that you don't have too much or too little in those accounts.

Andy: Yeah. And I think it depends on your situation. You know, I'm 48 years old, and I have my foot on the gas, so most of my money is in the stock market. You know, I believe that I can get a little bit better than what we're able to get in CDs and fixed income. However, if you're a retiree and need some preservation, obviously there's going to be some fixed-income CDs, those types of things within your portfolio.

So it's probably prudent for you to lock in some of those higher rates now because we're going to start to cut likely in September. And what that means is when we cut rates in September, the bonds or the CDs that you have now are gonna become more valuable because the alternative when rates are cut and new banks issue new CDs and entities issue new bonds are going to be lower rates. So the value of what you have is gonna become higher. So now is the time to strike and try to lock in some of those longer rates because obviously we're gonna see some cuts here in the near future.

Amy: Yeah. So point one, make sure you are making as much money in interest that you possibly can on any money that you have in a high-yield savings account or a CD. Make sure you've made that move. Now also, here's an interesting one. Put off any large purchases you have. A year or two ago, I don't know that I would have said that because you don't know how long we're gonna be in this place of rising interest rates. So if you needed to move or you needed to buy a car, I didn't feel okay being like, "Well, let's wait a couple of years, right? See if you can put some duct tape on that car and make it continue to run." But hey, we might be just a few months away from these rates starting to fall. And so it might make sense if you are looking at moving or buying a car to hold off because you might get much more favorable interest rates, you know, closer to the end of this year.

Andy: Yeah. I think that's very wise advice. You know, and we don't know how...

Amy: I only give wise advice, you know that, right?

Andy: Yeah. Well, but I think that... And the other thing is we don't really know the pace of cuts as well. It could be a slow process with cuts, but it could go fairly quickly. I remember, going back to early 2022, I was in the process of building a house and I was waiting on the architectural designs from my sister-in-law. Well, it was January and I knew that rates were going to start increasing. And she was kind of dragging her feet a little bit. And it's really tough when you're working with family. You can't really tighten the screws on them. So we finally were able to get things done in March and early April, but by then, rates had increased almost 3%. Now I'm happy with my mortgage rate, but the point is...

Amy: It was a little gut punch, right?

Andy: Yeah. But the point is we don't know the pace of these cuts. Hopefully, it's fairly quick. But on the other hand, if it is fairly quick, that suggests to the Fed that they need to cut to stimulate the economy to keep us out of recession. So there are some good points to it and there are some bad points to it, but certainly now is not the time to be securing a mortgage or paying high interest rates on a loan for your car, those types of things.

Amy: Yeah. For any kind of sort of variable, maybe you will keep a close eye on that too, right? Like your credit cards. We've seen credit cards, the annual percentage rates that you're paying on those. For anyone who carries a balance on those month-to-month, ugh, it has been hurting you. I mean, we're talking 25%, 28%, 22%. That hurts.

The problem though, when you have the Fed funds rates start to go down, these credit cards hold on for a while, it takes a while for them to start to lower their interest rates. I wouldn't say, like, "Hey, don't pay anything on that credit card right now while you're waiting for those rates to come down." Just get serious about paying off that debt. If you have certain kinds of privates due to loan debts, you know, it might make sense. You know, that might start to come down. Don't hold your breath here though. It's like a rocket and a feather. The rocket, you know, it goes up super-fast, and then the feather falls really slowly. I think that's what we're gonna see on any of these interest rates that are more friendly to consumers.

Here's the Allworth advice. There is still time to take advantage of the higher interest rate environment we are in right now. Please, please, please lock in those rates. Coming up next, there's something that more than one in three Americans are doing to make more money. We'll tell you what that is next. Plus, this could be the biggest mistake you will ever make with your 401(k). We'll tell you what not to do. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC, THE Talk Station.

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Andy Shafer. If you can't catch our show every night, you don't have to miss a thing. We've got great money advice for you every day. So just download the "Simply Money" show on the iHeart app or wherever you get your podcast.

Coming up, we see so many people making mistakes with their money because of misinformation. So we are playing retirement fact or fiction so we make sure that you get your facts straight. Okay. There's something that more than one in three Americans are doing to bring a little extra money. And we're talking about a side hustle here.

Andy: Yeah. I think that more than one-third of U.S. adults earn extra money beyond their regular source of income. And, you know, the popular term is side hustle. And I think that it's becoming more popular because it's more readily accessible with technology that we have today. You know, you can go online, you can do, you know, commerce online. We have an advisor in our office that actually drives for Uber after hours to make a little bit of extra money. And there are so many opportunities there, and that can make a significant impact on your overall income. The average side hustlers say they make about $900 on average per month in extra income. And so that's real money, and that can go a long way.

So I like that the opportunity is out there for people. It creates... You know, for the things that you enjoy in life I think there's probably a spot for it. But make sure you don't overdo it and take up your entire day because there is a work-life balance involved as well.

Amy: Yeah, I agree with you. I think technology has made this so much easier. I've got, you know, so many teenagers in my house. Some of them will just take these online surveys and get paid to take these surveys. But this runs the gamut. Babysitting, dog walking, you know, vacation season, watering people's flowers. I know retired teachers who get paid to tutor. You know, there's lots of opportunities out there. My daughter is going away to college, gosh, in just, like, four weeks now.

Andy: Is she really?

Amy: It's crazy. And she's realized it's expensive and she doesn't have enough money, right? Because there are certain things that she does have to pay for. And so one of the things that she's done is, like, cleaned out her closets and, like, anything that's, you know, not have holes or stains on it, she's trying to sell online and making a little money for.

Andy: Has she had success with that?

Amy: She just went through her closet over the weekend. So we are just starting this process. But we know other people who have made, not a ton of money, but maybe enough money to buy a few new things when you get to college. So, you know, I think when you look at these side hustles, it's like every little bit makes a difference. You know, don't break your back, don't kill yourself. But with inflation and what we've been seeing lately, for many people, this is just a necessity.

We're turning now to the mistake that we see people making with 401(k)s that shouldn't just be an absolute killer to any retirement. This might be eye-opening to a lot of you. Vanguard just did some new research and said, "Okay, nearly a third of you who had money in an old 401(k), right, and you rolled it over into an IRA and maybe you just assumed that that money was sitting there compounding and growing, it's actually sitting in cash and you're making not very much money on that."

Andy: You know, this statistic actually surprised me a little bit.

Amy: Me too.

Andy: But the more that I thought about it, you know, I do understand it, you know, because a lot of people don't realize when you roll money from a 401(k) into an IRA, it doesn't automatically get invested like it did within your 401(k), and it can be very confusing. You know, the tax ramifications on IRAs or 401(k)s are the same, but the IRAs are self-directed to a large degree unless you're working with a financial advisor.

So it really is up to you to make sure to follow up on those types of rollovers and make sure that it's invested appropriately, because otherwise, a lot of these custodians aren't going to reach out to you to say, "Hey, by the way, you're sitting in cash." You know, that's really not up to them. So just be very diligent about when you do start to roll over 401(k) balances that you make a point of investing it appropriately for your goals and for your needs.

Amy: Yeah. So this same research showed that 500 Vanguard IRA clients who rolled over their money in 2023 were actually still in cash in June, and 70% of them had no idea where that money was and how it was invested. I don't mean to be mean here, but I do wanna be direct. Pay attention. This stuff matters.

We recently had another statistic on the show that showed that there were a lot of people who thought that they were actually actively participating in their workplace 401(k) plan and they weren't. They thought they had money growing for their retirement and there wasn't a dime in that account. This is the number one vehicle that most of us are using to retire, these IRAs, these 401(k)s. They are so important. If you're taking the initial steps to roll over that money, please follow through, make sure that that money is invested, and not only that it's invested, but that it's invested in a way that makes sense for you.

Andy, you mentioned earlier on the show, you're 48 years old, you've got a lot of time before you retire. You're very aggressively invested, right? What if someone who is 48 years old rolled over that money and had no idea, and it was mostly in bonds? It wouldn't make sense.

Andy: Well, think about the growth from June 2023 until now.

Amy: I know. It hurts my heart.

Andy: Think of [inaudible 00:18:46.697] you're missing out of in that short period of time. That's crazy to me. You know, I think the growing concern is that you keep that in cash and then you start to have a major impact on your long-term goals. And by just losing that period of time, you're missing out on 10%, 12%, 15%, 20% of growth, and that can really stunt your overall goals and the track that you're on for retirement.

Amy: Yeah. History shows us that where you really make your money is on individual days, right, the best days in the market. We looked at this earlier this year, and it was like three or four days this year where all of your gains were made. You know, and if you miss out on those days or you think you made money on those days but you didn't because you didn't even know that money wasn't invested, that's a really tough pill to swallow.

Here's the Allworth advice. One of the big keys to financial freedom is just knowing where your money is, where those dollars are invested, and why, and making sure it really is a good fit for you and your long-term plan. Coming up next, a painful lesson on what happens if you really aren't very specific on what happens when you are no longer here. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC, THE Talk Station.

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Andy Shafer. You know, we talk about this all the time, the importance of having an estate plan in place, but we know that statistics show that many people, I think it's higher than 50% now, don't have wills, don't ever do this. And so we wanna highlight today, okay, if you don't have an estate plan and that money goes through probate, what is the reality there that your loved ones are facing?

I'm gonna tell you this right now. It's not a pretty picture. Andy, I wish we could do the research of talking to a bunch of people and saying, "Hey, when you pass away, what do you want to happen to your money?" Right? And then you record all of that, and then they pass away, and then that money goes through probate and you see, does it line up? Right? Does what that person wanted actually end up happening? I'm going to bet, most of the time that is not the case.

Andy: Well, I will tell you this, with working with all of my clients, and most of them very, very sharp and have their financial plan in order, the estate plan is usually the last thing that they get to.

Amy: No one likes to talk about that.

Andy: I'll have meetings with them for years and say, "Hey, did you get your stuff done?" "Well, we've been dragging our feet on it." But I think everybody knows and has experienced this within their own family of somebody that didn't have their estate documents together, and what a mess it can be to unwind it. And the point is that you want to make things as easy on your loved ones as possible because they want to grieve and get through that process and have it buttoned up. The typical probate process to settle a will or estate without having a will done takes about 20 months. And the cost is...

Amy: Twenty months. Think about that. After that person has passed away, more than a year and a half later, all of this nonsense and back and forth between the court and attorneys and you and all the things, it's still going on.

Andy: Well, not only that, there's a lot of costs involved with it. I mean, you're looking at probably 3% to 7% based on the size of the estate. And, you know, it can run from a couple hundred dollars to tens of thousands, you know, with people that hire an attorney to help them. So it's important that you, number one, get your intentions in order. I see so many times with my clients where they want to get the things done, but they don't know what they want to do. So it's incumbent upon you to really sit down with your spouse, or if you're single, to really figure out where you want your money to go.

My wife and I don't have kids, and so that adds a wrench into our decision-making. You know, we're gonna leave a little bit to our nieces and nephews. We have some charities that are involved, but you have to make a decision and get those things in order because it can be very cumbersome and mentally taxing if you don't have that stuff buttoned up.

Amy: Well, you make an excellent point. Okay, you don't have children. So if that money went through probate, it goes to your closest living relative. So maybe it ends up with those nieces and nephews, maybe not what you exactly...

Andy: Maybe my sister, who [crosstalk 00:22:56.931].

Amy: Yeah, that's true. Yeah. Maybe your sister versus the nieces and nephews, and then the charities that really are near and dear to your heart. They're not gonna know that, they're never gonna see a dime. You know, on the flip side, my husband and I are a blended family, and the way that we have our estate set up is that if we were to die in a car crash later today, the money would be held until the last kid went through college so that the college costs were totally paid for, and then it would be distributed to the kids. It wouldn't happen that way during probate.

I think of a dear family friend of ours, and there's a son who was...he was probably 18 when this happened. He got a call from an attorney, completely out of the blue, and he said, "You have some money coming your way." And this kid's like, "Wait, what? I'm in college. Like, why do I have money coming my way?" Well, there was an uncle that lives in the western part of Kentucky that was estranged. They hadn't seen each other in more than 10 years. Who knew that this uncle had quietly amassed millions of dollars?

Andy: Oh, wow.

Amy: He had actually started the estate planning process in his final days and had it outlined that there were some charities that really mattered to him, and that's where he wanted the money to go. The problem was he never signed it.

Andy: Oh, my gosh.

Amy: So that money went through probate. None of those charities ever saw the money. His estranged nephew, for whatever reason, you know, they didn't get along.

Andy: Good for him.

Amy: Millions and millions of dollars.

Andy: Happy for the kid.

Amy: He now lives in Chicago and has a really big boat on Lake Michigan.

Andy: I bet he does.

Amy: Worked out well for him. But think about what you really want to happen to your money. If you are not taking steps to protect that and make sure it's happening, anything can happen.

Andy: Yeah. And here's where people get it wrong. Nearly 4 in 10 people believe an inheritance is automatic. Nothing is automatic and easy about inheritance. Make sure that you have beneficiary designations on all of your accounts, obviously with IRAs and things like that. If you identify beneficiaries, contingent beneficiaries, all of that supersedes probate.

The other thing that you can do is add what we call transfer on death for non-qualified accounts, after-tax accounts, like savings accounts, checking accounts, individual or joint investment accounts. Those will supersede probate. So you can do a lot with the money that you have invested, liquid assets, those types of things to keep those out of probate by just adding those designations on those accounts. And that can save you a big headache as well.

Amy: I think, you know, Andy, you mentioned that you work with so many clients in this. Like, it keeps falling down on the list, right? No one wants to really deal with this topic. I've, like, raising my hand right now, been there, done that. It's been on my list of things to do many times in the past, you know. But when you finally take care of it, it's like, "Oh," this feeling of relief.

And if you're working with a financial advisor, this is part of a comprehensive plan. It's not just, "Hey, where is my money invested?" It is, "What happens to my money after I'm gone?" Right? There's a whole cycle, a very comprehensive thing that needs to happen and needs to be thought through. And the fact that you're kind of holding your clients' feet to the fire and saying, "Hey, this is really important," is actually a huge benefit to them because this is important.

And this research and this stat show people vastly underestimate how long this process can be if these documents aren't in place, how expensive it can be. You know, I mean, here's an example. Trust & Will that did this research have a $750,000 estate, right? And it's just billed at 3% from the attorneys. That total will be $22,500. Most people think it's less than 1,000 bucks to get these things done. Huge discrepancy here. Yet, if you pay the attorneys on the front end, it's much lesser time and money on the backend for the people that you love.

Andy: The other thing you need to understand about estate documents, it's not just about where your money is gonna go. You wanna make sure that you have your power of attorney buttoned up, your living power of attorney, your healthcare power of attorney, and that affects you personally while you are alive. So those things are just as important. You also might wanna consider a trust. A trust is a way to make sure that your assets are passed on in the way that you would like them to be passed on in the eventuality that you die.

You know, a good example of that is, let's say you have some kids that aren't very disciplined with their financial decisions and maybe you want to give them a little bit of money over time. So there's a lot of things to consider other than, hey, I just want this money to go here and this money to go here. There's other things involved with comprehensive estate planning.

Amy: A couple of months ago, my husband and I went to the PGA tournament down at Valhalla and ran into some people from this area, this group of guys. And they listen to the show. And they were like, "We're so glad you're here. We need you to settle this for us. We had this huge debate in the car on the way down. Do we need a will or a trust?" And it was so funny. And I was like, "Well..." And my husband is like, "Okay, here we go."

Andy: Yeah, you're back on the clock.

Amy: Here's Tiger, you know, teeing off over here, and here's Amy explaining the difference in wills and trust. But there is a difference. And it's important for you to understand what is best suited for you and your situation and just make sure that you take the steps to get those. Some of the stuff you can even do online super quickly and super cheap, but I'm telling you, it's gonna pay off in the long term. It is an act of love for your loved ones to take care of these things.

Here's the Allworth advice. If you wanna leave a financial legacy for your loved ones, make sure you do it in a way where they don't end up stuck in court for months on end and with huge expenses to boot. Coming up next, some retirement fact or fiction. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC, THE Talk Station.

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Andy Shafer. If you've got a financial question you need a little help with, we can help you figure it out. There's a red button you can click on when you're listening to the show. It's right there on the iHeart app. Record your question. It's coming straight to us.

And straight ahead, oh, how I know this topic. Some helpful information for those about to drop some serious coin for a car for your teen. By the way, we have three teen drivers, so we will really talk about that. Okay, now it's time to play retirement fact or fiction. You know, Andy, we try to make this fun, but as you know, there's so much misinformation out there about money, about retirement, about how Social Security works, how Medicare works, you know, all these things. And people can make really terrible mistakes with their money based on that. So this is kind of our fun way of making sure that you know the facts and nothing but the facts when it comes to your money. So let's get to the first one.

Andy: All right. This will be fun.

Amy: Yeah, let's do this. All right. So the first one, fact or fiction. If you have a 529 plan but your child doesn't end up going to college, you're gonna lose all of that money.

Andy: Fiction. And the reason is that you can still utilize those assets. Now, it won't be tax-free. You will have some taxable issues on those gains, but it's still your money. And fortunately, with 529 plans now, there's a lot looser rules and guidelines to that. So there are a lot of ways to use those 529 plans, but that is fiction.

Amy: Yeah. Love me, the 529. And as you mentioned, there's been way more flexibility with these accounts. If your kids are going to a private high school, it could also be used for that.

Andy: Preschool.

Amy: Yeah. It can be used for room and board. It can be used for technology in school.

Andy: Preschool.

Amy: Yeah. And if they're not going to school at all, it can actually be used later in life. If that money has been in the account, I think it's for 15 years, then it can transition into a retirement account for them.

Andy: It's looser and looser. It's great.

Amy: Yes. I love a 529. I think these make so much sense. All right. Got another one for you, Andy. Fact or fiction, target date funds often don't make sense for investors.

Andy: Fact. And here's a couple of reasons why. Target date funds, so let's say you have a fund that's 2035. We are all familiar with lifestyle funds. Just because you get older doesn't mean that your goals change. And so what happens with these target date funds is they become more conservative over time. Well, if you have a 2035 fund and you're in your early 40s and all of a sudden it's 2035 and you're all in bonds, that's not very good for your long-term goals. In addition to that, target date funds can typically be fairly expensive. They're what we call fund of funds. There is a fund within a fund. And so those internal expense ratios can be a little bit high.

Amy: And it's like how the sausage is made. A lot of times those target date funds get stuff stuck in them that most people don't invest in. And it's like, "Well, we got to get someone to invest in these, so we'll shove them in, you know, these target date funds." Think about when you go to the doctor and you have a headache. If the doctor said, "Every time someone comes to me with a headache I'm going to give them two aspirin and send them home. I'm not gonna say how long has it been happening. I'm not gonna ask what part of the head. I'm not gonna ask..."

And it's like a very one-size-fits-all approach to your money and retirement. If everyone had the same goal in retirement, great, but most people, it's very different. You need X amount of dollars because you wanna travel or spend time with your grandkids or whatever. I just think target date funds don't give you enough uniqueness to you, and I think you've got to figure out what that is. Okay, so fact or fiction, if you are already getting Social Security, right, you're getting those benefits and you go back to work, you actually might end up getting a reduced benefit.

Andy: That's a fact. And here's why. Social Security does have tax. It's based on your provisional income. It's calculated by adding your taxable income, tax-free interest, and 50% of your Social Security benefits. So if you earn a certain amount of money over a certain...whether you file jointly or you file individually and you're earning an income that's higher than you were before, there's a potential for a reduced benefit there.

Amy: Okay. This next question has to do with Medicare. This one is like...people are like, "Oh, I didn't know this" when you get close, because you think like, "Okay, I've been paying into the Medicare system all these years, it's gonna cover everything when I get there." So fact or fiction, Medicare will cover a majority of your skilled nursing costs if you need them.

Andy: That's fiction. And so, you know, Medicare generally provides limited coverage for skilled nursing. You're looking up to, let's say, 100 days of care. And for the first 20 days, Part A covers the full cost, for 21 through 100, Part A covers part of it, and the costs you pay on a daily occurrence. So it doesn't account for all of it. So you wanna make sure that you have decent supplemental insurance to be able to help you with those costs.

Amy: This just feels not fair. I referred to this before, but it's like, "Wait, I've been paying into this. I made it to 65. You mean to tell me I still have to pay for other stuff to supplement this?"

Andy: And that seems like an important part of your health is skilled nursing, right?

Amy: Yes, exactly. And, you know, you're talking about, you know, 1 through 100 days in skilled care. Here's the reality, and this is I think hard for a lot of us to wrap our heads around because when we're in our 40s, 50s, 60s, we're like, "Ugh, we're never gonna need that," right? Anything can happen later in our lives. And on average, the stay in these facilities are six months, a year, can be even longer. And when we get to a year, you're talking $100,000-plus per year. So don't let this catch you off guard because not knowing this can end up costing you big time, right? This is something you have to understand.

Coming up next, how to buy a car for your teen without going into the poorhouse to do it. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC, THE Talk Station.

You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Andy Shafer. Okay, when you're a teenager, we all remember this, you are, like, counting down the days until you turn 16. I now see it differently as a parent. I am worried, I am stressed out. They are, you know, coming home at night in the dark, driving by themselves. And the cost of teen driving, teens driving is astronomical. The cost of buying the car, the cost of the insurance.

We have three teen drivers in our house. And the one thing that we said, and this is kind of our criteria, Andy, when we were thinking about it, "We will help buy the first car. It needs to have all the safety features. It will be used, and it will be the only car that we ever buy you, and it needs to last you through college. And if it doesn't, that is on you." And two of these kids started driving during the pandemic, and I started looking at the cost of cars and I just...oh, my gosh, it's terrible.

Andy: Well, a lot of that has to do with the pandemic and also the cost of gasoline and things like that. So I think before you start the search, you wanna manage expectations, especially if money is tight. You know, you don't need to go out and buy a luxury car, a sports car, those types of things. I remember my first car, and I think most people do, it was a 1983 Cavalier hatchback that I bought for $1,200. And so, you know, back when I was a kid, you know, it was kind of up to us to figure out how we were gonna go about buying a car. So you had to be very economical about it.

So I think the first thing is just manage expectations on what's realistic, and don't go overboard with... You know, a car at the end of the day is from getting from point A to point B and making sure that your kids are safe. So I think that's the first thing you want to consider.

Amy: Yeah, and I think it's not just the cost of the car, right? We have soaring insurance premiums, you know, the cost of car loans is higher. And I would say if at all possible, and just to be transparent, we saved for these cars because we wanted to pay cash for them. We didn't wanna finance it. And so we saved and saved and saved. We knew this was an expense coming up, so it was part of our financial plan. So we were able to then buy these cars for a few reasons. Say your child is taking out the loan, right, and they're having to finance it. What happens if they lose their job or something happens? They can no longer do it, right? And I say that's why co-signing alone is also something you have to think about, right? You're like, "Oh, my kid needs a car. They can't do it on their own."

Andy: They can't do it.

Amy: Talk about why you say that because this is a conversation we end up having with a lot of our clients who wanna co-sign, whether it's student loans, whether it's helping them buy a car, whether it's... You know, whatever it is, this can get dicey.

Andy: Well, number one, you're on the hook for it, right? And number two, if they're not paying those regular recurring payments, that can affect your credit score. And so those are the two major things there. If you wanna help your kids out, do it in a way where you have a lot of clarity and understanding. And I think the way that you're approaching it, Amy, is great, you know, but co-signing on a loan, whether it's a car, and more importantly, a house, it's just a bad idea. There's more creative and better options that's healthier for both you and your children.

Amy: I think it's really important, and this is just my personal opinion, the kids have the skin in the game, right?

Andy: Absolutely.

Amy: In some way. And I've got friends who do this to varying different degrees. I have a good friend who, you know, their child pays half of the cost of the car and they pay half of the cost of the insurance. You know, we have our children pay part of the insurance as well. And I think one of the things that you can think about here is make them do the research on car insurance, right, even if you're paying it. Let them understand how much it costs. Make them do the research once a year shopping around so that you have that information.

But also once they get out in the real world, if you've been paying their cell phone and their car and their car insurance, they're like, "Whoa, what? You expect me to do this?" Let them know what they're getting themselves into. Giving them some financial responsibility earlier in their life makes that transition so much easier later.

Thanks for listening. We hope you're gonna tune in tomorrow. We're talking about how to reduce your taxes once you stop working. You've been listening to "Simply Money," presented by Allworth Financial here on 55KRC, THE Talk Station.