The Smart Money Moves That Matter at Every Age
On this episode of Simply Money presented by Allworth Financial, Bob and Brian break down the key financial moves that matter most in every decade of your life—from building wealth in your 20s and 30s to protecting it in your 40s and preparing for retirement in your 50s and beyond. They also explain how hidden tax traps can develop inside brokerage accounts, answer listener questions on estate planning, retirement tax strategies, and umbrella insurance, and sit down with Allworth's insurance expert to discuss when long-term care insurance actually makes sense. Plus, Bob shares his perspective on whether homeownership is always the right financial move.
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Bob: Tonight, the financial moves that matter most in every decade of your life. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Well, in many situations, you know, there's age brackets here where there's different challenges people are facing. And we never like to paint with too broad of a brush for every age bracket because everybody's different. But, for example, when you're 35, a lot of people are thinking mostly about building wealth. In your mid-40s, it's building, but starting to think about protecting it. At 55, maybe you're thinking about retirement or should be, you know, "Do I actually have enough to retire?" And by 65, a lot of folks are concerned with just, "Hey, is my money going to last longer than I do?"
I know that's painting with a little bit of a broad brush. The point in this segment is just everybody's thinking about maybe different things or prioritizing different things, Brian, depending on what age bracket they're in. And sometimes these things can overlap, too, because life comes at you quick. Things change. Family needs change. It's all about how you approach your financial plan and evolve with your changing financial situation over time.
Brian: And I want to step back even a decade earlier in your 20s because just to confirm, there's not a lot of science to what you should be doing in your 20s. So, let's really start there. I think there's three things to do when you're that age. Invest aggressively, don't make a mess of your credit, and don't panic when the market wobbles. That's it. Do that stuff for a good, long time and you're going to have all these challenges that we're about to talk through. I do think a lot of young people get sucked into all the different things they can find out there in terms of trying to make a million dollars overnight because there's one or two stories out there where that has happened. So, three things.
Bob: And also, I would add to that, Brian, I would add to that, systematically getting on a program where you're spending less than you make and do it consistently, right?
Brian: Yeah. A budget for concert tickets is what Bob is hinting at there.
Bob: Yeah, you're never going to let me live that one down.
Brian: Nope. Never in a million years.
Bob: Just wait until the key's locked today. We'll have more fun with that. Go ahead. Let's talk about what most people are doing in their 40s, Brian.
Brian: Yep. So, yeah. So, at this time, right now, you're trying to build margin, right? A lot of people think it's all about earning more, which that's, of course, helpful, but it's much more about creating flexibility. Earning more without a plan simply means you're spending is... You know, I like to think of spending as a gaseous substance. It expands to fill the space that it's in. So, if we make more money, we tend to spend more unless we have a plan in place with goal set.
I'm not the most disciplined person in the world either. This doesn't mean I have every single goal written out with a progress meter toward it. It's just knowing, what are my priorities? Goals can simply be priorities. Maybe that's an emergency fund. It's, of course, retirement. That's in the mix. You know, some effort toward helping your kids go through college, those kinds of things. But in any case, in your 40s, you're just trying to build a little bit of space. You might need to budget things like college as I just referenced. Aging parents, that could be on the horizon. Maxing out your own retirement accounts. That's usually a big desire for people who are really starting to enter their biggest earning years. Also, increasing taxable investing.
This is something that that that I've been talking about a lot more with younger people who have high income, 401(k)s and matches and all that stuff. Those are fantastic. We live in a in a city with a lot of strong, strong Fortune 500 companies and the companies that support them. That means, most of our citizens in this area are working towards 401(k)s, and that's great. Except remember, you're creating a huge tax overhang. That is not a bad thing. I'm not poo pooing this at all. But if every last nickel is going into the 401(k), then you are putting yourself in a situation where down the road, you're not going to have a lot of tax flexibility. Because when you're living off those assets, those dollars are purely taxed as ordinary income, and there's nothing you can do about it. There's almost no deductions anymore for the average person. So, just be mindful of that. Taxable investing, I think can be a really good opportunity for somebody on the younger end.
Bob: All right. Well, you just talked about all the things people in their 40s should be doing. Let's give a hypothetical example of what not to do. We're going to use a fictitious couple named Mike and Sarah. They're both 44. Together, they have a healthy income, a little over $325,000 a year, but they've got two kids in club sports. They live in a $900,000 home. They got two brand new SUVs on the driveway. And they're taking nice vacations, you know, maybe a few of them every year.
From the outside looking in, you'd say, "Man, they're crushing it. They got everything wired in, dialed in, doing great." But when we peel back the layers, here's what we find. They're contributing just enough to their 401(k)s to get a company match. They have about $25,000 only in savings, and most of their raises over the past decade have gone toward that bigger house, nicer car, more expensive lifestyle. In other words, lifestyle creep, Brian. And then what can happen? Life can happen. Mike's company restructures. Suddenly, he's out of work. And now they're asking, "How long can we survive and make it?" And the answer, based on their situation, maybe three or four months.
Brian: Right, exactly. And what that means is, yes, they've got money in their 401(k)s. You know, they put money away. But at the same time, they haven't done anything. There's no oil in that engine. So, it's going to run a little bit rough when we kind of hit some of the bumpy parts. So, that's very, very much... Again, that was the whole point of the 40s. We're building margin. You've got to build some space between, you no longer eating cat food, right, like you were when you were in your 20s. You have some flexibility, but it's tempting to just spend all of that flexibility. You should spend some of it. That's not a bad thing. But at the same time, also have an eye toward the future and kind of continue to build that buffer.
All right, let's jump ahead one decade. Let's talk about your 50s. This is when we need to start getting serious. Retirement stops being theoretical. You will start to notice your peers retiring themselves. Maybe those who are in a fortunate situation, they're retiring at your exact same age. Other people in your circle, you know, the 60s aren't that far away from the 50s, so that's kind of a realization that everybody gets when they're 50, is that some of their closest friends are now in their 60s. And those folks are definitely going to be retiring. You're going to start paying attention to these kinds of things. And those are the happy things. You'll also start to notice those same friends coming down with health problems and those kinds of things.
So, the goal here is to really, really start to get dialed in. Calculate that retirement number, pay attention to how those catch up contributions work, right? You can be putting more money away in your 401(k). Again, don't miss out on that taxable side either. Not every nickel should go into the 401(k). Get rid of your bad debts. Any debt that's over, I'd say, 7% or 8%, really focus on getting rid of that. Start to think about Social Security, maybe a little bit. Long-term care discussions, it's time to start learning about that stuff, but not necessarily pulling the trigger. Those kinds of things tee you up for a good, confident decision into the future if you started paying attention to it now. So, Bob, I think we've got another hypothetical here. I know you love your hypothetical. So, take us through an example of Tom and Lisa here.
Bob: All right, great. Tom and Lisa, they're both, say, 56 years old. Tom always figured he'd retire around 67. Lisa works part time outside the home. Between them, they earn $0.25 million a year. They've saved, but not very aggressively. They've got a little under a million dollars now accumulated between their retirement accounts and, say, another $150,000 in a brokerage account. They're thinking has always been, "We'll really start to ramp things up savings wise when we get in our 60s," Brian.
The problem is they never got serious. Tom still carries a car loan. They have a home equity line they use whenever they want to remodel or fix up their house or go on an expensive trip. They haven't looked at their investment allocation in years. They don't know what they'll spend in retirement, when they'll claim Social Security or whether they should be doing Roth conversions at all. Retirement is only 10 years away, but they still haven't built an actual plan to, you know, contemplate and get into retirement.
Then one day Tom's employer announces layoffs. He's offered an early buyout retirement package. Suddenly, the question immediately changes from, "Should I retire at 67?" To, "Can I afford to retire at 57 because I'm getting offered a package?" And that's when they realize they weren't behind because of one bad investment or maybe not optimized from a tax standpoint, they just assume they'd have more time to plan for retirement than they actually did. And Brian, we see this come up from time to time. That's why, you know, you talked about getting serious in your 50s. If you can get serious in your 30s and 40s by saving that extra 2%, 3%, 4%, putting it away, you know, toward retirement, you know, that makes things a little easier if life throws you a curve ball in your 50s.
Brian: Yeah, I would add onto that, too. So, when that does happen... And again, we're in an area of Fortune 500 companies. That's how they occasionally pump up their stock prices, is by announcing that they're reducing expenses via layoffs. So, if you work for one of those companies, you've probably had a fantastic career with lots of benefits attached and there's absolutely nothing wrong with that. Just bear in mind, that could happen. I would say, there are two types of people who received those retirement packages, those for whom it's a celebration, meaning they were kind of anticipating maybe it would come, and yay, it came. And those who got completely blindsided for it. And it's not a celebration, it's panic attack. Both of those can be exactly the same financially, but one prepared for it and understood what the impact might be. The other just got out of the blue out of left field, got informed that their last day is whenever, and they had given no thoughts to it.
So, all right, let's move forward again in time. Now we're in our 60s where it's no longer about maxing returns. It's about turning assets into income. So, we need a retirement income plan. You're talking about Medicare, Roth conversions, sequence of returns risk, cash reserves. "What's my withdrawal strategy based on how my different stuff is going to get taxed. And then of course, I always have that estate plan to worry about there in the background." So, I want to take the hypothetical here this time. I want to... I like this story.
So, Jim and Karen, both 64-year-old fake people who look an awful lot like a lot of our clients that we talked to on a daily basis. So, Jim just retired after 38 years, nice, long career. Karen has gotten a little jealous and she wants to follow him next year. So, on paper, looking at the spreadsheet, they look like they're in great shape. They've got $2.4 million across 401(k)s, IRAs, and other investments. Paid off house. Obviously, this has taken decades to put together.
Here's the problem though. They spent all those years focused on saving for retirement and no time at all almost about living in retirement, which is very, very different. They have no idea which account they're going to withdraw from first. And part of that is because they simply don't understand exactly what it's going to cost them or how to draw on their assets. All the way up until now, their bills have been paid with other people's money. What I like to call OPM. That means somebody gives them a paycheck every single month. That's how they pay their bills.
Now, it's not necessarily a concern that they can't afford it, but they're paying themselves. And that is a huge psychological hurdle to get over in terms of, "I've always convinced myself that my nest egg is for the future," but the future is now in this case. So, that first year of retirement, that throws them a big curve ball. We've not taken any time understanding how it works or what it looks like to draw on my own assets. And then of course, God thinks he's funny, so the market drops 15% at the same time. This has happened the last two Aprils. So now, they're wondering, "Should we quit taking withdrawals at all? Do we go back to work? Maybe we retired too soon." All this stress, Bob, is unnecessary, but it's an unforced error. Had they spent any time at all understanding how they themselves live, and then how their assets can support them in the most efficient manner, we don't have to go through this.
Bob: Yep. It's all about having a financial plan, something that you build and maintain over time. Here's the Allworth advice, your financial plan shouldn't stay the same as you age. Every decade brings new opportunities, new risks, and a new definition of success. The best plans evolve right along with your life. Coming up next, why you might have a big tax bomb hiding in your brokerage account and what you could do about it. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Straight ahead, we're going to be answering your questions about estate planning, whether switching investment vehicles can really help your tax bill during retirement, and if higher net worth families really need umbrella insurance. Well, just in the last couple of weeks, we've seen a couple of new proposals out of Washington aimed at limiting tax advantages for people with very large retirement accounts. And while those headlines mostly impact a small group of investors, they highlight a much bigger issue that millions of successful savers face at one time or another. You don't have to be a billionaire to have a potentially huge tax problem sitting in your brokerage account, Brian.
Brian: Yeah, that's right. So, congratulations. Now we have a problem. You've been investing for 30 years. Every month, money goes into a brokerage account. You bought these great companies, maybe an S&P 500 index fund, maybe about the whole market, some Apple, Microsoft, Berkshire Hathaway, those kinds of things, and you simply never sold. Now, that has worked great on paper. That account is worth $3 million. Well, that sounds fantastic. We'd all love to have that problem, except there's one catch. You only invested about $900, that other $2.1 million, it's all capital gains, which that's not a bad thing, right? Everybody has different opinions on taxes, but at the end of the day, taxes are, at least, some level of recognition that you did good. You earned money, an investment you made went up, and there's taxes due on that. If you're upset about that, don't let the tax tail wag the dog. Call your congressperson, but don't change around your financial plan. So, this is one of the...
Bob: Hey, Brian, on this topic, do you remember the meeting you and I had together with a client a little over a week ago, where they brought in the spreadsheet, and own a pretty large position and three stocks. And this guy went on to describe how he's sitting on... He knew exactly what his accumulated rate of return on those stocks were. I mean, it was a four-digit number, 1083% or whatever. And we asked him, "Hey, how have those stocks performed to a diversified," just say," "S&P portfolio over the last three, four, five years?" And we got a deer in the headlights look, right? Sometimes people just want to stare at that high percentage return over 20 or 30 years on a spreadsheet, and it just paralyzes them because they're addicted to seeing that big gain. But go ahead.
Brian: Yeah, and there's nothing wrong with that. And in that particular conversation, I do remember that, and that was much more about, the comment was, "These stocks have done really well," and they had. But they had done, I think the average was something like maybe 7%, 8% on average over years, which that's good. But then we were able to point out that, "Look, if you have all the risk of all of these couple of companies, they can do anything. They'll swing up and down wildly," and they had over time. "Meanwhile, you could have diversified that and gotten an average of 10% out of the S&P 500."
So, people do tend to assume that up is up, any up is good, and if it goes up, then nothing else matters. But you don't have to go any further than, you know, talking to anybody who's owned a company at the wrong time. We all love our Procter & Gamble around here. But go back to the early 2000s. You know the story I'm talking about here with the Durk Jager years. Anybody who worked at P&G remembers Durk Jager and the decisions that he made. I'm sure he's a lovely man.
Bob: Brian's favorite CEO of all time.
Brian: Oh, I think that's a perfect example of a really, really strong company that can step in the bucket every now and then. That's exactly what P&G did, lost half of its value over a quarter. That didn't mean P&G suddenly was a bad company to own. It just means the market temporarily didn't like it. Sometimes it rains, stuff happens.
Bob: All right. Well, Brian, we talk about this often on the show, but there are a myriad of ways to manage a big, embedded capital gain in your portfolio and get things diversified, take care of making sure you've got an appropriate risk level while managing taxes. Walk us through a good example of how that's done. Because I think too many people don't understand how relatively easy it is to get good advice and good management in this area of tax management.
Brian: Yeah. And I think a lot of... This is a good example, too, of where a financial advisor adds value. When I first started in this industry, I didn't care about any of this other stuff. I thought, 30 years ago, it was all about internet stocks and it was all about growth, growth, growth, and who cares about everything else. And at some point, maybe in your 20s, that's really kind of all you need. But eventually if you're successful, you're going to create all these problems that you need solutions for. And this is where an advisor who has a lot of experience watching people go through this can help you understand new concepts.
For example, there's smarter ways to deal with these things. A lot of strategies can help you figure out how to handle the tax that you're going to take. Simply, first of all, you can spread sales over several years. So, right now as we're sitting here, anytime during the year, you can usually get into multiple tax years. Let's pretend it's December and I'm worried about taking a gain. I don't want to pay the taxes. Well, in any years, December, I can get into 3 tax years over a 13-month period. Sell something right now in fake December, something anytime next year, and then one more time the following January. That's a 13 month spread, but 3 tax years over a little more than a year.
You can also look for losses. If you have to take some gains, go find something else that's sitting at a loss. A lot of times we tend to... You know, that position we took that is become the red-headed stepchild because it's in a loss position. We want to ignore it. Well, you might be able to just sell it and offset something. You know, maybe you got to buy a car or whatever the thing is. Go unload that position that's been making you mad for a long time, anyway. That will incur a loss for you that will offset that gain.
Or if you are already charitably inclined, if you're already writing checks to... And we say this frequently, too. If you have appreciated securities in a taxable account and you are writing checks to the charity, you're doing it wrong, especially if you can't even itemize your deductions. So, if you want to support your charities, but you know full well, you're not itemizing, you're not getting deduction, start using those appreciated securities. And you won't really get a new deduction necessarily in that specific case, but you will avoid the taxable gain, which is kind of like getting a future deduction. Kind of labor that a little bit.
Bob: Here's the Allworth advice, don't let taxes become the only factor driving your investment decisions. A thoughtful diversification plan can cost you some taxes today, for sure, but it can buy you more flexibility, gets your risk profile back where it needs to be, and give you a greater peace of mind for the years to come. Coming up next, our insurance expert is in to help you decide if and when to actually pull the trigger on acquiring some long-term care insurance. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James, joined tonight by our in-house insurance expert, our director of insurance for all things Allworth Financial, Jodee Deutsch. Jodee, thanks for carving out some time for us tonight. And you want to cover a very important topic, which I know Brian and I run into all the time, who should consider long-term care insurance? I know you work with a lot of our clients and run these in-depth analyses. Give us kind of a 30,000 foot view of what you're finding as you work with actual families wrestling with this very important decision.
Jodee: Well, thanks for having me, Bob and Brian. I do hear all the time, "Do I really need long-term care insurance?" And what I tell clients is it depends. Long-term care planning is not just about insurance. It's about having an overall plan if you need care and discussing what assets you have and having discussions with your family. So, really, I think that there's three categories to consider starting the discussion about options to pay for long-term care.
First, people in their 50s and 60s. That's really an ideal time to explore your options because you're generally healthier and premiums are lower than if you wait until later 60s or 70s when many people are retiring. So, that's number one. Number two, people who have accumulated meaningful assets. So, if your goals are to leave a legacy for your family, which could be kids or grandkids or a charity, and you want to make sure that they get that legacy even if you need long-term care, having a discussion about options to pay for long-term care makes sense so that we can preserve the legacy that clients worked so hard to build.
Brian: That's great advice, Jodee. I've thought about this a lot lately because it's almost like... And I remember when I started doing as a financial advisor, you know, you could set somebody up with long-term care insurance, and it would cover a good chunk of what they would need, if not all of it. And it was maybe $5,000 a month for a married couple. That was 30 years ago. Nowadays...
Bob: A year, not a month, right?
Brian: Yeah, yeah. That's true. That's a great point. So, I'm talking about the premium. Yes, the insurance premium could be like $5,000 per year total for a married couple. Thanks for the reroute there. Nowadays, that same policy, the Cadillac policy that could, should cover most things is really more like $12,000 to $15,000. Meanwhile, incomes haven't risen that much. So, it's almost like that same debate that young people have about, "Well, grandma and grandpa didn't have to pay this much of their salary for a house." It's the same argument of somebody else's parents didn't have to pay this much for long-term care insurance. So, that makes it harder to buy term-based, long-term, or at least, less attractive to buy term-based long-term care where the premium is every year. Are there any other better solutions if we don't want to write that annual check, not knowing whether we'll ever need it?
Jodee: There absolutely are. You can look at policies that provide a portion of the benefits, number one, so that you're not buying the Cadillac policy, maybe you're buying a Toyota. I love Toyotas.
Brian: Good, reliable vehicle.
Jodee: Yes. Or there are policies out there that if you don't use the long-term care benefits, the beneficiaries get a death benefit. So, we know that someone's going to use the benefits of the policy, and that allows clients to have more peace of mind of spending the money knowing that it's not just a use it or lose it scenario. So, there's a lot more options than used to be out there 30 years ago, absolutely.
Bob: Jodee, is there such a thing as the most common strategy you come across as you evaluate financial plans, let's say, for people in their 50s? Where are you seeing people fall out at the end of the analysis and why? Is there such a thing as a most common planning scenario that makes the most sense today, or is that painting with too broad of a brush?
Jodee: I think one general thing that people don't really think about is accumulating assets that are in a 401(k) and/or ultimately a traditional IRA. So, if clients have a large concentration of qualified funds sitting in their 401(k)s, because they've done really well, that will eventually move to a traditional IRA. Using those funds to pay for long-term care has a bigger tax impact and overall impact to their plan than non-qualified funds. And so, part of the analysis is looking at where their overall assets are, and what percentage is sitting in those qualified funds versus funds that are a little more liquid, maybe a little less tax heavy to use for care.
Brian: Got it. So, in that case, it really becomes a decision of, "Does this fit my budget. And is this too much of a sacrifice versus what I'm protecting against?" Let me walk you through how I present this to my clients ways to think about it and tell me what you think. What I like to talk to people about is, first of all, let's not panic over this. If we're in a situation where we've got assets... If we don't have any assets, then probably Medicaid is in the picture. And then that's a whole different discussion. Then there are people who are very well aware they've got $5, $10, $15 million. It's not a major concern. They can afford to self-insure. So, it's really that middle window of people with maybe $1 to $5 million, something like that, where they're really scared to death.
So, my thought there is, what I always tell people is we should expect something like $120,000 per year if we need to stay in a home. That's $10,000 per month in this area for a nice facility. That's for one person, one half of a married couple. And the average day, we're talking end of life care, so the average day is two and a half to three years. So, we might need to come up with $350,000 to $400,000. However, that is not $10,000 layered on top of your extra bills that we've already built in your financial plan. You're not traveling anymore. You're probably not going to the grocery store anymore. You probably don't have an electric bill anymore because you're living in a nursing home. There may be moving parts to this with a surviving spouse that has stayed at home, but that's a little bit different than an extra $300,000 to $400,000 we need to spend in retirement. Is any of that off base? Do you feel like there's anything I should add or adjust to that?
Jodee: No, that is absolutely what we need to assess, is what your overall goals are and what will change if you do need care, because those dollars can be repositioned to pay for long-term care. That is absolutely the way that we look at it. So, everything is specific to who the client is, what your overall assets look like, and what your financial goals are.
Bob: Sounds great, Jodee. Thanks as always for the great advice tonight. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show if you're listening on the iHeart app. Simply record your question there and it will come straight to us. David and Mary, Brian, say, "We are Florida residents now, but most of our investments, advisors, and family are all still in Cincinnati. How often should we revisit our estate documents to make sure both states are covered?"
Brian: Yeah, that's a great and important question, and hopefully, it comes up quickly after the shine has worn off of the, "Hey, we're just steps from the beach." Yes, you have changed other things in your life other than your place of living. There's moving parts to all this. So, generally, the objective isn't to create one plan that works in Florida and then a whole separate one for Ohio. In this case, your documents should be coordinated under Florida law because that's where you live. Ohio will, may still do the job, but it may be valid, but valid and well-designed for Florida are necessarily not the same thing. So, have a Florida State Planning Attorney review your wills, trust, durable powers of attorney, all those kinds of things. Doesn't mean you necessarily have to gut them and start from scratch, but on the other hand, they might be 80% good to go. It's the 20% that'll be the curve ball. So, make sure that you have somebody take an eye on that.
Replacing older Ohio documents with Florida stuff can also reduce the chance that a Florida bank or hospital or a title company might choke on whatever you hand them when you need them to do some things for you. So, your investments and advisors, being in Cincinnati, that itself does not drive a separate Ohio plan. Everybody knows how to use Zoom and Teams and all those kinds of things nowadays. So, that's not really a big deal. Brokerage accounts can be anywhere as long as you're okay, not being in the same state as your advisors. The investment advisors and financial planners are less impacted by the fact that you have moved to Florida than your estate attorney and your accountant. Those folks are going to be more impactful with the Florida move, but the one who helps kind of guide the big picture, not as big of a deal.
I'd look at this, as soon as you get to Florida, review the whole thing. Check the account titles, beneficiary designations every year. You should do that anyway. Have the legal documents formally reviewed every about every three or five years, something like that. And then if the death occurs, divorce, marriage, all the things like that, life changing events, have them eyeballed again. And then make sure those Cincinnati-based family members are still the right people to serve your needs. They usually can do that from another state, but there may be things about your situation that make that a little more challenging. So, hope that helps.
We'll move now to Phil and Nancy in Westchester. They say they've always invested in mutual funds and they're attracted to exchange-traded funds. So, if they switch to exchange-traded funds or separately managed accounts, could that lower their taxes in retirement? Bob?
Bob: Well, it certainly could. And I'm going to make a couple of assumptions here. You know, Phil and Nancy, I'm assuming you're talking about mutual funds owned in a taxable brokerage account, because if these are in an IRA, you can switch to anything you want and there's really not going to be any tax impact. But Brian kind of touched on a lot of these points earlier in tonight's show that I'll repeat here briefly.
If you want to make a transition into separately managed accounts or ETFs, you can do this. You're going to have to pay a little bit of, most likely, capital gains to do so, but as Brian mentioned earlier, use a couple of three years to do it. The other thing you could do is incorporate some of your charitable giving into the equation. Those mutual funds with embedded long-term capital gains in them are perfect vehicles to gift to charity or donor-advised fund.
A lot of reasons why people want to transition out of these mutual funds is because you lose a lot of tax control. In other words, in the fourth quarter of each year, the mutual fund company makes a distribution and they tell you what your capital gain exposure is going to be. And that's where this industry has evolved, where the actual client can own individual stock positions, ETF positions, where you have more tax control over your account. A separately managed account would work great because now you've got a bunch of different positions zigging and zagging, creating short-term capital losses in the background that you could use to gradually transition out of those mutual funds by having some short-term losses to offset gains in the mutual funds.
So, there's definitely a way to do this. I think the key is to transition over a reasonable period of time, not pay a huge tax bill upfront to make this conversion or change. And yet, I think if done properly, I do think you'll find that your investment portfolio will be much more tax efficient during your retirement years. All right, we've got time for one more. Eric in Kimberly said, "Our financial advisor," Brian," says we don't need umbrella insurance because we have good homeowners coverage." Is that really enough when your net worth starts to become, let's say several million dollars?
Brian: Yeah, I would challenge that a little bit. Good homeowners coverage, that's important, but it's not a substitute for umbrella. Umbrella covers stuff that homeowners doesn't. So, homeowners insurance generally includes personal liability, somewhere around $300,000, maybe $500,000. That can cover a routine accident. Somebody falls in your property and you're responsible, slips on the ice, something like that. But once those damages and those legal costs exceed the policy limit, now we're talking about your personal assets. And that larger issue is the liability doesn't begin and end at the house. An automobile accident, that's probably the most obvious example. Also especially, we don't know that this is the case, but we don't know if you have young drivers in the neighborhood. Well, that's a liability to you because you're responsible for them, of course.
So, those claims could easily exceed what the liability is on a regular auto policy. Homeowners insurance not going to cover it because it's not auto coverage. Personal umbrella, on the other hand, that sits above several underlying policies. It sits on top of your homeowners, auto, and boat wreck RV coverage if you have it. Once that underlying policy reaches its limit, the umbrella then kicks in for another million or two or 5 million or more. Some even cover personal injury claims, even libel, slander, false arrest. Umbrella insurance is for the crazy stories out there that everybody occasionally hears from somebody who is fairly distant. These things are fairly rare that they might occur, but they're not impossible.
So, umbrella insurance is really not that much. You know, a couple of $3, $4, or $5 million of umbrella insurance might only be $500, $1000 a year. It's not really that expensive because, again, the likelihood that these things happen is not that great. But so therefore, the premium isn't that much. The risk isn't all that great that it actually occurs, but if they do, they can absolutely be ship sinkers. So, I would definitely challenge your financial advisor on that advice.
Bob: Coming up next, I've got my two cents on whether it really makes sense in all circumstances for everybody to own their own 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. Hey, Brian, I came across a married couple in their mid to late twenties recently that's really been struggling about the cost surrounded with owning their home that they've been in for, you know, I think a little under three years. And, you know, they're starting to get serious about building a financial plan. And as I'm listening to them talk about their life over the last few years, one of the spouses is in the middle of getting her professional certifications to make a career change. They don't know whether they want to stay in Cincinnati for the long-term or perhaps move to Florida. Meanwhile, they're coming up with some unexpected repair bills, you know, getting a little bit of a basement leak fixed in their house. They've got some trees they need to get service.
My point is, as I'm listening to them talk, they were, you know, just for lack of a better term, hell bent on buying a house a few years ago. And I think they underestimated some of the costs involved with actually owning a home. To say nothing of the fact that if they decide to move or relocate, you're going to have to pay a real estate professional, say, 6% to sell your home. There's a lot of costs that come into home ownership, and a lot of younger folks, I don't think budget that into their financial plan before they just, you know, bite the bullet and sign and buy a house. Do you run into similar things with some of your younger clients, Brian?
Brian: Yeah. And the trend that I've kind of noticed there is that if the young people aren't budgeting all of the expenses in, and that probably means, the older people in their lives, their parents or whoever it is that's guiding them probably aren't either because that tends to run in the family. So, yeah, and there is a mindset. It doesn't surface as often as it used to now that we're in this era, this kind of 15-year-old era of really expensive real estate, maybe even longer than that, that used to be put down roots. Get that mortgage going as soon as possible because you're building equity, you're saving money. No, you're not. You're building property taxes, you're building hot water heater repair expenses and all those kinds of things.
That doesn't mean don't buy a home, but real estate does tend to be among...as a pure investment, it doesn't tend to be all that efficient, especially if it's not generating income for you. You got to have somewhere to keep the rain off your stuff, but that doesn't mean it's the greatest savings vehicle known to man. So, yeah, I would definitely not rush into any housing decision. Make sure you're in the area you want to be in. You know, and that can be the big city. Do we like the Midwest? Do we like the South? Assuming we have flexibility in our careers. And then even within that, what part of this big city do we want to be in? You might need to experiment with different neighborhoods and just see what you want.
And also remember, when you're young, the awesome place will eventually become the loud place. So, you'll eventually get to a point where you're going to want more space and you're going to want to move out. So, make sure that that is available to you. And make sure you also have not overspent. You know, if you're overspending your monthly expenses and you've got a 3% down payment deal or something, that's not necessarily a good thing. Means you're not really going to have a whole lot of equity when the pendulum swings toward needing to buy a bigger home somewhere else three, four years later.
Bob: Well, and you also have to factor in these unpredictable costs that it's not a matter of if, but when they come. You've mentioned a hot water heater, you know, stuff breaks down, the roof needs to be fixed, gutters need to be fixed. And a lot of young folks do not want to budget that into a financial plan and keep that large emergency fund in place. And when reality hits, you know, it creates a lot of stress that sometimes outweigh the benefits of home ownership. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Well, in many situations, you know, there's age brackets here where there's different challenges people are facing. And we never like to paint with too broad of a brush for every age bracket because everybody's different. But, for example, when you're 35, a lot of people are thinking mostly about building wealth. In your mid-40s, it's building, but starting to think about protecting it. At 55, maybe you're thinking about retirement or should be, you know, "Do I actually have enough to retire?" And by 65, a lot of folks are concerned with just, "Hey, is my money going to last longer than I do?"
I know that's painting with a little bit of a broad brush. The point in this segment is just everybody's thinking about maybe different things or prioritizing different things, Brian, depending on what age bracket they're in. And sometimes these things can overlap, too, because life comes at you quick. Things change. Family needs change. It's all about how you approach your financial plan and evolve with your changing financial situation over time.
Brian: And I want to step back even a decade earlier in your 20s because just to confirm, there's not a lot of science to what you should be doing in your 20s. So, let's really start there. I think there's three things to do when you're that age. Invest aggressively, don't make a mess of your credit, and don't panic when the market wobbles. That's it. Do that stuff for a good, long time and you're going to have all these challenges that we're about to talk through. I do think a lot of young people get sucked into all the different things they can find out there in terms of trying to make a million dollars overnight because there's one or two stories out there where that has happened. So, three things.
Bob: And also, I would add to that, Brian, I would add to that, systematically getting on a program where you're spending less than you make and do it consistently, right?
Brian: Yeah. A budget for concert tickets is what Bob is hinting at there.
Bob: Yeah, you're never going to let me live that one down.
Brian: Nope. Never in a million years.
Bob: Just wait until the key's locked today. We'll have more fun with that. Go ahead. Let's talk about what most people are doing in their 40s, Brian.
Brian: Yep. So, yeah. So, at this time, right now, you're trying to build margin, right? A lot of people think it's all about earning more, which that's, of course, helpful, but it's much more about creating flexibility. Earning more without a plan simply means you're spending is... You know, I like to think of spending as a gaseous substance. It expands to fill the space that it's in. So, if we make more money, we tend to spend more unless we have a plan in place with goal set.
I'm not the most disciplined person in the world either. This doesn't mean I have every single goal written out with a progress meter toward it. It's just knowing, what are my priorities? Goals can simply be priorities. Maybe that's an emergency fund. It's, of course, retirement. That's in the mix. You know, some effort toward helping your kids go through college, those kinds of things. But in any case, in your 40s, you're just trying to build a little bit of space. You might need to budget things like college as I just referenced. Aging parents, that could be on the horizon. Maxing out your own retirement accounts. That's usually a big desire for people who are really starting to enter their biggest earning years. Also, increasing taxable investing.
This is something that that that I've been talking about a lot more with younger people who have high income, 401(k)s and matches and all that stuff. Those are fantastic. We live in a in a city with a lot of strong, strong Fortune 500 companies and the companies that support them. That means, most of our citizens in this area are working towards 401(k)s, and that's great. Except remember, you're creating a huge tax overhang. That is not a bad thing. I'm not poo pooing this at all. But if every last nickel is going into the 401(k), then you are putting yourself in a situation where down the road, you're not going to have a lot of tax flexibility. Because when you're living off those assets, those dollars are purely taxed as ordinary income, and there's nothing you can do about it. There's almost no deductions anymore for the average person. So, just be mindful of that. Taxable investing, I think can be a really good opportunity for somebody on the younger end.
Bob: All right. Well, you just talked about all the things people in their 40s should be doing. Let's give a hypothetical example of what not to do. We're going to use a fictitious couple named Mike and Sarah. They're both 44. Together, they have a healthy income, a little over $325,000 a year, but they've got two kids in club sports. They live in a $900,000 home. They got two brand new SUVs on the driveway. And they're taking nice vacations, you know, maybe a few of them every year.
From the outside looking in, you'd say, "Man, they're crushing it. They got everything wired in, dialed in, doing great." But when we peel back the layers, here's what we find. They're contributing just enough to their 401(k)s to get a company match. They have about $25,000 only in savings, and most of their raises over the past decade have gone toward that bigger house, nicer car, more expensive lifestyle. In other words, lifestyle creep, Brian. And then what can happen? Life can happen. Mike's company restructures. Suddenly, he's out of work. And now they're asking, "How long can we survive and make it?" And the answer, based on their situation, maybe three or four months.
Brian: Right, exactly. And what that means is, yes, they've got money in their 401(k)s. You know, they put money away. But at the same time, they haven't done anything. There's no oil in that engine. So, it's going to run a little bit rough when we kind of hit some of the bumpy parts. So, that's very, very much... Again, that was the whole point of the 40s. We're building margin. You've got to build some space between, you no longer eating cat food, right, like you were when you were in your 20s. You have some flexibility, but it's tempting to just spend all of that flexibility. You should spend some of it. That's not a bad thing. But at the same time, also have an eye toward the future and kind of continue to build that buffer.
All right, let's jump ahead one decade. Let's talk about your 50s. This is when we need to start getting serious. Retirement stops being theoretical. You will start to notice your peers retiring themselves. Maybe those who are in a fortunate situation, they're retiring at your exact same age. Other people in your circle, you know, the 60s aren't that far away from the 50s, so that's kind of a realization that everybody gets when they're 50, is that some of their closest friends are now in their 60s. And those folks are definitely going to be retiring. You're going to start paying attention to these kinds of things. And those are the happy things. You'll also start to notice those same friends coming down with health problems and those kinds of things.
So, the goal here is to really, really start to get dialed in. Calculate that retirement number, pay attention to how those catch up contributions work, right? You can be putting more money away in your 401(k). Again, don't miss out on that taxable side either. Not every nickel should go into the 401(k). Get rid of your bad debts. Any debt that's over, I'd say, 7% or 8%, really focus on getting rid of that. Start to think about Social Security, maybe a little bit. Long-term care discussions, it's time to start learning about that stuff, but not necessarily pulling the trigger. Those kinds of things tee you up for a good, confident decision into the future if you started paying attention to it now. So, Bob, I think we've got another hypothetical here. I know you love your hypothetical. So, take us through an example of Tom and Lisa here.
Bob: All right, great. Tom and Lisa, they're both, say, 56 years old. Tom always figured he'd retire around 67. Lisa works part time outside the home. Between them, they earn $0.25 million a year. They've saved, but not very aggressively. They've got a little under a million dollars now accumulated between their retirement accounts and, say, another $150,000 in a brokerage account. They're thinking has always been, "We'll really start to ramp things up savings wise when we get in our 60s," Brian.
The problem is they never got serious. Tom still carries a car loan. They have a home equity line they use whenever they want to remodel or fix up their house or go on an expensive trip. They haven't looked at their investment allocation in years. They don't know what they'll spend in retirement, when they'll claim Social Security or whether they should be doing Roth conversions at all. Retirement is only 10 years away, but they still haven't built an actual plan to, you know, contemplate and get into retirement.
Then one day Tom's employer announces layoffs. He's offered an early buyout retirement package. Suddenly, the question immediately changes from, "Should I retire at 67?" To, "Can I afford to retire at 57 because I'm getting offered a package?" And that's when they realize they weren't behind because of one bad investment or maybe not optimized from a tax standpoint, they just assume they'd have more time to plan for retirement than they actually did. And Brian, we see this come up from time to time. That's why, you know, you talked about getting serious in your 50s. If you can get serious in your 30s and 40s by saving that extra 2%, 3%, 4%, putting it away, you know, toward retirement, you know, that makes things a little easier if life throws you a curve ball in your 50s.
Brian: Yeah, I would add onto that, too. So, when that does happen... And again, we're in an area of Fortune 500 companies. That's how they occasionally pump up their stock prices, is by announcing that they're reducing expenses via layoffs. So, if you work for one of those companies, you've probably had a fantastic career with lots of benefits attached and there's absolutely nothing wrong with that. Just bear in mind, that could happen. I would say, there are two types of people who received those retirement packages, those for whom it's a celebration, meaning they were kind of anticipating maybe it would come, and yay, it came. And those who got completely blindsided for it. And it's not a celebration, it's panic attack. Both of those can be exactly the same financially, but one prepared for it and understood what the impact might be. The other just got out of the blue out of left field, got informed that their last day is whenever, and they had given no thoughts to it.
So, all right, let's move forward again in time. Now we're in our 60s where it's no longer about maxing returns. It's about turning assets into income. So, we need a retirement income plan. You're talking about Medicare, Roth conversions, sequence of returns risk, cash reserves. "What's my withdrawal strategy based on how my different stuff is going to get taxed. And then of course, I always have that estate plan to worry about there in the background." So, I want to take the hypothetical here this time. I want to... I like this story.
So, Jim and Karen, both 64-year-old fake people who look an awful lot like a lot of our clients that we talked to on a daily basis. So, Jim just retired after 38 years, nice, long career. Karen has gotten a little jealous and she wants to follow him next year. So, on paper, looking at the spreadsheet, they look like they're in great shape. They've got $2.4 million across 401(k)s, IRAs, and other investments. Paid off house. Obviously, this has taken decades to put together.
Here's the problem though. They spent all those years focused on saving for retirement and no time at all almost about living in retirement, which is very, very different. They have no idea which account they're going to withdraw from first. And part of that is because they simply don't understand exactly what it's going to cost them or how to draw on their assets. All the way up until now, their bills have been paid with other people's money. What I like to call OPM. That means somebody gives them a paycheck every single month. That's how they pay their bills.
Now, it's not necessarily a concern that they can't afford it, but they're paying themselves. And that is a huge psychological hurdle to get over in terms of, "I've always convinced myself that my nest egg is for the future," but the future is now in this case. So, that first year of retirement, that throws them a big curve ball. We've not taken any time understanding how it works or what it looks like to draw on my own assets. And then of course, God thinks he's funny, so the market drops 15% at the same time. This has happened the last two Aprils. So now, they're wondering, "Should we quit taking withdrawals at all? Do we go back to work? Maybe we retired too soon." All this stress, Bob, is unnecessary, but it's an unforced error. Had they spent any time at all understanding how they themselves live, and then how their assets can support them in the most efficient manner, we don't have to go through this.
Bob: Yep. It's all about having a financial plan, something that you build and maintain over time. Here's the Allworth advice, your financial plan shouldn't stay the same as you age. Every decade brings new opportunities, new risks, and a new definition of success. The best plans evolve right along with your life. Coming up next, why you might have a big tax bomb hiding in your brokerage account and what you could do about it. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Straight ahead, we're going to be answering your questions about estate planning, whether switching investment vehicles can really help your tax bill during retirement, and if higher net worth families really need umbrella insurance. Well, just in the last couple of weeks, we've seen a couple of new proposals out of Washington aimed at limiting tax advantages for people with very large retirement accounts. And while those headlines mostly impact a small group of investors, they highlight a much bigger issue that millions of successful savers face at one time or another. You don't have to be a billionaire to have a potentially huge tax problem sitting in your brokerage account, Brian.
Brian: Yeah, that's right. So, congratulations. Now we have a problem. You've been investing for 30 years. Every month, money goes into a brokerage account. You bought these great companies, maybe an S&P 500 index fund, maybe about the whole market, some Apple, Microsoft, Berkshire Hathaway, those kinds of things, and you simply never sold. Now, that has worked great on paper. That account is worth $3 million. Well, that sounds fantastic. We'd all love to have that problem, except there's one catch. You only invested about $900, that other $2.1 million, it's all capital gains, which that's not a bad thing, right? Everybody has different opinions on taxes, but at the end of the day, taxes are, at least, some level of recognition that you did good. You earned money, an investment you made went up, and there's taxes due on that. If you're upset about that, don't let the tax tail wag the dog. Call your congressperson, but don't change around your financial plan. So, this is one of the...
Bob: Hey, Brian, on this topic, do you remember the meeting you and I had together with a client a little over a week ago, where they brought in the spreadsheet, and own a pretty large position and three stocks. And this guy went on to describe how he's sitting on... He knew exactly what his accumulated rate of return on those stocks were. I mean, it was a four-digit number, 1083% or whatever. And we asked him, "Hey, how have those stocks performed to a diversified," just say," "S&P portfolio over the last three, four, five years?" And we got a deer in the headlights look, right? Sometimes people just want to stare at that high percentage return over 20 or 30 years on a spreadsheet, and it just paralyzes them because they're addicted to seeing that big gain. But go ahead.
Brian: Yeah, and there's nothing wrong with that. And in that particular conversation, I do remember that, and that was much more about, the comment was, "These stocks have done really well," and they had. But they had done, I think the average was something like maybe 7%, 8% on average over years, which that's good. But then we were able to point out that, "Look, if you have all the risk of all of these couple of companies, they can do anything. They'll swing up and down wildly," and they had over time. "Meanwhile, you could have diversified that and gotten an average of 10% out of the S&P 500."
So, people do tend to assume that up is up, any up is good, and if it goes up, then nothing else matters. But you don't have to go any further than, you know, talking to anybody who's owned a company at the wrong time. We all love our Procter & Gamble around here. But go back to the early 2000s. You know the story I'm talking about here with the Durk Jager years. Anybody who worked at P&G remembers Durk Jager and the decisions that he made. I'm sure he's a lovely man.
Bob: Brian's favorite CEO of all time.
Brian: Oh, I think that's a perfect example of a really, really strong company that can step in the bucket every now and then. That's exactly what P&G did, lost half of its value over a quarter. That didn't mean P&G suddenly was a bad company to own. It just means the market temporarily didn't like it. Sometimes it rains, stuff happens.
Bob: All right. Well, Brian, we talk about this often on the show, but there are a myriad of ways to manage a big, embedded capital gain in your portfolio and get things diversified, take care of making sure you've got an appropriate risk level while managing taxes. Walk us through a good example of how that's done. Because I think too many people don't understand how relatively easy it is to get good advice and good management in this area of tax management.
Brian: Yeah. And I think a lot of... This is a good example, too, of where a financial advisor adds value. When I first started in this industry, I didn't care about any of this other stuff. I thought, 30 years ago, it was all about internet stocks and it was all about growth, growth, growth, and who cares about everything else. And at some point, maybe in your 20s, that's really kind of all you need. But eventually if you're successful, you're going to create all these problems that you need solutions for. And this is where an advisor who has a lot of experience watching people go through this can help you understand new concepts.
For example, there's smarter ways to deal with these things. A lot of strategies can help you figure out how to handle the tax that you're going to take. Simply, first of all, you can spread sales over several years. So, right now as we're sitting here, anytime during the year, you can usually get into multiple tax years. Let's pretend it's December and I'm worried about taking a gain. I don't want to pay the taxes. Well, in any years, December, I can get into 3 tax years over a 13-month period. Sell something right now in fake December, something anytime next year, and then one more time the following January. That's a 13 month spread, but 3 tax years over a little more than a year.
You can also look for losses. If you have to take some gains, go find something else that's sitting at a loss. A lot of times we tend to... You know, that position we took that is become the red-headed stepchild because it's in a loss position. We want to ignore it. Well, you might be able to just sell it and offset something. You know, maybe you got to buy a car or whatever the thing is. Go unload that position that's been making you mad for a long time, anyway. That will incur a loss for you that will offset that gain.
Or if you are already charitably inclined, if you're already writing checks to... And we say this frequently, too. If you have appreciated securities in a taxable account and you are writing checks to the charity, you're doing it wrong, especially if you can't even itemize your deductions. So, if you want to support your charities, but you know full well, you're not itemizing, you're not getting deduction, start using those appreciated securities. And you won't really get a new deduction necessarily in that specific case, but you will avoid the taxable gain, which is kind of like getting a future deduction. Kind of labor that a little bit.
Bob: Here's the Allworth advice, don't let taxes become the only factor driving your investment decisions. A thoughtful diversification plan can cost you some taxes today, for sure, but it can buy you more flexibility, gets your risk profile back where it needs to be, and give you a greater peace of mind for the years to come. Coming up next, our insurance expert is in to help you decide if and when to actually pull the trigger on acquiring some long-term care insurance. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James, joined tonight by our in-house insurance expert, our director of insurance for all things Allworth Financial, Jodee Deutsch. Jodee, thanks for carving out some time for us tonight. And you want to cover a very important topic, which I know Brian and I run into all the time, who should consider long-term care insurance? I know you work with a lot of our clients and run these in-depth analyses. Give us kind of a 30,000 foot view of what you're finding as you work with actual families wrestling with this very important decision.
Jodee: Well, thanks for having me, Bob and Brian. I do hear all the time, "Do I really need long-term care insurance?" And what I tell clients is it depends. Long-term care planning is not just about insurance. It's about having an overall plan if you need care and discussing what assets you have and having discussions with your family. So, really, I think that there's three categories to consider starting the discussion about options to pay for long-term care.
First, people in their 50s and 60s. That's really an ideal time to explore your options because you're generally healthier and premiums are lower than if you wait until later 60s or 70s when many people are retiring. So, that's number one. Number two, people who have accumulated meaningful assets. So, if your goals are to leave a legacy for your family, which could be kids or grandkids or a charity, and you want to make sure that they get that legacy even if you need long-term care, having a discussion about options to pay for long-term care makes sense so that we can preserve the legacy that clients worked so hard to build.
Brian: That's great advice, Jodee. I've thought about this a lot lately because it's almost like... And I remember when I started doing as a financial advisor, you know, you could set somebody up with long-term care insurance, and it would cover a good chunk of what they would need, if not all of it. And it was maybe $5,000 a month for a married couple. That was 30 years ago. Nowadays...
Bob: A year, not a month, right?
Brian: Yeah, yeah. That's true. That's a great point. So, I'm talking about the premium. Yes, the insurance premium could be like $5,000 per year total for a married couple. Thanks for the reroute there. Nowadays, that same policy, the Cadillac policy that could, should cover most things is really more like $12,000 to $15,000. Meanwhile, incomes haven't risen that much. So, it's almost like that same debate that young people have about, "Well, grandma and grandpa didn't have to pay this much of their salary for a house." It's the same argument of somebody else's parents didn't have to pay this much for long-term care insurance. So, that makes it harder to buy term-based, long-term, or at least, less attractive to buy term-based long-term care where the premium is every year. Are there any other better solutions if we don't want to write that annual check, not knowing whether we'll ever need it?
Jodee: There absolutely are. You can look at policies that provide a portion of the benefits, number one, so that you're not buying the Cadillac policy, maybe you're buying a Toyota. I love Toyotas.
Brian: Good, reliable vehicle.
Jodee: Yes. Or there are policies out there that if you don't use the long-term care benefits, the beneficiaries get a death benefit. So, we know that someone's going to use the benefits of the policy, and that allows clients to have more peace of mind of spending the money knowing that it's not just a use it or lose it scenario. So, there's a lot more options than used to be out there 30 years ago, absolutely.
Bob: Jodee, is there such a thing as the most common strategy you come across as you evaluate financial plans, let's say, for people in their 50s? Where are you seeing people fall out at the end of the analysis and why? Is there such a thing as a most common planning scenario that makes the most sense today, or is that painting with too broad of a brush?
Jodee: I think one general thing that people don't really think about is accumulating assets that are in a 401(k) and/or ultimately a traditional IRA. So, if clients have a large concentration of qualified funds sitting in their 401(k)s, because they've done really well, that will eventually move to a traditional IRA. Using those funds to pay for long-term care has a bigger tax impact and overall impact to their plan than non-qualified funds. And so, part of the analysis is looking at where their overall assets are, and what percentage is sitting in those qualified funds versus funds that are a little more liquid, maybe a little less tax heavy to use for care.
Brian: Got it. So, in that case, it really becomes a decision of, "Does this fit my budget. And is this too much of a sacrifice versus what I'm protecting against?" Let me walk you through how I present this to my clients ways to think about it and tell me what you think. What I like to talk to people about is, first of all, let's not panic over this. If we're in a situation where we've got assets... If we don't have any assets, then probably Medicaid is in the picture. And then that's a whole different discussion. Then there are people who are very well aware they've got $5, $10, $15 million. It's not a major concern. They can afford to self-insure. So, it's really that middle window of people with maybe $1 to $5 million, something like that, where they're really scared to death.
So, my thought there is, what I always tell people is we should expect something like $120,000 per year if we need to stay in a home. That's $10,000 per month in this area for a nice facility. That's for one person, one half of a married couple. And the average day, we're talking end of life care, so the average day is two and a half to three years. So, we might need to come up with $350,000 to $400,000. However, that is not $10,000 layered on top of your extra bills that we've already built in your financial plan. You're not traveling anymore. You're probably not going to the grocery store anymore. You probably don't have an electric bill anymore because you're living in a nursing home. There may be moving parts to this with a surviving spouse that has stayed at home, but that's a little bit different than an extra $300,000 to $400,000 we need to spend in retirement. Is any of that off base? Do you feel like there's anything I should add or adjust to that?
Jodee: No, that is absolutely what we need to assess, is what your overall goals are and what will change if you do need care, because those dollars can be repositioned to pay for long-term care. That is absolutely the way that we look at it. So, everything is specific to who the client is, what your overall assets look like, and what your financial goals are.
Bob: Sounds great, Jodee. Thanks as always for the great advice tonight. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show if you're listening on the iHeart app. Simply record your question there and it will come straight to us. David and Mary, Brian, say, "We are Florida residents now, but most of our investments, advisors, and family are all still in Cincinnati. How often should we revisit our estate documents to make sure both states are covered?"
Brian: Yeah, that's a great and important question, and hopefully, it comes up quickly after the shine has worn off of the, "Hey, we're just steps from the beach." Yes, you have changed other things in your life other than your place of living. There's moving parts to all this. So, generally, the objective isn't to create one plan that works in Florida and then a whole separate one for Ohio. In this case, your documents should be coordinated under Florida law because that's where you live. Ohio will, may still do the job, but it may be valid, but valid and well-designed for Florida are necessarily not the same thing. So, have a Florida State Planning Attorney review your wills, trust, durable powers of attorney, all those kinds of things. Doesn't mean you necessarily have to gut them and start from scratch, but on the other hand, they might be 80% good to go. It's the 20% that'll be the curve ball. So, make sure that you have somebody take an eye on that.
Replacing older Ohio documents with Florida stuff can also reduce the chance that a Florida bank or hospital or a title company might choke on whatever you hand them when you need them to do some things for you. So, your investments and advisors, being in Cincinnati, that itself does not drive a separate Ohio plan. Everybody knows how to use Zoom and Teams and all those kinds of things nowadays. So, that's not really a big deal. Brokerage accounts can be anywhere as long as you're okay, not being in the same state as your advisors. The investment advisors and financial planners are less impacted by the fact that you have moved to Florida than your estate attorney and your accountant. Those folks are going to be more impactful with the Florida move, but the one who helps kind of guide the big picture, not as big of a deal.
I'd look at this, as soon as you get to Florida, review the whole thing. Check the account titles, beneficiary designations every year. You should do that anyway. Have the legal documents formally reviewed every about every three or five years, something like that. And then if the death occurs, divorce, marriage, all the things like that, life changing events, have them eyeballed again. And then make sure those Cincinnati-based family members are still the right people to serve your needs. They usually can do that from another state, but there may be things about your situation that make that a little more challenging. So, hope that helps.
We'll move now to Phil and Nancy in Westchester. They say they've always invested in mutual funds and they're attracted to exchange-traded funds. So, if they switch to exchange-traded funds or separately managed accounts, could that lower their taxes in retirement? Bob?
Bob: Well, it certainly could. And I'm going to make a couple of assumptions here. You know, Phil and Nancy, I'm assuming you're talking about mutual funds owned in a taxable brokerage account, because if these are in an IRA, you can switch to anything you want and there's really not going to be any tax impact. But Brian kind of touched on a lot of these points earlier in tonight's show that I'll repeat here briefly.
If you want to make a transition into separately managed accounts or ETFs, you can do this. You're going to have to pay a little bit of, most likely, capital gains to do so, but as Brian mentioned earlier, use a couple of three years to do it. The other thing you could do is incorporate some of your charitable giving into the equation. Those mutual funds with embedded long-term capital gains in them are perfect vehicles to gift to charity or donor-advised fund.
A lot of reasons why people want to transition out of these mutual funds is because you lose a lot of tax control. In other words, in the fourth quarter of each year, the mutual fund company makes a distribution and they tell you what your capital gain exposure is going to be. And that's where this industry has evolved, where the actual client can own individual stock positions, ETF positions, where you have more tax control over your account. A separately managed account would work great because now you've got a bunch of different positions zigging and zagging, creating short-term capital losses in the background that you could use to gradually transition out of those mutual funds by having some short-term losses to offset gains in the mutual funds.
So, there's definitely a way to do this. I think the key is to transition over a reasonable period of time, not pay a huge tax bill upfront to make this conversion or change. And yet, I think if done properly, I do think you'll find that your investment portfolio will be much more tax efficient during your retirement years. All right, we've got time for one more. Eric in Kimberly said, "Our financial advisor," Brian," says we don't need umbrella insurance because we have good homeowners coverage." Is that really enough when your net worth starts to become, let's say several million dollars?
Brian: Yeah, I would challenge that a little bit. Good homeowners coverage, that's important, but it's not a substitute for umbrella. Umbrella covers stuff that homeowners doesn't. So, homeowners insurance generally includes personal liability, somewhere around $300,000, maybe $500,000. That can cover a routine accident. Somebody falls in your property and you're responsible, slips on the ice, something like that. But once those damages and those legal costs exceed the policy limit, now we're talking about your personal assets. And that larger issue is the liability doesn't begin and end at the house. An automobile accident, that's probably the most obvious example. Also especially, we don't know that this is the case, but we don't know if you have young drivers in the neighborhood. Well, that's a liability to you because you're responsible for them, of course.
So, those claims could easily exceed what the liability is on a regular auto policy. Homeowners insurance not going to cover it because it's not auto coverage. Personal umbrella, on the other hand, that sits above several underlying policies. It sits on top of your homeowners, auto, and boat wreck RV coverage if you have it. Once that underlying policy reaches its limit, the umbrella then kicks in for another million or two or 5 million or more. Some even cover personal injury claims, even libel, slander, false arrest. Umbrella insurance is for the crazy stories out there that everybody occasionally hears from somebody who is fairly distant. These things are fairly rare that they might occur, but they're not impossible.
So, umbrella insurance is really not that much. You know, a couple of $3, $4, or $5 million of umbrella insurance might only be $500, $1000 a year. It's not really that expensive because, again, the likelihood that these things happen is not that great. But so therefore, the premium isn't that much. The risk isn't all that great that it actually occurs, but if they do, they can absolutely be ship sinkers. So, I would definitely challenge your financial advisor on that advice.
Bob: Coming up next, I've got my two cents on whether it really makes sense in all circumstances for everybody to own their own 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. Hey, Brian, I came across a married couple in their mid to late twenties recently that's really been struggling about the cost surrounded with owning their home that they've been in for, you know, I think a little under three years. And, you know, they're starting to get serious about building a financial plan. And as I'm listening to them talk about their life over the last few years, one of the spouses is in the middle of getting her professional certifications to make a career change. They don't know whether they want to stay in Cincinnati for the long-term or perhaps move to Florida. Meanwhile, they're coming up with some unexpected repair bills, you know, getting a little bit of a basement leak fixed in their house. They've got some trees they need to get service.
My point is, as I'm listening to them talk, they were, you know, just for lack of a better term, hell bent on buying a house a few years ago. And I think they underestimated some of the costs involved with actually owning a home. To say nothing of the fact that if they decide to move or relocate, you're going to have to pay a real estate professional, say, 6% to sell your home. There's a lot of costs that come into home ownership, and a lot of younger folks, I don't think budget that into their financial plan before they just, you know, bite the bullet and sign and buy a house. Do you run into similar things with some of your younger clients, Brian?
Brian: Yeah. And the trend that I've kind of noticed there is that if the young people aren't budgeting all of the expenses in, and that probably means, the older people in their lives, their parents or whoever it is that's guiding them probably aren't either because that tends to run in the family. So, yeah, and there is a mindset. It doesn't surface as often as it used to now that we're in this era, this kind of 15-year-old era of really expensive real estate, maybe even longer than that, that used to be put down roots. Get that mortgage going as soon as possible because you're building equity, you're saving money. No, you're not. You're building property taxes, you're building hot water heater repair expenses and all those kinds of things.
That doesn't mean don't buy a home, but real estate does tend to be among...as a pure investment, it doesn't tend to be all that efficient, especially if it's not generating income for you. You got to have somewhere to keep the rain off your stuff, but that doesn't mean it's the greatest savings vehicle known to man. So, yeah, I would definitely not rush into any housing decision. Make sure you're in the area you want to be in. You know, and that can be the big city. Do we like the Midwest? Do we like the South? Assuming we have flexibility in our careers. And then even within that, what part of this big city do we want to be in? You might need to experiment with different neighborhoods and just see what you want.
And also remember, when you're young, the awesome place will eventually become the loud place. So, you'll eventually get to a point where you're going to want more space and you're going to want to move out. So, make sure that that is available to you. And make sure you also have not overspent. You know, if you're overspending your monthly expenses and you've got a 3% down payment deal or something, that's not necessarily a good thing. Means you're not really going to have a whole lot of equity when the pendulum swings toward needing to buy a bigger home somewhere else three, four years later.
Bob: Well, and you also have to factor in these unpredictable costs that it's not a matter of if, but when they come. You've mentioned a hot water heater, you know, stuff breaks down, the roof needs to be fixed, gutters need to be fixed. And a lot of young folks do not want to budget that into a financial plan and keep that large emergency fund in place. And when reality hits, you know, it creates a lot of stress that sometimes outweigh the benefits of home ownership. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
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