Are You Really Diversified? Plus Life Insurance Gaps and Protecting Family Wealth
On this episode of Simply Money presented by Allworth Financial, Bob and Brian explain what true diversification looks like in today's market—and why owning more investments doesn't always reduce risk. They also discuss a proposal that could bring private equity, crypto, and other alternative investments into 401(k) plans, and whether highly compensated employees have enough life and disability insurance coverage.
Plus, they answer listener questions on navigating different retirement timelines, protecting family wealth from divorce risk, tax planning after moving to Florida, and preparing to sell a closely held business.
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Bob: Tonight, a deep dive into portfolio diversification, a look at whether you actually might need some more life insurance, and as always, we answer your questions. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Well, we say it all the time, you need a diversified portfolio, but what does that actually mean? It's not so black and white, especially nowadays, Brian.
Brian: Yeah, Bob, according to a new report from Morningstar, a deeply diversified investment portfolio, and that would include layers of asset classes, a little different than it used to be, including layers of asset classes beyond just your typical stocks and bonds, that outpaced the traditional 60/40 portfolio by five percentage points last year. That's the biggest spread we've seen there since about 2009. So, let's talk about diversification. Just make sure everybody's on the same page, how we're kind of viewing this here.
We're talking about stocks and bonds, of course, those have always been the elements of diversification, at least. But nowadays alternative investments like crypto, private credit, gold, those kinds of things. You know, a lot of times people have a small portion of this stuff in their portfolios really for diversification purposes, but sometimes these alternative investments just act a little differently than the public markets. But there is risk to it, right? So, the whole purpose of diversification is to have something that is not correlated directly with the stock market, something that might, that has a chance of going in the opposite direction. If investors are fleeing stocks, then they might go into something else, you know, or vice versa. The opposite is true too. Sometimes they dump all those things, come back into the stock market. That's why we want to try to have a horse in all the races.
So, it sounds great to, "Well, the heck with it. Maybe I'll just own the same even proportion of everything." So, not the best idea. There is risk if you kind of go nuts over owning a little bit of everything or a lot of everything. It really is important to say, you know, just because you're diversified may not mean you have the right percentage allocated to each asset class. Some things are more violent and unpredictable than others. You want to have pretty small allocations to those types of things if you're going to take those steps.
Bob: All right. Well, Brian, this study that we're talking about tonight, I mean, let's face it, we're talking about one year's worth of data. So, we're not throwing the baby out with the bathwater here and saying that the 60/40 portfolio is dead forever. Over the last 20 year timeframe, this traditional 60% stock, 40% bond portfolio generated an average return of around 9.7%, while a deeply diversified portfolio with all those alternative investments and all that stuff thrown into it, you know, north to return of just over 7%.
So, a lot of times, Brian, in any one year, we'll get some outperformance. We'll have a bit of a unique year with certain asset classes... I mean, gold and oil come to mind here recently. So, again, we're not saying this 60/40 portfolio is dead by any chance, by any sake, but we really do need to keep an eye on this. Because at the end of the day, to your point, I think we're trying to do two things with a diversified portfolio. We're trying to have a little negative correlation, which helps with risk management, but we're also, at the end of the day, trying to generate some return. One thing that's interesting to me, Brian, you know, I think a five-year period is worth at least looking at. I'm looking at the Bloomberg aggregate bond index, you know, with the five years ending last Friday. You want to know what the return on that Bloomberg bond index is?
Brian: Hit me. What was it, Bob?
Bob: Zero. And I think that's why this 60/40 whole thing, I think we really need to be looking at how much should be allocated to bonds over the long term. Because I don't think interest rates are coming down anytime soon. I mean, the last time we had any kind of real volatility, to speak of, was back in 2022. And that year we did not get that ying and yang relationship. Stocks and bonds were both down together by quite a bit. That's the year that the Fed raised interest rates seven times. That doesn't happen very often. But point being, I think to sit there with 40% in treasury bonds and hope you're going to get this 9% or almost 10%, you know, combined return over the next 10 years, that might be a little wishful thinking. That's the point I'm trying to make here.
Brian: Yeah. And I want to go back to what you were saying earlier about the 60/40 portfolio, which that's a traditional balanced portfolio averaging 9.6%. That's hard for people to fathom because nobody wants to... You know, I think we know enough about the volatility of the markets these days. Nobody comes in wanting us to build a financial plan assuming a 9.6% rate of return because it seems too unrealistic. But the reality is that that is what a 60/40 portfolio has averaged over the last 20 years. And so, that means the stock market, a 100% stock portfolio has done even better, more along the lines of 11% to 12%. That's an average. Is it a predictable average? Absolutely not.
Think of what the last 20 years includes. In that is 2008, which, you know, obviously, that was the great recession. Everybody remembers what happened then. As well as '22, two of the worst years we've ever had in the markets. And we've had some stinkers in there as well, 2018, which was sort of like water torture. It wasn't any one big panicky event, but it was just a year where we just couldn't get things get off the mat at all. And some other years as well.
So, you have to ride it out. You have to see the portfolio through, which means you have to manage your emotions when those years happen. And that can be extremely hard to do. It is really easy to look at a spreadsheet of numbers and say, "Wow, stock balance portfolio, average is 9.6%. Sign me up. That's for me." But you're not going to get there in one year. It could do better than that. It could do a lot worse. This is, again, a 20-year timeframe. That's the bulk of some of the average person's retirement. But that's why we have this conversation, because people are always tempted to look at these other assets, "Well, if this point, this must be broken. It's not doing my 9.6% this year. Therefore, I guess that means this doesn't work anymore. I have to go do something else."
And a lot of people have suddenly started paying attention to their portfolios, not because they are interested suddenly, it's because they have the time. When people retire, they are attracted to really get in there and tinker with things that they haven't had time to mess with over the last 30 years while they've been working and raising families. And that can be a bit of a danger zone in terms of, you know, the market hasn't changed, investment hasn't changed just because you're now paying attention. Everybody should look into the history and understand, is their portfolio behaving any differently than it ever has over history, or is it just, now, you have time to pay attention to it? That's two different things.
Bob: No, for sure. And that leads me right into the next kind of topic I want to cover on this whole thing and that's sequence of return risk. And, Brian, you and I talk about this all the time. I think on the show as well as with clients, people care far less about volatility when they're still working because they're still piling money into their 401(k) plan. They stomach the volatility because they know over a reasonable period of time, markets always recover and you go along and you get those stock-like returns and everybody's fat, dumb, and happy. Things change when you've got to factor in that sequence of return risk. When you got to turn, as you like to say, your pile of money into a stream of income. That's where volatility by tinkering around with some of these alternative asset classes, or just having too much concentration in one sector of the market or too much in stocks all together, that can really impact the long-term health of your portfolio.
Because while a 7, 8, 20-year average return is great on paper, as you just said, while you're trying to eat and put gas in the car and buy clothes and all that and pull money out of that pile of money during periods of sometimes what can be extreme volatility, it's counterintuitive. But the math just doesn't math when you're pulling money out of an extremely volatile portfolio. And that's why sometimes you have to take a close look at what you really own and really dovetail that with some Monte Carlo analysis of your overall retirement income plan.
Brian: Monte Carlo analysis, Bob, that sounds fancy. That sounds like gambling. What are we talking about there? Well, let's go through a quick definition of what Monte Carlo really is. Monte Carlo analysis is a fancy way of saying, let's just run your numbers. Let's live out your life financially 1,000 different times with all the spending and all that stuff locked in. Let's get an idea of what we think you need to spend on your various spending goals, what inflation factors we should attach to that. Don't forget healthcare. That's going to be its own deal, possibly a long-term care type situation, and so forth.
Then what you do is, again, let's vary the rate of return every single year. This is very much a study of sequence of returns, is what Bob is saying. The outcome of a Monte Carlo analysis study is simply, how many times out of 1,000 or out of 100 or whatever variable I'm looking at, how many times do I make it all the way to the end with all these spending and inflation assumptions in place, including my income streams from Social Security and pension, whatever else I have going on? How many times do I make it all the way to the end with, at least, a dollar in the bank? The higher that percentage goes, obviously, the better off you are.
I'm not a believer. Of course, this is not something where we're looking to make the things say a 100%. That's not the case. That's usually too much of a sacrifice. There's risk in anything we do. I'm perfectly fine with somebody who's Monte Carlo saying 70%, 80%. That means we've got a three out of four, four out of five chance of success. And the other thing to bear in mind is that human beings will adjust along the way. So, if we, heaven forbid, we do start heading down one of those rougher paths with bumpy markets early in retirement, people naturally adjust. We don't take that big vacation. We don't make the big improvement to the house. So, you won't spend the money that the Monte Carlo is telling you might not be there to spend anyway on a kind of off chance that the markets may behave in a way that the ship doesn't float as well as it did before.
Bob: Yeah, one other thing I think it's important to touch base on here with respect to diversification, Brian, and I know you see this all the time, sometimes people will come in, they'll bring in all their investment statements and they'll say, "Yep, we're already diversified." And they show us all their different accounts that have umpteen different mutual funds and ETFs and all that. And when we actually look at what's actually contained in those funds, there is just a ton of overlap. Whether you're investing in broad-based S&P 500, ETFs or funds or large cap growth funds, the holdings tend to be all the same. And we talk about this all the time on the show, just the concentration of the magnificent stock or Magnificent Seven big cap tech stocks in most of these mutual funds and ETFs and index holdings. That is a reason too, to just take a look at diversifying things even more to cut down on what you just covered in great detail here, this sequence of return risk.
Brian: Yeah. And I think, again, that's an important thing that really where this starts though, is sitting down and figuring out what your spending looks like in the first place. Everything I described computers are going to do for you, but you have to come to the table knowing, here's what it costs me to get my normal bills paid every month. Here's what I think I want to do. And that's really the key. Most people haven't spent any time thinking about, "What am I going to do when I don't have to go to a job 40, 50, 60 or more hours a week? What will I do with that free time? Do I want to travel? Am I going to do things with the kids?" You know, and so that's really the homework assignment. Figure out what the real expenses are going to be, then we can do that level of math.
Bob: Here's the Allworth advice, diversification isn't measured simply by the number of holdings in your portfolio. It's measured by how many different risks you're actually taking as you build your long-term retirement income strategy. Well, a major retirement proposal is drawing an enormous response from the public. Plus, a new report raises concerns about how prepared Americans actually are to make big financial decisions. We'll explain why both of those stories matter next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your favorite podcasts. Straight ahead, protecting family wealth from future divorce risk, key moves before selling a privately-held business and tax planning opportunities that come with potentially leaving Ohio for Florida.
If you've been listening to the show over the past several months, you've heard us talk about a major proposal that could change the way Americans invest in their 401(k) and other employer-sponsored retirement plans. There's a push to open the door to investment options like private credit, private equity, real estate, annuities, and even cryptocurrency. Brian, the latest public comment period ended on this proposal recently, and the Department of Labor now has over 45,000 comments to review about this proposal. I think this is going to take a while.
Brian: Yeah, it's going to take a while, but I don't see any way that we don't wind up doing this with 401(k)s. We really as a society don't care about consequences or bad outcomes anymore. It's all about how much money can we make. So, yeah, I'm sure included in those 45,000 comments are a range of a spectrum of opinions on all this stuff. The number of comments tells you how controversial this really is. Depending on who you ask, this is a huge win for retirement savers. And I'm pretty sure the people who would say that are the financial institutions who want to get behind just creating more transactional activity, tapping into the $12 trillion. Actually, I bet it's not $12 trillion anymore. It's probably been more like $13, $14 worth of dollars that are in 401(k)s retirement plans for assets that you can't currently buy these types of private equity, private credit types of things, cryptocurrency, and so forth.
So, again, what the proposal does here is it creates a safe harbor for retirement plan fiduciaries. If you're a company with a retirement plan or if you're on the committee for the ABC widget maker that has a 401(k) for its employees, then you are a fiduciary. And currently, you could be sued for allowing enough rope for people to hang themselves. But it's going to... The goal here is the Department of Labor wants to loosen those reins to allow these fiduciaries to be a little bit more protected by advancing these types of options inside of 401(k)s. That's the goal here.
Bob: Yeah, and I agree that's the goal. And there's a lot of different interests at play here. And you've already pointed some of them out. I mean, among some of them are fees and expenses of these actively managed private equity, private credit, alternative asset funds. I mean, let's face it, these employers, there are fees and expenses to run a 401(k) plan. In case people don't understand this, a lot of those fees and expenses are generated from the internal operating expenses on the funds that are included in the fund lineup. And these companies are trying to make money like everybody else, as you've already pointed out.
So, yeah, if we throw 20% or 30% of these alternative investments into these different fund offerings or plan offerings or target date funds, guess what happens? The fees go up in these plans, and those plans help pay for themselves, so to speak. But what's usually left behind is an amount of proper education for the participants in these plans to actually know what they're buying, what the fees are, what the lockup periods are, and all of that. So, I am all about freedom and choice and opportunity.
But I'll repeat what I said months ago, I think this stuff should be put in a private brokerage account within a 401(k) plan. So, at least the participants have to opt out of the traditional platform and actively go seeking these things rather than wake up one night and just know that this stuff is in their plan and they had no idea what it is, what to do with it. That's the danger I see. And I think that that's why we're getting so many comments about this pro and con out there. It's just a very interesting time. But, yeah, there's my, "I'll get off my soapbox."
Brian: No, I think that's fine. And there's going to be plenty more to come on. Let's pivot now. Because we talk a lot about investing, retirement planning, tax strategies, building wealth, all that stuff. And all of those things depend on one very basic skill, which is understanding money in the first place. And we've got a new study out there saying that Americans are not getting better at that. We're getting a little worse, unfortunately. So, this is according to the latest personal finance index from the TIAA Institute and Stanford University's Global Financial Literacy Excellence Center. Americans scored just 47% on a basic financial literacy test. And that is the worst result we've seen in the 10-year history of the survey. So, that the questions that are...
Bob: Okay, all right. So, this survey result, I think it's going to make my point on what I just talked about. Walk us through just question number one on the survey, Brian.
Brian: Well, you know, and you wouldn't think this kind of thing is all that complicated, but quite the most popular question that is not getting answered very well, "Which statement about investing is correct? A, investing in the stock of a single company is typically safer than investing in a mutual fund that holds shares of many companies in multiple industries, or B, investing in a mutual fund that holds shares of many companies in multiple industries is typically safer than investing in the stock of a single company." So, obviously, you know, if anybody listening to these airwaves, if you've never heard us say anything else, you've probably heard that diversification is important. So, of course, the answer there is B, but that one is not getting answered correctly very often.
Bob: Yeah. And so, if only half of the people still working, contributing to 401(k) plans get that question right, this is why I don't think they should just wake up one day and have 20% of their retirement plan put in alternative investments, crypto, all that kind of stuff. Call me crazy. Now, on the good news side, people are saving for retirement. More than 8 in 10 people working and saving on a regular basis feel confident that they're going to have enough money to retire. So, I think this is what's going on. People are learning that, "Hey, participating in these plans is necessary and good," and they're seeing their money compound. I would just like to see us not get off the reservation here and just blindly put people into volatile investments, expensive assets that they don't understand. All right, coming up next, do you have enough life and disability insurance? We'll explore that question next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James, joined tonight by our good friend and the insurance director for all of Allworth Financial nationwide who happens to be right here in our office in Cincinnati, Jodee Deutsch. Jodee, thank you for carving out some time for us tonight. You want to talk about a very important topic that I think it's overlooked often, and that's highly compensated employees of some of these major companies out there that sometimes overlook the value of their life insurance and long-term disability plans and might not be taking full advantage of them or not planning ahead in the event that those plans might go away someday.
Jodee: I spend a lot of time meeting with pre-retirees that are "highly compensated". That's a hard number to actually figure out, well, what is that exact number? The IRS would tell you it's $165,000 per person, but it could also be for a salesperson that the majority of their compensation is incentive comp and not salary. And the two primary benefits that we want to make sure that we're doing a review for our clients is on their life insurance benefits and their long-term disability benefits. Sometimes they're more than enough to cover their family, other times they're not.
And our goal is to help these clients understand what the benefits are and where there might be gaps so that we address them both while they're working to make sure that they're properly protecting their family and to plan on how those benefits, which likely go away, what benefits they might need when they hit retirement. How do you guys talk to clients about these topics to make sure that they're not waiting until they're getting ready to retire to address these?
Brian: Well, I think, first, the thing we look at is, do they understand what position they're in to begin with, right? A lot of people just don't understand, you know, if something unexpected were to happen where insurance and some of these types of things would play a role, what does that look like? How much of my income do I need to replace? And then, what do I actually have in place, right? Oftentimes, disability insurance, those kinds of things are simply boxes we check around November of every year because it's time to do that. My HR department told me I have to go do it. We don't really think about what level do we need. And that's good, right?
I mean, I think everybody should take advantage of the disability that is provided to them virtually for free, not really for free, but a heck of a lot cheaper than you're going to get anywhere else, which is your group plan that's available to you. But that may not cover it. That may not be enough to truly keep your family on an even keel when things do go sideways on you. So, there may be a need to go purchase disability insurance outside of that. So, for those who have maybe concluded that, Jodee, can you talk about how you would combine an individually-purchased and disability policy with some kind of group benefit that I have less control over?
Jodee: Absolutely. And we do that both on the life insurance side and the disability side. Let's focus on the disability side first, because I think that tends to be where there could be a significant gap. Most long-term disability plans are a percentage of salary with a monthly cap. So, 60% of your salary with a monthly cap of $5,000 a month or $10,000 a month, depending on your plan. And in most cases, those benefits, if you file for disability, are taxable.
So, what I like to do with our clients is we look at plugging in those benefits into their financial plan and show them where the gap is. This is what you said you needed to support your family. This is what your benefits provide. And are they taxable or not taxable? And then they can cover the gap by either planning on reducing spending if they're disabled. And while no one wants to do that, it is a possible solution. Or consider an individual disability policy to bridge that gap.
And it can be complex, because most policies, you're right, people check the box. They focus on the health insurance benefits. Do we want Plan A or Plan B or Plan C? And most of the time, disability is checking a box. And since we are going to start seeing open enrollments coming up for traditional January 1 plans in October, November, I really encourage you to be asking your clients and for clients to be bringing in their employee benefit statements so that we can do this review. If the benefits are sufficient, that's great. But most people don't understand the benefits. So, it's as much explaining what they have and figuring out if there's a gap, what are the options to cover it?
Bob: Yeah, Jodee, speaking on things getting complex in a hurry and people really not understanding, the life insurance discussion, at least, to me, is a lot simpler than the long-term disability. And here's what I mean. You can generally go out now, and correct me if I'm wrong here, and buy on your own 20, 30-year term insurance. And the cost of that is not going to be vastly different than what you pay buying a group policy through your company. When you get into this whole long-term disability world, that's where things get complicated in a hurry, right? Because the definition of disability changes. You get into things like own occupation versus any occupation. And I think sometimes people get a little bit of sticker shock here on what the true cost of protecting your income is based on these unique, highly-paid positions when you get into own occupation type of coverage. Am I on the right track there?
Jodee: Absolutely. And the idea is for people to understand their benefits, understand the gaps, and then we look at options to cover those.
Bob: All right. In the minute or so we've got left, what do you see when...? I mean, you review hundreds of financial plans done by people like us all the time, what are the biggest holes you end up addressing in financial plans that come across your desk all day, every day?
Jodee: Other than what we talked about, the highly compensated individuals, or mostly incentive comp on the disability side, it's really life insurance when clients are getting ready to retire. Because supplemental group coverage that you check the box for, the price goes up every five years, and you don't really start to feel that until you hit around 50. And if you're healthy, and you need more than your group policy gives you for free, your employer provides, which is typically for free, you're usually better off buying an individual policy. So, I like to look at both of those. And it's most of the time, you can get the data right from your open enrollment statement or your HR department. And we can look at that and make sure you understand what it is and talk about the gaps.
Bob: Yeah. So, in other words, take advantage of your health. Because in these group policies, everybody's priced the same. If you really are healthy, take advantage of that underwriting table and go out there and get yourself a better deal. All right, great stuff. Very important topic. I'm sure we'll hit this one again pretty soon. But thank you very much, Jodee, for your time 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. You have a financial question you'd like for us to answer, there's a red button you could click while you're listening to the show if you're listening on the iHeart app. Simply record your question there and it will come straight to us. All right, Brian, Jeff in Terrace Park says, "My wife retired last year, but I still enjoy working. We have $5 million in investments and no debt. How do we navigate being on completely different retirement timelines?" Brian, this seems to be less about money and more about lifestyle.
Brian: Yeah, a little bit about communication, too, I think, here, too. So, yeah, this is more common than people think, especially when one spouse retires because they're just ready to leave work while the other is fortunate to genuinely enjoy what they do. And for them, it maybe doesn't feel like work that much. But the good news is $5 million invested and no debt, this is much more of a lifestyle planning question than a financial planning question. We didn't talk at all about your expenses and so forth. I don't know. Maybe you live like you have $15 million. That's a problem. But assuming that your spending is at some level that it's allowed you to swirl away $5 million, then this, again, probably less of a financial question than it is communications.
So, often, the mistake couples will make is treating retirement as one single event. In reality, it's a whole string of things. It's a transition that unfolds over several years. One spouse will retire, the other one keeps working. And what I always tell people there is, if you're the working spouse, then your job is to pull the covers off your newly retired spouse and turn the lights on as you exit the bedroom every morning, just to make sure that they know how much that you're thinking about them. But anyway, so that changes the daily rhythm of the household. That retired spouse may want to travel more, they've got the time, they want to spend more time together, or just do new things that they haven't done before at all while that working spouse is still focused on the same career goals and structure and so forth.
So, I think the first step here really is to define what retirement actually means for each of you. One spouse may view retirement as freedom from schedules. That's one view of it. Or you might view work as something you enjoy and you get a lot of meaning out of. Neither is wrong, but those expectations need to be discussed pretty openly. If one spouse is dying to travel and the other one absolutely loves what they do and their current job actually is going to play a role in retirement, that's going to work against the travel goal. So, there's going to have to be some compromise there. The sooner those discussions start, the better.
And also, model out multiple scenarios. Five million bucks, well, one spouse's retirement may already be fully funded, so maybe the spouse that's still working really doesn't have to continue to put money into 401(k), you know, those kinds of things. You can figure out whether you can change your lifestyle now and create some more spendable cash in the shorter term. So, it's a good problem to have, but it's still a problem. But it's got everything to do with communication. There's plenty of resources. This is not about scarcity. This is about, how do we apply our resources in a way that's going to make us both happy? So, the sooner you start that conversation, the better. Martin, we're going to go with Martin. Martin didn't tell us where he's from, so we'll just say tri-state area, Martin. Oh, this is why. He says, "We just moved from Ohio to Florida," so we're talking to a Florida man here. What tax planning opportunities does Martin have?
Bob: Martin decided to bail on Ohio. He's living on a blanket on the beach in Siesta Key. He doesn't care. He's homeless on the beach. He's happy.
Brian: Exactly.
Bob: But go ahead with the question.
Brian: Martin on the beach. Martin wants to know what tax planning opportunities should they be looking at now that they no longer have state income tax. That's an easy one, Bob. Taxes went down. There are no more taxes because we moved to Florida. Is that right?
Bob: Yeah, Martin, I think, you know, don't overcomplicate this. To keep it really simple, congratulations, you saved about 3% in state taxes by moving from Ohio to Florida. You're going to be paying for it elsewhere. Probably higher grocery costs, higher costs to get your license plates renewed. They get you one way or another in all these states. But I love Florida. I'm all for living there. All that.
Most of the big tax planning opportunities that really move the needle have to do with federal taxes anyway. So, don't think you're done just because you moved to Florida. What am I talking about here? Potential Roth conversion strategies. If you just retired and you've got a window between now when you were earning, had a high earned income, and when those dreaded Required Minimum Distributions start, that's a way to potentially look at using some Roth conversions.
The other thing is take a look at where your income is being generated from. We're trying to manage those marginal tax brackets by creating the most tax efficient income stream possible, and then layering Social Security along the way. So, you're not done tax planning, you just reduced a little bit of state income taxes off the top. Keep planning, keep looking at opportunities to make things as efficient as possible. All right, we got time for one more tonight, Brian. Laura in Fort Thomas says, "Our son-in-law is great, but we're concerned about protecting family assets if our daughter ever gets divorced. What planning options should we be considering?"
Brian: Yeah, so this can be a really delicate topic because you're not really protected. The way you phrased it, I can hear kind of the anguish here. You're not wanting to hurt anybody because you really do appreciate this person being involved with your daughter, and...
Bob: "Our son-in-law is great, but..."
Brian: Exactly. We just never know, right? You're not protecting the assets from your son-in-law. You're really protecting your daughter from the unknown because we just never know. And this is not unreasonable. And a reasonable son-in-law will probably be like, "Yeah, I would do that for my daughter, too." So, go nuts, do what you got to do. If he doesn't react that way, well, then that's an indicator right there.
But anyway, let's talk details here. The first thing to understand, inherited assets generally receive special treatment. In most states, an inheritance kept separate from marital assets, meaning give it to her and she keeps it in her name. That is considered the recipient's separate property. So, if she does keep that in her name, does not put it into a joint account, it would not be split up in the event of a divorce somehow. Oftentimes, people accidentally destroy that protection innocently just by saying, "Well, yeah, we're married, what's mine is yours, yours is mine, so forth. So, of course, we're going to stick it in a joint account."
You can't control this. This is her choice. Once it's hers, it's hers. But you might make her aware that this is on your mind. And here's a way to keep it simpler. A trust often, if you really want to control this, a trust is the most powerful tool. Instead of leaving assets outright to your daughter, you can put them in a properly structured trust for her benefit. That will control it beyond your and your spouse's death. You will have to identify a trustee. That can be a corporate trustee, family friend, and so forth. But really two options. She keeps it in her own name and then she's got complete control over it, but it would be protected from her. Although, again, she's got complete control. Or if you need to maintain complete control, a trust is what you need.
Bob: Coming up next, some things to think about if you're planning on selling a closely-held business, say, within the next five years. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, we're going to spend a few minutes tonight talking about an actual listener question that came in from Mark out in Mason, who's planning to sell a physician practice within the next five years. And Brian, I think this topic applies to anybody, whether it's a physician practice or any closely-held business. Just some common things to be thinking about and get out in front of. Because a lot of times people think they can just pull the trigger and get this deal done quickly. And there's some definite things that you need to think about before you really pull the trigger.
One is have a good financial plan. A lot of times these people are earning high incomes. They got plenty of cash flow coming in. They have not done any long-term planning to think about, "Hey, after I sell this and turn this stream of income," a big one at that, in most cases, "into a sudden pile of money after taxes, by the way, is it going to make the ship float long-term?" So, number one, have a financial plan. Number two, a lot of times, Brian, I see people are pulling a lot of personal income out of the business, and a potential buyer is going to discount that stream of income from a sale price. Because after all, anything the owner is pulling out and living on is going to be a suck on the net profits. And a lot of times business owners are surprised to see that. And that's where some discord could get into and some disenchantment can happen.
I'd say a third is go get an independent valuation. Yep, it costs some money, takes a little time. It's good to have a second set of eyes, an objective set of eyes come back and tell you, Mark, what is this practice or business really worth to a third party buyer? I'd start with that. And then the last one, and then I'd love your thoughts, Brian. A lot of times, people are surprised when they go to sell a business, if the business has not been growing revenue, meaning sales and earnings over the last few years, potential buyers are going to look at that as well. So, you got to make sure, if at all possible, you're selling a business that is healthy and growing, not one that's just running on fumes that you're pulling a big paycheck out of. Anything you would add to my list, Brian?
Brian: I think the most important thing you said in all of that was to start with a valuation. What's it worth now? We're on a five-year runway, so what is it worth now? We all think that we're better off than we are, right? We all think that we've built this perfect thing, and how can anybody poke holes in it? But as you mentioned, a buyer is not going to pay for what could be. A buyer is going to pay for what is, and they will have to do the work to do the could be part in order to reap those benefits. So, if you can clearly identify what this practice could be worth, figure out what that is, figure out what steps need to happen, and then spend the next five years putting those steps in place. And maybe not even all of them. As Bob just said, how can you move it in a direction where clearly there is identifiable growth? That's the selling point, not something that simply pays you a decent salary and otherwise has been kind of languishing a little bit.
Bob: Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Well, we say it all the time, you need a diversified portfolio, but what does that actually mean? It's not so black and white, especially nowadays, Brian.
Brian: Yeah, Bob, according to a new report from Morningstar, a deeply diversified investment portfolio, and that would include layers of asset classes, a little different than it used to be, including layers of asset classes beyond just your typical stocks and bonds, that outpaced the traditional 60/40 portfolio by five percentage points last year. That's the biggest spread we've seen there since about 2009. So, let's talk about diversification. Just make sure everybody's on the same page, how we're kind of viewing this here.
We're talking about stocks and bonds, of course, those have always been the elements of diversification, at least. But nowadays alternative investments like crypto, private credit, gold, those kinds of things. You know, a lot of times people have a small portion of this stuff in their portfolios really for diversification purposes, but sometimes these alternative investments just act a little differently than the public markets. But there is risk to it, right? So, the whole purpose of diversification is to have something that is not correlated directly with the stock market, something that might, that has a chance of going in the opposite direction. If investors are fleeing stocks, then they might go into something else, you know, or vice versa. The opposite is true too. Sometimes they dump all those things, come back into the stock market. That's why we want to try to have a horse in all the races.
So, it sounds great to, "Well, the heck with it. Maybe I'll just own the same even proportion of everything." So, not the best idea. There is risk if you kind of go nuts over owning a little bit of everything or a lot of everything. It really is important to say, you know, just because you're diversified may not mean you have the right percentage allocated to each asset class. Some things are more violent and unpredictable than others. You want to have pretty small allocations to those types of things if you're going to take those steps.
Bob: All right. Well, Brian, this study that we're talking about tonight, I mean, let's face it, we're talking about one year's worth of data. So, we're not throwing the baby out with the bathwater here and saying that the 60/40 portfolio is dead forever. Over the last 20 year timeframe, this traditional 60% stock, 40% bond portfolio generated an average return of around 9.7%, while a deeply diversified portfolio with all those alternative investments and all that stuff thrown into it, you know, north to return of just over 7%.
So, a lot of times, Brian, in any one year, we'll get some outperformance. We'll have a bit of a unique year with certain asset classes... I mean, gold and oil come to mind here recently. So, again, we're not saying this 60/40 portfolio is dead by any chance, by any sake, but we really do need to keep an eye on this. Because at the end of the day, to your point, I think we're trying to do two things with a diversified portfolio. We're trying to have a little negative correlation, which helps with risk management, but we're also, at the end of the day, trying to generate some return. One thing that's interesting to me, Brian, you know, I think a five-year period is worth at least looking at. I'm looking at the Bloomberg aggregate bond index, you know, with the five years ending last Friday. You want to know what the return on that Bloomberg bond index is?
Brian: Hit me. What was it, Bob?
Bob: Zero. And I think that's why this 60/40 whole thing, I think we really need to be looking at how much should be allocated to bonds over the long term. Because I don't think interest rates are coming down anytime soon. I mean, the last time we had any kind of real volatility, to speak of, was back in 2022. And that year we did not get that ying and yang relationship. Stocks and bonds were both down together by quite a bit. That's the year that the Fed raised interest rates seven times. That doesn't happen very often. But point being, I think to sit there with 40% in treasury bonds and hope you're going to get this 9% or almost 10%, you know, combined return over the next 10 years, that might be a little wishful thinking. That's the point I'm trying to make here.
Brian: Yeah. And I want to go back to what you were saying earlier about the 60/40 portfolio, which that's a traditional balanced portfolio averaging 9.6%. That's hard for people to fathom because nobody wants to... You know, I think we know enough about the volatility of the markets these days. Nobody comes in wanting us to build a financial plan assuming a 9.6% rate of return because it seems too unrealistic. But the reality is that that is what a 60/40 portfolio has averaged over the last 20 years. And so, that means the stock market, a 100% stock portfolio has done even better, more along the lines of 11% to 12%. That's an average. Is it a predictable average? Absolutely not.
Think of what the last 20 years includes. In that is 2008, which, you know, obviously, that was the great recession. Everybody remembers what happened then. As well as '22, two of the worst years we've ever had in the markets. And we've had some stinkers in there as well, 2018, which was sort of like water torture. It wasn't any one big panicky event, but it was just a year where we just couldn't get things get off the mat at all. And some other years as well.
So, you have to ride it out. You have to see the portfolio through, which means you have to manage your emotions when those years happen. And that can be extremely hard to do. It is really easy to look at a spreadsheet of numbers and say, "Wow, stock balance portfolio, average is 9.6%. Sign me up. That's for me." But you're not going to get there in one year. It could do better than that. It could do a lot worse. This is, again, a 20-year timeframe. That's the bulk of some of the average person's retirement. But that's why we have this conversation, because people are always tempted to look at these other assets, "Well, if this point, this must be broken. It's not doing my 9.6% this year. Therefore, I guess that means this doesn't work anymore. I have to go do something else."
And a lot of people have suddenly started paying attention to their portfolios, not because they are interested suddenly, it's because they have the time. When people retire, they are attracted to really get in there and tinker with things that they haven't had time to mess with over the last 30 years while they've been working and raising families. And that can be a bit of a danger zone in terms of, you know, the market hasn't changed, investment hasn't changed just because you're now paying attention. Everybody should look into the history and understand, is their portfolio behaving any differently than it ever has over history, or is it just, now, you have time to pay attention to it? That's two different things.
Bob: No, for sure. And that leads me right into the next kind of topic I want to cover on this whole thing and that's sequence of return risk. And, Brian, you and I talk about this all the time. I think on the show as well as with clients, people care far less about volatility when they're still working because they're still piling money into their 401(k) plan. They stomach the volatility because they know over a reasonable period of time, markets always recover and you go along and you get those stock-like returns and everybody's fat, dumb, and happy. Things change when you've got to factor in that sequence of return risk. When you got to turn, as you like to say, your pile of money into a stream of income. That's where volatility by tinkering around with some of these alternative asset classes, or just having too much concentration in one sector of the market or too much in stocks all together, that can really impact the long-term health of your portfolio.
Because while a 7, 8, 20-year average return is great on paper, as you just said, while you're trying to eat and put gas in the car and buy clothes and all that and pull money out of that pile of money during periods of sometimes what can be extreme volatility, it's counterintuitive. But the math just doesn't math when you're pulling money out of an extremely volatile portfolio. And that's why sometimes you have to take a close look at what you really own and really dovetail that with some Monte Carlo analysis of your overall retirement income plan.
Brian: Monte Carlo analysis, Bob, that sounds fancy. That sounds like gambling. What are we talking about there? Well, let's go through a quick definition of what Monte Carlo really is. Monte Carlo analysis is a fancy way of saying, let's just run your numbers. Let's live out your life financially 1,000 different times with all the spending and all that stuff locked in. Let's get an idea of what we think you need to spend on your various spending goals, what inflation factors we should attach to that. Don't forget healthcare. That's going to be its own deal, possibly a long-term care type situation, and so forth.
Then what you do is, again, let's vary the rate of return every single year. This is very much a study of sequence of returns, is what Bob is saying. The outcome of a Monte Carlo analysis study is simply, how many times out of 1,000 or out of 100 or whatever variable I'm looking at, how many times do I make it all the way to the end with all these spending and inflation assumptions in place, including my income streams from Social Security and pension, whatever else I have going on? How many times do I make it all the way to the end with, at least, a dollar in the bank? The higher that percentage goes, obviously, the better off you are.
I'm not a believer. Of course, this is not something where we're looking to make the things say a 100%. That's not the case. That's usually too much of a sacrifice. There's risk in anything we do. I'm perfectly fine with somebody who's Monte Carlo saying 70%, 80%. That means we've got a three out of four, four out of five chance of success. And the other thing to bear in mind is that human beings will adjust along the way. So, if we, heaven forbid, we do start heading down one of those rougher paths with bumpy markets early in retirement, people naturally adjust. We don't take that big vacation. We don't make the big improvement to the house. So, you won't spend the money that the Monte Carlo is telling you might not be there to spend anyway on a kind of off chance that the markets may behave in a way that the ship doesn't float as well as it did before.
Bob: Yeah, one other thing I think it's important to touch base on here with respect to diversification, Brian, and I know you see this all the time, sometimes people will come in, they'll bring in all their investment statements and they'll say, "Yep, we're already diversified." And they show us all their different accounts that have umpteen different mutual funds and ETFs and all that. And when we actually look at what's actually contained in those funds, there is just a ton of overlap. Whether you're investing in broad-based S&P 500, ETFs or funds or large cap growth funds, the holdings tend to be all the same. And we talk about this all the time on the show, just the concentration of the magnificent stock or Magnificent Seven big cap tech stocks in most of these mutual funds and ETFs and index holdings. That is a reason too, to just take a look at diversifying things even more to cut down on what you just covered in great detail here, this sequence of return risk.
Brian: Yeah. And I think, again, that's an important thing that really where this starts though, is sitting down and figuring out what your spending looks like in the first place. Everything I described computers are going to do for you, but you have to come to the table knowing, here's what it costs me to get my normal bills paid every month. Here's what I think I want to do. And that's really the key. Most people haven't spent any time thinking about, "What am I going to do when I don't have to go to a job 40, 50, 60 or more hours a week? What will I do with that free time? Do I want to travel? Am I going to do things with the kids?" You know, and so that's really the homework assignment. Figure out what the real expenses are going to be, then we can do that level of math.
Bob: Here's the Allworth advice, diversification isn't measured simply by the number of holdings in your portfolio. It's measured by how many different risks you're actually taking as you build your long-term retirement income strategy. Well, a major retirement proposal is drawing an enormous response from the public. Plus, a new report raises concerns about how prepared Americans actually are to make big financial decisions. We'll explain why both of those stories matter next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your favorite podcasts. Straight ahead, protecting family wealth from future divorce risk, key moves before selling a privately-held business and tax planning opportunities that come with potentially leaving Ohio for Florida.
If you've been listening to the show over the past several months, you've heard us talk about a major proposal that could change the way Americans invest in their 401(k) and other employer-sponsored retirement plans. There's a push to open the door to investment options like private credit, private equity, real estate, annuities, and even cryptocurrency. Brian, the latest public comment period ended on this proposal recently, and the Department of Labor now has over 45,000 comments to review about this proposal. I think this is going to take a while.
Brian: Yeah, it's going to take a while, but I don't see any way that we don't wind up doing this with 401(k)s. We really as a society don't care about consequences or bad outcomes anymore. It's all about how much money can we make. So, yeah, I'm sure included in those 45,000 comments are a range of a spectrum of opinions on all this stuff. The number of comments tells you how controversial this really is. Depending on who you ask, this is a huge win for retirement savers. And I'm pretty sure the people who would say that are the financial institutions who want to get behind just creating more transactional activity, tapping into the $12 trillion. Actually, I bet it's not $12 trillion anymore. It's probably been more like $13, $14 worth of dollars that are in 401(k)s retirement plans for assets that you can't currently buy these types of private equity, private credit types of things, cryptocurrency, and so forth.
So, again, what the proposal does here is it creates a safe harbor for retirement plan fiduciaries. If you're a company with a retirement plan or if you're on the committee for the ABC widget maker that has a 401(k) for its employees, then you are a fiduciary. And currently, you could be sued for allowing enough rope for people to hang themselves. But it's going to... The goal here is the Department of Labor wants to loosen those reins to allow these fiduciaries to be a little bit more protected by advancing these types of options inside of 401(k)s. That's the goal here.
Bob: Yeah, and I agree that's the goal. And there's a lot of different interests at play here. And you've already pointed some of them out. I mean, among some of them are fees and expenses of these actively managed private equity, private credit, alternative asset funds. I mean, let's face it, these employers, there are fees and expenses to run a 401(k) plan. In case people don't understand this, a lot of those fees and expenses are generated from the internal operating expenses on the funds that are included in the fund lineup. And these companies are trying to make money like everybody else, as you've already pointed out.
So, yeah, if we throw 20% or 30% of these alternative investments into these different fund offerings or plan offerings or target date funds, guess what happens? The fees go up in these plans, and those plans help pay for themselves, so to speak. But what's usually left behind is an amount of proper education for the participants in these plans to actually know what they're buying, what the fees are, what the lockup periods are, and all of that. So, I am all about freedom and choice and opportunity.
But I'll repeat what I said months ago, I think this stuff should be put in a private brokerage account within a 401(k) plan. So, at least the participants have to opt out of the traditional platform and actively go seeking these things rather than wake up one night and just know that this stuff is in their plan and they had no idea what it is, what to do with it. That's the danger I see. And I think that that's why we're getting so many comments about this pro and con out there. It's just a very interesting time. But, yeah, there's my, "I'll get off my soapbox."
Brian: No, I think that's fine. And there's going to be plenty more to come on. Let's pivot now. Because we talk a lot about investing, retirement planning, tax strategies, building wealth, all that stuff. And all of those things depend on one very basic skill, which is understanding money in the first place. And we've got a new study out there saying that Americans are not getting better at that. We're getting a little worse, unfortunately. So, this is according to the latest personal finance index from the TIAA Institute and Stanford University's Global Financial Literacy Excellence Center. Americans scored just 47% on a basic financial literacy test. And that is the worst result we've seen in the 10-year history of the survey. So, that the questions that are...
Bob: Okay, all right. So, this survey result, I think it's going to make my point on what I just talked about. Walk us through just question number one on the survey, Brian.
Brian: Well, you know, and you wouldn't think this kind of thing is all that complicated, but quite the most popular question that is not getting answered very well, "Which statement about investing is correct? A, investing in the stock of a single company is typically safer than investing in a mutual fund that holds shares of many companies in multiple industries, or B, investing in a mutual fund that holds shares of many companies in multiple industries is typically safer than investing in the stock of a single company." So, obviously, you know, if anybody listening to these airwaves, if you've never heard us say anything else, you've probably heard that diversification is important. So, of course, the answer there is B, but that one is not getting answered correctly very often.
Bob: Yeah. And so, if only half of the people still working, contributing to 401(k) plans get that question right, this is why I don't think they should just wake up one day and have 20% of their retirement plan put in alternative investments, crypto, all that kind of stuff. Call me crazy. Now, on the good news side, people are saving for retirement. More than 8 in 10 people working and saving on a regular basis feel confident that they're going to have enough money to retire. So, I think this is what's going on. People are learning that, "Hey, participating in these plans is necessary and good," and they're seeing their money compound. I would just like to see us not get off the reservation here and just blindly put people into volatile investments, expensive assets that they don't understand. All right, coming up next, do you have enough life and disability insurance? We'll explore that question next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James, joined tonight by our good friend and the insurance director for all of Allworth Financial nationwide who happens to be right here in our office in Cincinnati, Jodee Deutsch. Jodee, thank you for carving out some time for us tonight. You want to talk about a very important topic that I think it's overlooked often, and that's highly compensated employees of some of these major companies out there that sometimes overlook the value of their life insurance and long-term disability plans and might not be taking full advantage of them or not planning ahead in the event that those plans might go away someday.
Jodee: I spend a lot of time meeting with pre-retirees that are "highly compensated". That's a hard number to actually figure out, well, what is that exact number? The IRS would tell you it's $165,000 per person, but it could also be for a salesperson that the majority of their compensation is incentive comp and not salary. And the two primary benefits that we want to make sure that we're doing a review for our clients is on their life insurance benefits and their long-term disability benefits. Sometimes they're more than enough to cover their family, other times they're not.
And our goal is to help these clients understand what the benefits are and where there might be gaps so that we address them both while they're working to make sure that they're properly protecting their family and to plan on how those benefits, which likely go away, what benefits they might need when they hit retirement. How do you guys talk to clients about these topics to make sure that they're not waiting until they're getting ready to retire to address these?
Brian: Well, I think, first, the thing we look at is, do they understand what position they're in to begin with, right? A lot of people just don't understand, you know, if something unexpected were to happen where insurance and some of these types of things would play a role, what does that look like? How much of my income do I need to replace? And then, what do I actually have in place, right? Oftentimes, disability insurance, those kinds of things are simply boxes we check around November of every year because it's time to do that. My HR department told me I have to go do it. We don't really think about what level do we need. And that's good, right?
I mean, I think everybody should take advantage of the disability that is provided to them virtually for free, not really for free, but a heck of a lot cheaper than you're going to get anywhere else, which is your group plan that's available to you. But that may not cover it. That may not be enough to truly keep your family on an even keel when things do go sideways on you. So, there may be a need to go purchase disability insurance outside of that. So, for those who have maybe concluded that, Jodee, can you talk about how you would combine an individually-purchased and disability policy with some kind of group benefit that I have less control over?
Jodee: Absolutely. And we do that both on the life insurance side and the disability side. Let's focus on the disability side first, because I think that tends to be where there could be a significant gap. Most long-term disability plans are a percentage of salary with a monthly cap. So, 60% of your salary with a monthly cap of $5,000 a month or $10,000 a month, depending on your plan. And in most cases, those benefits, if you file for disability, are taxable.
So, what I like to do with our clients is we look at plugging in those benefits into their financial plan and show them where the gap is. This is what you said you needed to support your family. This is what your benefits provide. And are they taxable or not taxable? And then they can cover the gap by either planning on reducing spending if they're disabled. And while no one wants to do that, it is a possible solution. Or consider an individual disability policy to bridge that gap.
And it can be complex, because most policies, you're right, people check the box. They focus on the health insurance benefits. Do we want Plan A or Plan B or Plan C? And most of the time, disability is checking a box. And since we are going to start seeing open enrollments coming up for traditional January 1 plans in October, November, I really encourage you to be asking your clients and for clients to be bringing in their employee benefit statements so that we can do this review. If the benefits are sufficient, that's great. But most people don't understand the benefits. So, it's as much explaining what they have and figuring out if there's a gap, what are the options to cover it?
Bob: Yeah, Jodee, speaking on things getting complex in a hurry and people really not understanding, the life insurance discussion, at least, to me, is a lot simpler than the long-term disability. And here's what I mean. You can generally go out now, and correct me if I'm wrong here, and buy on your own 20, 30-year term insurance. And the cost of that is not going to be vastly different than what you pay buying a group policy through your company. When you get into this whole long-term disability world, that's where things get complicated in a hurry, right? Because the definition of disability changes. You get into things like own occupation versus any occupation. And I think sometimes people get a little bit of sticker shock here on what the true cost of protecting your income is based on these unique, highly-paid positions when you get into own occupation type of coverage. Am I on the right track there?
Jodee: Absolutely. And the idea is for people to understand their benefits, understand the gaps, and then we look at options to cover those.
Bob: All right. In the minute or so we've got left, what do you see when...? I mean, you review hundreds of financial plans done by people like us all the time, what are the biggest holes you end up addressing in financial plans that come across your desk all day, every day?
Jodee: Other than what we talked about, the highly compensated individuals, or mostly incentive comp on the disability side, it's really life insurance when clients are getting ready to retire. Because supplemental group coverage that you check the box for, the price goes up every five years, and you don't really start to feel that until you hit around 50. And if you're healthy, and you need more than your group policy gives you for free, your employer provides, which is typically for free, you're usually better off buying an individual policy. So, I like to look at both of those. And it's most of the time, you can get the data right from your open enrollment statement or your HR department. And we can look at that and make sure you understand what it is and talk about the gaps.
Bob: Yeah. So, in other words, take advantage of your health. Because in these group policies, everybody's priced the same. If you really are healthy, take advantage of that underwriting table and go out there and get yourself a better deal. All right, great stuff. Very important topic. I'm sure we'll hit this one again pretty soon. But thank you very much, Jodee, for your time 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. You have a financial question you'd like for us to answer, there's a red button you could click while you're listening to the show if you're listening on the iHeart app. Simply record your question there and it will come straight to us. All right, Brian, Jeff in Terrace Park says, "My wife retired last year, but I still enjoy working. We have $5 million in investments and no debt. How do we navigate being on completely different retirement timelines?" Brian, this seems to be less about money and more about lifestyle.
Brian: Yeah, a little bit about communication, too, I think, here, too. So, yeah, this is more common than people think, especially when one spouse retires because they're just ready to leave work while the other is fortunate to genuinely enjoy what they do. And for them, it maybe doesn't feel like work that much. But the good news is $5 million invested and no debt, this is much more of a lifestyle planning question than a financial planning question. We didn't talk at all about your expenses and so forth. I don't know. Maybe you live like you have $15 million. That's a problem. But assuming that your spending is at some level that it's allowed you to swirl away $5 million, then this, again, probably less of a financial question than it is communications.
So, often, the mistake couples will make is treating retirement as one single event. In reality, it's a whole string of things. It's a transition that unfolds over several years. One spouse will retire, the other one keeps working. And what I always tell people there is, if you're the working spouse, then your job is to pull the covers off your newly retired spouse and turn the lights on as you exit the bedroom every morning, just to make sure that they know how much that you're thinking about them. But anyway, so that changes the daily rhythm of the household. That retired spouse may want to travel more, they've got the time, they want to spend more time together, or just do new things that they haven't done before at all while that working spouse is still focused on the same career goals and structure and so forth.
So, I think the first step here really is to define what retirement actually means for each of you. One spouse may view retirement as freedom from schedules. That's one view of it. Or you might view work as something you enjoy and you get a lot of meaning out of. Neither is wrong, but those expectations need to be discussed pretty openly. If one spouse is dying to travel and the other one absolutely loves what they do and their current job actually is going to play a role in retirement, that's going to work against the travel goal. So, there's going to have to be some compromise there. The sooner those discussions start, the better.
And also, model out multiple scenarios. Five million bucks, well, one spouse's retirement may already be fully funded, so maybe the spouse that's still working really doesn't have to continue to put money into 401(k), you know, those kinds of things. You can figure out whether you can change your lifestyle now and create some more spendable cash in the shorter term. So, it's a good problem to have, but it's still a problem. But it's got everything to do with communication. There's plenty of resources. This is not about scarcity. This is about, how do we apply our resources in a way that's going to make us both happy? So, the sooner you start that conversation, the better. Martin, we're going to go with Martin. Martin didn't tell us where he's from, so we'll just say tri-state area, Martin. Oh, this is why. He says, "We just moved from Ohio to Florida," so we're talking to a Florida man here. What tax planning opportunities does Martin have?
Bob: Martin decided to bail on Ohio. He's living on a blanket on the beach in Siesta Key. He doesn't care. He's homeless on the beach. He's happy.
Brian: Exactly.
Bob: But go ahead with the question.
Brian: Martin on the beach. Martin wants to know what tax planning opportunities should they be looking at now that they no longer have state income tax. That's an easy one, Bob. Taxes went down. There are no more taxes because we moved to Florida. Is that right?
Bob: Yeah, Martin, I think, you know, don't overcomplicate this. To keep it really simple, congratulations, you saved about 3% in state taxes by moving from Ohio to Florida. You're going to be paying for it elsewhere. Probably higher grocery costs, higher costs to get your license plates renewed. They get you one way or another in all these states. But I love Florida. I'm all for living there. All that.
Most of the big tax planning opportunities that really move the needle have to do with federal taxes anyway. So, don't think you're done just because you moved to Florida. What am I talking about here? Potential Roth conversion strategies. If you just retired and you've got a window between now when you were earning, had a high earned income, and when those dreaded Required Minimum Distributions start, that's a way to potentially look at using some Roth conversions.
The other thing is take a look at where your income is being generated from. We're trying to manage those marginal tax brackets by creating the most tax efficient income stream possible, and then layering Social Security along the way. So, you're not done tax planning, you just reduced a little bit of state income taxes off the top. Keep planning, keep looking at opportunities to make things as efficient as possible. All right, we got time for one more tonight, Brian. Laura in Fort Thomas says, "Our son-in-law is great, but we're concerned about protecting family assets if our daughter ever gets divorced. What planning options should we be considering?"
Brian: Yeah, so this can be a really delicate topic because you're not really protected. The way you phrased it, I can hear kind of the anguish here. You're not wanting to hurt anybody because you really do appreciate this person being involved with your daughter, and...
Bob: "Our son-in-law is great, but..."
Brian: Exactly. We just never know, right? You're not protecting the assets from your son-in-law. You're really protecting your daughter from the unknown because we just never know. And this is not unreasonable. And a reasonable son-in-law will probably be like, "Yeah, I would do that for my daughter, too." So, go nuts, do what you got to do. If he doesn't react that way, well, then that's an indicator right there.
But anyway, let's talk details here. The first thing to understand, inherited assets generally receive special treatment. In most states, an inheritance kept separate from marital assets, meaning give it to her and she keeps it in her name. That is considered the recipient's separate property. So, if she does keep that in her name, does not put it into a joint account, it would not be split up in the event of a divorce somehow. Oftentimes, people accidentally destroy that protection innocently just by saying, "Well, yeah, we're married, what's mine is yours, yours is mine, so forth. So, of course, we're going to stick it in a joint account."
You can't control this. This is her choice. Once it's hers, it's hers. But you might make her aware that this is on your mind. And here's a way to keep it simpler. A trust often, if you really want to control this, a trust is the most powerful tool. Instead of leaving assets outright to your daughter, you can put them in a properly structured trust for her benefit. That will control it beyond your and your spouse's death. You will have to identify a trustee. That can be a corporate trustee, family friend, and so forth. But really two options. She keeps it in her own name and then she's got complete control over it, but it would be protected from her. Although, again, she's got complete control. Or if you need to maintain complete control, a trust is what you need.
Bob: Coming up next, some things to think about if you're planning on selling a closely-held business, say, within the next five years. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, we're going to spend a few minutes tonight talking about an actual listener question that came in from Mark out in Mason, who's planning to sell a physician practice within the next five years. And Brian, I think this topic applies to anybody, whether it's a physician practice or any closely-held business. Just some common things to be thinking about and get out in front of. Because a lot of times people think they can just pull the trigger and get this deal done quickly. And there's some definite things that you need to think about before you really pull the trigger.
One is have a good financial plan. A lot of times these people are earning high incomes. They got plenty of cash flow coming in. They have not done any long-term planning to think about, "Hey, after I sell this and turn this stream of income," a big one at that, in most cases, "into a sudden pile of money after taxes, by the way, is it going to make the ship float long-term?" So, number one, have a financial plan. Number two, a lot of times, Brian, I see people are pulling a lot of personal income out of the business, and a potential buyer is going to discount that stream of income from a sale price. Because after all, anything the owner is pulling out and living on is going to be a suck on the net profits. And a lot of times business owners are surprised to see that. And that's where some discord could get into and some disenchantment can happen.
I'd say a third is go get an independent valuation. Yep, it costs some money, takes a little time. It's good to have a second set of eyes, an objective set of eyes come back and tell you, Mark, what is this practice or business really worth to a third party buyer? I'd start with that. And then the last one, and then I'd love your thoughts, Brian. A lot of times, people are surprised when they go to sell a business, if the business has not been growing revenue, meaning sales and earnings over the last few years, potential buyers are going to look at that as well. So, you got to make sure, if at all possible, you're selling a business that is healthy and growing, not one that's just running on fumes that you're pulling a big paycheck out of. Anything you would add to my list, Brian?
Brian: I think the most important thing you said in all of that was to start with a valuation. What's it worth now? We're on a five-year runway, so what is it worth now? We all think that we're better off than we are, right? We all think that we've built this perfect thing, and how can anybody poke holes in it? But as you mentioned, a buyer is not going to pay for what could be. A buyer is going to pay for what is, and they will have to do the work to do the could be part in order to reap those benefits. So, if you can clearly identify what this practice could be worth, figure out what that is, figure out what steps need to happen, and then spend the next five years putting those steps in place. And maybe not even all of them. As Bob just said, how can you move it in a direction where clearly there is identifiable growth? That's the selling point, not something that simply pays you a decent salary and otherwise has been kind of languishing a little bit.
Bob: Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.