- Are You Rich or Just Comfortable? 0:00
- The Spending Trap: Why Income Isn’t Everything 1:50
- Retirement Math: When $2 Million Isn’t Enough 4:02
- Anxiety Among the Affluent 5:17
- Practical Planning Questions You Must Ask 7:06
- The Cash Conundrum: How Much is Too Much? 10:45
- Smart Alternatives to Idle Cash 17:29
- Estate Planning Myths 19:53
- Family Wealth Letters: More Valuable Than a Trust? 28:42
- Brian’s Bottom Line: Roth Conversions Demystified 35:18
Are You Rich or Just Comfortable? The Truth About Financial Independence
Think a $2 million nest egg makes you rich? On this week’s Best of Simply Money podcast, Bob and Brian break down the often misunderstood line between being wealthy and being truly financially independent. From benchmark net worth stats to the emotional rollercoaster that accompanies money management, they dive into the crucial questions every high-earner should ask themselves before and during retirement.
You’ll also learn why knowing your spending habits matters more than your net worth, how to build a guardrail strategy for market dips, the silent dangers of holding too much cash, and the emotional impact of delayed retirement. Plus, an estate planning expert joins the show to bust some common myths and share what most people overlook.
Whether you're nearing retirement or just curious about your financial future, this episode delivers practical advice with a dose of hard truth.
Download and rate our podcast here.
Bob: Tonight, are you rich, or just comfortable? You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. See, maybe you've got $2 million saved, maybe more, so why do you still worry about money? Tonight, Brian, we're gonna unpack the difference between being "rich" and being truly financially independent.
Brian: This is an important topic, Bob, because obviously, you know, everybody wants to be rich because we assume that just a little bit more money will remove all the stress that I have in my life. So, let's talk about how that doesn't exactly work out the way we expect it. So, but just a little bit of benchmarking here first. It doesn't take a whole lot of net worth to kinda put you in the upper echelon of wealth in the United States, but if you... So, if you've got a million dollars, you're in about the top 10% of U.S. households, according to net worth. If you've got $3 million, now you're in the top 3%, and if you're up there at $5 million, now you're in the top 1%. So, there's an awful lot of people out there who just don't have a whole lot to work with, and if we could push a button and fix that, we would have done it already. But we're gonna talk today about the ones that are in these situations, and have a little bit more opportunity to kinda fine-tune things for them.
Bob: Brian, I don't know about you, but I strongly dislike all these benchmark numbers, you know, but I think it's unavoidable. People like to know, occasionally. I've got clients, I don't know about you, but I've got clients that say, "Well, what's everybody else have? What's your average client look like? What's everyone else doing?" Kinda, "Where do I stand in the pecking order?" And my answer's pretty much always the same. It doesn't matter. The only thing that matters is your personal financial plan, and what you're trying to accomplish for you and your family.
Brian: Yeah, I take that question in a slightly... I get it too, but I take it in a slightly different direction than you. I pivoted toward, let's talk about how your spending compares to other people. To me, that's what's relevant. Somebody who's got $25 million might spend like they have $50 million, which means they're basically dirt poor. Somebody who's got $500,000 but spends like they have $50,000, they're gonna be just fine. It's spending that matters, not your pile of money.
Bob: Well, what this really comes down to, and I agree with you, I think we're saying the same thing in a different way. One of the things that I'm always shocked at sometimes, Brian, is, no matter how much money people have, I am literally shocked that a lot of people have no idea, to your point, what they actually spend, and where they spend it every year. And I think that can tend to happen...when people have a very high income, they have a successful career, they got a lot of cash flow coming in, they haven't needed to think too much about where and what they spend. But when it comes time to turn the page, and flip from retirement into turning that pile of money into a paycheck, well, now it matters a lot where you spend, how you spend, the tax efficiency of what you spend, and to make sure you don't run out of money, you gotta make sure you spend within your means.
Brian: Yeah, and this is the part of the meeting where we say, "Okay, what do you think you spend on a monthly basis?" And a lot of people, to your point, just really don't know, because they haven't had to pay attention to it. I'm not forced to stick to a budget, so therefore I have no idea what my budget is. All I know is that I'm not running up credit card bills, and cash is not piling up in the bank, so therefore I must be kind of at equilibrium. And I think, Bob, that's a good way, for those of you out there who are listening to this and trying to think about your own situation while you're staring at the inside of your windshield, a great way to think about what your spending is, look at what hits the bank account on a monthly basis, and then figure out what are the things in there that are finite. Your mortgage is in there. Maybe there's college expenses for kids, or things, they're auto loans, whatever, stuff that is not going to be out there forever. Take that off, and then look for a surplus. Is there money left? Is there extra money in that bank account after every month? If there is, knock that off, too. What's left after those items being removed, that's what you spend on a monthly basis, assuming you also aren't running up credit card balances.
Bob: Yeah, and getting back to that, you know, "what's your number" kinda thing, I mean, some people, Brian, we find, they have $2 million, and they're thinking...you know, well, they're not thinking. If you take 5% of that, it's $100 grand a year coming out, and people are shocked. I think, even though this is kinda back-of-the-cocktail-napkin math, they're shocked to conclude, well, shoot, I can't or I don't wanna live on $100,000 a year. But they saw that $2 million accumulated amount, and their default provision was, "I got enough. I'm rich." And it's not the case when you start looking, again, at what are you actually going to spend during retirement.
Brian: Yeah. And I think the other pivot point there that comes up is, what will you do with that vacuum of time? Right? So, we spend what we spend on travel and all these other things while we're working, because we're shoehorning it in with all the other stuff we have to do that's consuming time. Well, sooner or later, you and possibly a spouse are going to have more time than you've ever had. When we get bored, we tend to spend. That's not a bad thing necessarily, as long as you see it coming ahead on the railroad tracks. So make sure you're budgeting for it. If you go to the beach twice a year now, while you're both working full time, well, then what will that be when nobody has to go anywhere anymore? Will it be four times, six times, eight times? Budget for it.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, let's pivot a little bit. Sometimes I think people can know they got a bunch of money, they know it's enough, but they're still feeling anxious. You know, people worry. The bigger that net worth becomes, they allow themselves to get consumed by every jot and tittle in the financial markets, you know, a 3% pullback. Some people can act and behave like the whole world's coming to an end. And they're wondering, am I missing something? You know, with taxes, there's always things to worry about. And sometimes we just have to counsel people kinda off the ledge, as far as you don't really need to worry so much. Your plan is solid. It's intact. We still got well over a 90% probability of success of pulling off all your goals. Sometimes it's more of just an emotional reaction, the higher that pile of money, value-wise, becomes.
Brian: Yeah. I think, and speaking of emotions, the saddest times I've had in my office with people, believe it or not, are not when we realize that their plan isn't going to work. Maybe they have to work a little bit longer, or, you know, there, just something else drastic needs to change. That's sad, but at the same time, that usually happens when people are young enough to react to it and deal with it. The saddest times, Bob, are when people come in and they realize they could have retired five, six, seven years ago. There's nothing you can do about that. They missed out on their grandkids growing up, things that they thought they maybe wanted to do, but they simply never took the time to take stock and realize what they had built for themselves. And again, that's why a financial plan comes in so importantly, because that's gonna help you know exactly what you can get away with and what you can't.
Bob: That leads us into a few key questions. I think these are great questions to ask yourself, or sit with an advisor and talk about. Let's get into some of these questions, you know, in terms of, well, how do we address this whole topic, in practicality, in real life? Question number one, can you clearly identify how much income you'll need each year, and what source that income is coming from? That's a great question to ask. It's a loaded question, but one that needs to be answered.
Brian: Yeah, and this goes back to what I was referring to earlier. Figure out where it goes on a monthly basis now. What you're spending now is gonna come awful close to what you're gonna be spending in retirement, for probably the vast majority of it. That's probably at least 80% of it. The rest of it is, again, like I said, think about what you'll do when you have time, and then budget for it appropriately. But the whole point is have a target.
Bob: Here's another great question to ask yourself. If the market dropped 20% this year, how would that impact your lifestyle? Would you need to cut spending, delay a vacation or a trip, or do you have a guardrail strategy in place? Another great conversation to have with yourself, your spouse, or with your advisor.
Brian: Yeah, and we call this stress testing. So, in other words, let's build a financial plan, and figure out what course are we on right now? How's it coming? Are we doing okay? If the baseline scenario is okay, that's great. Everybody agrees that if nothing bad ever happens again, then here's how we're gonna look. Then right next to that, run another one, and just make 20% of your net worth go poof. Doesn't matter how. You gambled it away, the market took it, doesn't make any difference. Just run the numbers again with less money, and see if you're still okay. That's a stress test, and it's important to do.
Bob: Here's another great question to ask. Are you confident that your portfolio is set up not just for growth, but for tax efficiency, volatility, and long-term care needs? It comes back to that stress test that you talked about, but also tax efficiency.
Brian: Asset location is very important. Asset location, what that means is what kind of an account? It's one thing to own XYZ stock, but what kind of account is it sitting in? That's gonna dictate how you're gonna react to it. So, for example, I have a lot of clients that maybe inherited assets, or they sold a business, or whatever, and there's a decent-sized pile of money that is not tax-sheltered. It didn't come from employment, 401(k), that kinda thing, so it's not in an IRA. That means it's gonna get taxed every year. And very frequently, especially in the case of inheritances, people don't have the cost basis. I have active conversations with people who might be listening to this right now going, going, "Yep, he's talking about me," where people don't know the cost basis, so we don't know the tax impact, and they're always resistant to sell those assets because of that concern. The problem, though, is, and what I have to tell them, is, look, if we're saying we're not gonna sell them, then we don't own them. I can't account for them in your financial plan if they are walled off. They don't help you. If your goal is to sit there and let it go to your kids with a stepped-up cost basis, then that's fine, except for that makes it impossible for us to count it as a cash-flowable asset for you. So we need to think about how we react to this.
Bob: Yeah, the point Brian and I are trying to drive home here is if you can't answer that short list of questions that we just went through, then we'll say, even if you're in the top 5% in the country, by net worth, you're probably still in that "comfortable but uncertain" category. And uncertainty is never a good thing, and that's what we wanna try to help all of you get out of, that uncertain...bring certainty and a plan into your life. Here's the Allworth advice: To some, being rich is just having a pile of money, but being financially independent is having a plan. And in the long run, the plan is oftentimes worth more than the money itself. A healthy emergency fund is smart, but what about having too much cash? We're gonna break down that, and how to avoid it 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" every night, subscribe and get our daily podcast. You can listen the following morning, during your commute, or at the gym, or out on your walk. Just search "Simply Money" on the iHeart app, or wherever you find your podcasts.
Straight ahead at 6:43, the one document every high-income family needs, but very few ever create. All right, Brian. We all know there's great comfort in having a bunch of cash. It feels safe, it's accessible, it never drops 20% like the stock market can, but holding too much cash, that comfort can come with a big cost.
Brian: Yeah, oftentimes we see this when people inherit cash or somehow come into a windfall. And it's always interesting to me, and this happens especially a little bit more when the market is a little bit wobbly, but it's always interesting to me that somehow, in somebody's brain, that they know they inherited, let's say, $250,000 in cash, somehow that has now become the emergency fund. They didn't decide that they needed $250,000 liquid. It just is liquid, and therefore that's the amount they need, and they're hesitant to do anything with it. Which is always an interesting conundrum for me, because cash is of course the least efficient asset you can have. It's important, and you can put it in things that get a return, but an emergency fund doesn't need to cover five years' worth of expenses. We're really looking for more like a year, or possibly two years, depending on how you feel about things, minus anything you know you're going to spend. If you know you're gonna, if you gotta buy a car for $50,000, $60,000, maybe more, replace the roof or the HVAC, or those different kinds of things, then carve that out first, and then the rest of it can be your cash. But use the tool for what it is. That enables you to do a bunch more things, rather than just sit on it.
Bob: Brian, I don't know about you, but I find sometimes, when people sell that business or have that big inheritance come through, and that big pile of cash is sitting there, it's not so much sometimes that people get too conservative. They see that pile of cash is their slush fund. You know, they got, in the back of their mind, "Well, I can put in a pool. I can take four cruises next year. I can give a bunch of money away." They don't wanna do anything with that cash, and really don't wanna talk to us about it, because in their mind, that's the money they can go blow on certain things in a short... Do you ever run into that?
Brian: Absolutely. All the time. But I will say, I'm a big proponent of doing the things that you want to do that make you happy, provided that your plan supports it. So I'll never stand in the way of somebody who wants to do those things to make their living situation for them and their families a better situation, however that is, but they gotta understand what the impact is. That's my main goal.
Bob: For sure. And that's a great lead-in to some of the dangers that we're gonna talk about here, of holding too much cash for too long. The first danger, obviously, is inflation erosion. And again, we're talking about, Brian, within the context of a fully developed, comprehensive financial plan. So we gotta run the model and say, hey, wherever your money, is cash, stocks, bonds, what have you, pension, social security, do you have enough money to generate the cash flow you need to generate for the rest of your life, indexed for inflation? Because inflation is just compounding year after year in the background, and a lot of people misunderstand or don't wanna think about the impact inflation has, in terms of eroding that large capital base.
Brian: Right, and a lot of people have a general understanding of inflation, but haven't really applied that to their own situation. In other words, what does it mean for my own expenses? Because every situation is a different set of puzzle pieces. Everybody spends differently and has different resources, so inflation's going to affect them differently. But Bob, I wanna also point out that I think a lot of people assume, and I know when I talk to my clients who are in this situation, they say, "I know you think I should invest this, but..." and I always stop them there and I say, "Yeah, of course. That's the default. Yes. We can always invest." But, that's not the first thing that comes to mind. What are the other things in your life that are screaming for money, whether you know it or not? Perhaps there's an expense coming up that we need to cover. Maybe there's a mortgage or some other kind of debt out there that we could use to blow it all up at once. Perhaps we keep it liquid, to wait for that period of time between when you retire and you turn on your social security spigots, to use that cash to do Roth conversions when you are in the lowest bracket that you have been in in decades. There are other things to do than invest it, before we just officially decide that.
Bob: Yeah, because to make those Roth conversions really work, and really sing and hum, so to speak, you gotta pay the taxes.
Brian: Yep.
Bob: And it's great to have some cash sitting there. All right, well, let's get into a second risk of holding too much cash for too long, and that's just missed growth. For example, over the last 20 years, a basic 60% stock, 40% bond portfolio has returned roughly 7% annually. Holding large amounts of cash means you're just flat out missing out on that opportunity to grow and compound your wealth at a rate higher than inflation on an after-tax basis. It's a missed opportunity.
Brian: Yeah, and the way compounding works, the way that snowball effect really kicks in, those early years, when I'm speaking early in retirement, right? There's different phases in life. Just like the first dollar you put into your 401(k) when you were in your 20s, that's the most valuable dollar you'll ever own, because it has spawned many, many more dollars over the 40 years that it grew. Well, you're in the same situation, even if you're retired, because we're still looking for 25, 30 years for this money to grow. So don't take a time-out for three years to decide what to do with that pile of cash. Come up with a plan, prioritize your goals, and then execute.
Bob: And then the final risk we wanna cover here in this segment is just emotional decision-making, making basic financial decisions purely on emotion. And we see this sometimes with families who have built a significant amount of wealth, or inherited a large amount of money. They get very, very conservative after a market pullback or correction, say 2008, or shoot, even in 2022, and they just stayed in cash. It's like, again, I got this big pile of money. I never wanna see that dollar amount drop at any time, for any reason. And that's not because of logic. It's because of fear. And again, if your financial plan will support a boatload of cash, and everything's gonna work out fine, we're not gonna talk you into taking risk you don't need to take. But oftentimes, we find things, Brian, find time, the opposite is true. Sitting there, you can feel comfortable in the short term, but when you project that plan out long-term, without earning any rate of return on that cash, you could see some dangerous things happen later on in life.
Brian: Bob, I'm gonna throw a baseball analogy at you.
Bob: I love those.
Brian: I know you're a baseball fan.
Bob: Bring it.
Brian: I know you're a huge baseball fan, so...
Bob: Lay it on me.
Brian: You know, you're watching a game, and you're in between pitches, or new batter up to the plate, and you see the outfielders pull that little card out of their pocket. What are they doing? They are reading the notes that they have on that batter, so that they can anticipate what the play might be. And they know, if I get a fly ball, I gotta go to this base for this runner, or the guy on second is pretty quick, so I may not be able to... They're thinking ahead of time. Financial planning is absolutely no different. If I find myself with an abundance of cash at some point, here are the five things that I would like to do with it, in order that I will accomplish them. In other words, first, my emergency fund is X amount of dollars. Once I've got that goal, you know, check the box, that goal is done. Now, any dollar amount over that emergency fund amount can be applied to anything else. Maybe it's the mortgage. It could be Roth conversions. It could be helping your kids, whatever. But once, if you have a plan put in place first, then you can easily execute on your goals, because you already prioritized them.
Bob: Yeah. And in the few minutes we got less left in this segment, there are some great alternatives that we can use here, to not take a bunch of risk with that money sitting in cash, but still earn a healthy, respectable rate of return. Things like laddered treasuries, you know, where you're getting yields way above what you're gonna get in a checking account or savings account or money market account. Things like buffered ETFs or structured notes, where you can get a piece of participation in the market, and have that downside covered. There's ways to blend strategies to still kinda be in the game, get a healthy rate of return, and not be subject to big market decline impacting your portfolio.
Brian: Yeah. I think a lot of people get confused by the term ladder. What that means is you're spreading the time out. So, I'll have five bonds coming due in one year, then two years, three years, four years, five years. That way, you've kinda locked in an interest rate [inaudible 00:19:17] always have fresh cash coming due to be reinvested.
Bob: Yeah. In other words, you can be conservative without being a 100% idle. Cash has its place, but it's about where and when you deploy that. Here's the Allworth advice: Holding too much cash without a plan might feel safe, but over time, you could be just going broke safely. Coming up next, some great advice from our estate planning expert, Dan Perry, from the law firm of Wood + Lamping. 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 estate planning expert, Dan Perry from the law firm of Wood + Lamping. Dan, first of all, thanks for making time for us today. And I know you wanna talk today about estate planning, the importance of having one, and then maybe even debunking some of the more common myths out there when it comes to estate planning.
Dan: Yeah, that's right. Again, thanks for having me. Happy to be here. You know, what I say is estate planning is, just real simply, is about making a plan for what happens to your property, whether that's your money, your home, your car, even your pets, after you pass away, or if you can't make decisions for yourself. It's not just for the wealthy. It's really for everyone over the age of 18 who wants to protect their family, and ensure their wishes are followed. And I like to think of estate planning encompassing four key pieces, the first being a last will and testament. And that's just a document that says who gets your assets and who takes care of your kids if they happen to be minors at the time of your death. And without a will, a court is gonna decide, which can, of course, lead to delays and disputes. Another key piece is a trust. And I like to explain trust as containers that hold your assets, and are managed by someone you choose, to avoid a court process called probate. Trusts can also save on taxes, or protect money for your kids. A third key piece would be a power of attorney. And that names someone to handle your finances if you're incapacitated, such as after an accident, for example. And a final key piece would be a healthcare directive. And that says who makes medical decisions for you, and what care you want if you can't speak for yourself, such as if you're in a coma. And...
Brian: Dan, thanks for breaking it down like that. That really, this topic can get overwhelming. And Bob and I are, of course, not attorneys, so we don't draft documents or anything like that. But as certified financial planners, these topics come up all the time, and we help people understand exactly how to arrange it. I wanna drill into one comment you made about trust, because I think every other day, I have this conversation with people who had a trust written up. And it makes logical sense. I have a trust. I paid money for it to exist. I should now name it as the beneficiary of everything, or the owner of everything, and so that the objectives of the trust will be carried out. Where this comes up as an issue sometimes is when we kinda knee-jerk, name the trust as the beneficiary of IRAs or 401(k)s, tax-advantaged money, and that can sometimes make a mess, in terms of denying, in worst-case scenario, denying beneficiaries their right to spread that tax impact of liquidating that pre-tax IRA or 401(k) over 10 years. How do you address that? How can we safely make sure a trust can serve its purpose, as well as protect that benefit?
Dan: Sure, absolutely. So as you may know, as you probably know, the tax laws changed significantly in this regard a few years ago. And a spouse named as a beneficiary in a IRA has the ability to stretch that benefit out over their lifetime, upon them reaching age 72. But a non-spouse beneficiary doesn't have that right. And when...a lot of clients wanna name their trust as a beneficiary, and the problem with that is if it doesn't have special language in the trust document itself, what we lawyers call it as see-through language, if it's not seeing through the trust agreement, to the specific named beneficiaries, it can create a situation where the non-spouse beneficiaries, such as an adult child, can't withdraw that benefit over a 10-year period. And it can create a much larger taxable event when they inherit that account.
Brian: So, see-through is the key word. I appreciate that. Is there a way... Now, obviously, somebody who's concerned about this should check with the attorney who drafted the document. But is there, I mean, are they literally looking for the word "see-through" in the document, or is there a special section? Where is this language hidden usually?
Dan: So, the language is usually hidden in a article or a paragraph that describes, that says "retirement accounts." And the language is going to usually reference a section of the Internal Revenue Code on how the trustee is going to view these retirement benefits. So, if you're listening to this and wondering if there's see-through language in your trust, try to find a section titled "retirement accounts." And it almost always will have the see-through language, and will say "see-through to the individual beneficiaries." Something along those lines.
Bob: Hey, Dan, I know you see all kinds of situations come past your desk, you know, as part of your practice. I know probably most of the listeners out there are thinking to themselves, "Hey, I've got some kind of estate plan, in some way, shape, or form. I got this covered." What are some of the things or situations you come across every day in your practice, some of the landmines out there, that people might not be aware of, you know, due to the fact that they just didn't cross all the T's and dot all the I's, you know, in terms of actually implementing a good estate planning strategy?
Dan: So, the one I see the most is people that believe that they're done when they complete their plan. Because, you know, as we all know, life changes. You know, there's marriage, perhaps divorce, kids, starting a new business, and your plan needs to keep up with those changes. You know, for example, I had a client who wrote a will in his 30s, and he named his wife as a beneficiary of that will. And after their divorce, he never updated it. However, in Ohio, divorce operates as what's called a revocation of any provision going to the ex wife. But it can also create a situation of ambiguity in the will on who is to receive the property that was to go to the wife when they were married. And that can create some problems, so [crosstalk 00:26:07]
Brian: So, that would send it back through probate then, wouldn't it? Wouldn't that result in them saying there's no beneficiary, therefore...?
Dan: It would either... Yeah, it would either go back to there's no beneficiary, or, this falls through what's called the residuary clause of the will. But again, that's ambiguity that a court has to weigh out.
Brian: Hey, one more question that comes up very frequently. A lot of times, we have clients come in, they bring their stack of papers and statements and trust documents. And they'll kinda casually throw out, "Well, we set up this trust, you know, because it's gonna protect us in the event of long-term care needs, or if we ever need to be on Medicaid" or something like that. That's almost like a, that's just thrown out there. And I know it is not that, not nearly that simple, if it's even possible at all. Can you weigh in a little bit on how a trust, and whether a trust can truly protect in a situation like that?
Dan: So, trusts can be designed to protect for Medicaid, Medicaid planning purposes. In general, those trusts have to be what's called irrevocable trusts. And the person who set up the trust, such as a settlor, is what they're called, cannot act as the trustee of that trust. And more importantly, for trusts to really protect for Medicaid planning purposes, the trust has to be funded with the person's assets at least five years prior to applying for Medicaid. So, I hear that a lot from clients as well. And it's, I always say, "Well, slow down. Let's take a look at what the trust actually says, and what assets have you funded to this trust?"
Brian: Okay, one more quick one in the last few seconds here. What about nursing homes? What if it's not a case where we're trying to impoverish to get to Medicaid stage?
Dan: If we're not trying to impoverish a person to get to a Medicaid stage, there's really no benefit for an irrevocable trust for Medicaid purposes. There could be a benefit for irrevocable trust for tax planning, if their estate is valued over $13.9 million, for example. But if it's for, if we're just, if we're not looking at those two issues, or any kind of asset protection, an irrevocable trust, in my experience, just isn't providing that benefit.
Bob: A lot of good things to think about and consider as we review our estate plan, you know, and I think the key point is, is review it, at a minimum, of every three to five years. Great stuff from Dan Perry, our estate planning expert with the law firm of Wood + Lamping. 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 have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show, right there on the iHeart app. Simply record your question, and it will come straight to us.
All right. When we talk to families who've done a great job building wealth, one of the most common things we hear is this. Something like, "Hey, we don't wanna spoil the kids, but we do wanna help them." Enter the family mission statement, or what some like to call a "wealth letter." Brian, this is an excellent topic that I wanna get into, and I'm anxious to hear your perspectives on this, because I have some as well.
Brian: So, yeah, the wealth letter is just really sitting down and figuring out what does money mean to me. And a lot of times, it's most impactful in a situation where maybe you are the first generation who had a significant amount of wealth over and above what you needed to pay the bills. Mom and dad might have done a great job, you know, raising you and getting you off on your feet and everything, such a great job that you're in a position to have more than you need, and therefore you have to prioritize how you're gonna spend it. Some people like the creature comforts, and they choose to spend on that, and there's nothing wrong with that. You know, free country. Our only concern is that the financial plan work. Other people think very differently about it. I have obligations to families, to charities and other things. I have, I've been given so much, I need to give back a little more. Lots of people are solidly in the middle, and there's no right, wrong, or indifferent to any of it, but those are the kinda values that you would pass along, you know, via something like a wealth letter, which essentially is just really documenting, "Here's what I believe, and here's how we got in this position, and here's what I wanna pass on to you children," as opposed to, "Here's a big pile of money."
Bob: I think this is an excellent idea to go through, and a lot of families don't do this, and I think it's a potential miss. Here's what we mean by that wealth letter. Here's a couple questions that you could just sit down, think about with your spouse. And it doesn't have to be a one-time thing. This can be a letter that evolves over time, but here are some of the big questions to write down answers to. What does money mean to our family? What are our responsibilities with money, as a family? What legacy do we wanna leave behind? Not just in dollars, but in character?
Brian: You know, Bob, we often hear about situations where a significant amount of wealth was passed from one generation to the next, and, you know, sometimes that includes a business, for example. And a lot of times, that second and third generation, you know, may be perfectly well-meaning people, but they did not have to put in the same blood, sweat, and tears, and elbow grease into building that business that the original generation did. And that's not their fault, but they tend to view it a little bit differently, and it can be tough to pass that drive on to someone who didn't have to do it in order to survive. So, it can be very, very important to make sure that everybody knows the history of the family, where did this come from, and what is their obligation in keeping it moving forward? So, let's talk about a local example here, Bob. We know a family from Hyde Park. They put a whole letter together, that went all the way through their entrepreneurial story, and it starts with an old shoe store down in Over-the-Rhine, and now they go through it every Thanksgiving, to remind everybody of where it all came from. And again, this goes back four and five generations. It's a great story, and I think that's a great place to, Thanksgiving's a great time to come together, not only be thankful for the situation that you're in, but also remind everybody how you got there in the first place.
Bob: Well, and the key thing I love about that story, and that example from the family in Cincinnati, is they're not waiting for them to die, to leave a piece of paper behind. They're talking about it at the Thanksgiving dinner table. In other words, they're living it out now. They're talking about their family history and their value now, when everyone's seated at the table, and they can hear mom and dad and grandma and grandpa talk about it today. That is a powerful way to actually pass down these values and live them out, instead of just leaving a document behind that says, basically, it might be like, "Hey, do what I say, not what I necessarily did." That tends to sometimes fall on deaf ears.
Brian: Yeah, and a lot of, you might be hearing this, going, "Okay, do I need another document? I already gotta worry about my will and my trust and all these other things." Those estate planning documents are about how. Those are the, that's the instruction manual for how your assets are to be distributed, according to whatever you have, and whatever the goals are, whatever... This one is about the why. There is no legal requirement that you put it together, but it will help your descendants understand exactly why you made the decisions you did.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, talk about what you've seen. Have you seen actual clients of yours go through anything like this, either in written form, or conversation with family, or both? You know, can you cite maybe an example that you've seen your clients do, that have really warmed your heart, and made you feel real good about the future of a family, based on this kind of planning?
Brian: You know, when you ask me that question, the one that comes to mind immediately, I have a family who, every year, they get together and they do estate planning gifts. This is a fairly common type of situation. If an elderly couple has more than they need, and they're concerned about estate taxes, then what they'll do is they'll use what's called the annual gift exclusion. You can give anybody a certain amount. I'm thinking of a family that does annual gift exclusions, meaning they use the annually available amount that they can give to their families without any repercussions for taxes, gift taxes, anything like that. And a lot of families do this, but a lot of times, it's just a check in the mail, which just means it's money that falls from the sky, and the recipients simply stick it in the bank or blow it on something or whatever, and have no appreciation for it. But the family I'm thinking of makes a production over the holidays. Everybody sits down for holiday Thanksgiving, or possibly Christmas dinner, and they will talk about, again, as many do, they'll talk about why they're thankful of their situation, what it is about their situation that they're truly grateful for, and then what they're going to do with that money that's coming from the generations above. And that is a tradition that will continue on in this family. It already has for several generations.
Bob: Great stuff. Here's the Allworth advice. A family mission statement won't show up on a balance sheet, but it may be the most valuable document you ever create. Coming up next, we've got Brian's bottom line. Brian's gonna spend a few minutes talking to us about Roth conversions, and he does a wonderful job counseling clients through this. I'm excited to hear his take on the whole Roth conversion topic. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Man: All right. Let's get this thing moving.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James, and it's time for Brian's bottom line. Brian, fill up...give us some wisdom about Roth conversions, as seen through the eyes of Brian James.
Brian: Well, Roth conversions are an amazingly powerful tool, that not a lot of people understand the pros and cons to. But what we're talking about, of course, for a long time, if you have had a job over the last several decades, and you had a 401(k), most likely, that was a traditional, or pre-tax 401(k), because it's just what you did. It was the only choice for a very long time. Roth came to be in the early 2000s, literally the year 2000. That was IRAs, and then eventually it found its way into 401(k)s. Now, Roth, of course, means that you are paying taxes up front. This doesn't mean more tax. You're not gonna get an extra tax bill. You're simply just not getting it deducted from your income at the payroll level. But you'll pay taxes on it now, and you'll invest it in something, and it'll grow to whatever it grows to over time. You're gonna pull it out completely tax-free. That means that there are no capital gains, no dividends, no kind of ordinary income tax at all, and there are no required minimum distributions. So, when you are 73 or 75, depending on your year of birth, you're not gonna have to deal with those kinds of things, with being forced to take money out and pay taxes on it. And, most beneficially, your kids will inherit it tax-free. Not only that, when they inherit, Roth IRAs or Roth 401(k)s are subject to the same 10-year rule, meaning it has to be completely liquidated, for anybody who passes after 2020, the heirs have 10 years to totally liquidate that Roth IRA or 401(k). But what that means, though, if you think about it, that means those heirs can let it grow an additional 10 years completely tax-free, because they don't have to empty that bucket until then.
Bob: The benefits of all this are obviously many, and it's lucrative, but walk us through, how do you actually guide somebody through this process of saying, Brian, this all sounds great. How do I do this? How do I decide the amount to do, when to do it? Walk us through your process.
Brian: Yeah. So, first of all, acknowledge the fact that you are voluntarily writing a fat check to the IRS, that is often sometimes in the mid to high five digits, depending on what we're trying to accomplish. So, I'm thinking of somebody who, of course, had a lucrative career, maybe 30, 40 years of work, the end of which was in the higher tax brackets. And then they retire, and we've got cash set aside to pay the bills for a while. Now, all of a sudden, they're in a really, really low tax bracket, because they literally have no income. This is before you turn on social security and other income streams. Maybe you can hold off as well if there's a benefit to it. But take advantage of those low tax brackets. Don't just be happy paying no taxes. Turn that around. Pay low taxes, not no, but low taxes, to get those Roth conversions done now. And then you can turn the ship around. All the growth that will happen inside the account from then on out will be tax-free. But again, you are definitely sacrificing a good chunk up front. That is a sacrifice. There's a break-even point out into the future. But, in the right situation, it can be an extremely powerful tool to control the income taxation of your hard-earned assets.
Bob: Good stuff, Brian. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Brian: This is an important topic, Bob, because obviously, you know, everybody wants to be rich because we assume that just a little bit more money will remove all the stress that I have in my life. So, let's talk about how that doesn't exactly work out the way we expect it. So, but just a little bit of benchmarking here first. It doesn't take a whole lot of net worth to kinda put you in the upper echelon of wealth in the United States, but if you... So, if you've got a million dollars, you're in about the top 10% of U.S. households, according to net worth. If you've got $3 million, now you're in the top 3%, and if you're up there at $5 million, now you're in the top 1%. So, there's an awful lot of people out there who just don't have a whole lot to work with, and if we could push a button and fix that, we would have done it already. But we're gonna talk today about the ones that are in these situations, and have a little bit more opportunity to kinda fine-tune things for them.
Bob: Brian, I don't know about you, but I strongly dislike all these benchmark numbers, you know, but I think it's unavoidable. People like to know, occasionally. I've got clients, I don't know about you, but I've got clients that say, "Well, what's everybody else have? What's your average client look like? What's everyone else doing?" Kinda, "Where do I stand in the pecking order?" And my answer's pretty much always the same. It doesn't matter. The only thing that matters is your personal financial plan, and what you're trying to accomplish for you and your family.
Brian: Yeah, I take that question in a slightly... I get it too, but I take it in a slightly different direction than you. I pivoted toward, let's talk about how your spending compares to other people. To me, that's what's relevant. Somebody who's got $25 million might spend like they have $50 million, which means they're basically dirt poor. Somebody who's got $500,000 but spends like they have $50,000, they're gonna be just fine. It's spending that matters, not your pile of money.
Bob: Well, what this really comes down to, and I agree with you, I think we're saying the same thing in a different way. One of the things that I'm always shocked at sometimes, Brian, is, no matter how much money people have, I am literally shocked that a lot of people have no idea, to your point, what they actually spend, and where they spend it every year. And I think that can tend to happen...when people have a very high income, they have a successful career, they got a lot of cash flow coming in, they haven't needed to think too much about where and what they spend. But when it comes time to turn the page, and flip from retirement into turning that pile of money into a paycheck, well, now it matters a lot where you spend, how you spend, the tax efficiency of what you spend, and to make sure you don't run out of money, you gotta make sure you spend within your means.
Brian: Yeah, and this is the part of the meeting where we say, "Okay, what do you think you spend on a monthly basis?" And a lot of people, to your point, just really don't know, because they haven't had to pay attention to it. I'm not forced to stick to a budget, so therefore I have no idea what my budget is. All I know is that I'm not running up credit card bills, and cash is not piling up in the bank, so therefore I must be kind of at equilibrium. And I think, Bob, that's a good way, for those of you out there who are listening to this and trying to think about your own situation while you're staring at the inside of your windshield, a great way to think about what your spending is, look at what hits the bank account on a monthly basis, and then figure out what are the things in there that are finite. Your mortgage is in there. Maybe there's college expenses for kids, or things, they're auto loans, whatever, stuff that is not going to be out there forever. Take that off, and then look for a surplus. Is there money left? Is there extra money in that bank account after every month? If there is, knock that off, too. What's left after those items being removed, that's what you spend on a monthly basis, assuming you also aren't running up credit card balances.
Bob: Yeah, and getting back to that, you know, "what's your number" kinda thing, I mean, some people, Brian, we find, they have $2 million, and they're thinking...you know, well, they're not thinking. If you take 5% of that, it's $100 grand a year coming out, and people are shocked. I think, even though this is kinda back-of-the-cocktail-napkin math, they're shocked to conclude, well, shoot, I can't or I don't wanna live on $100,000 a year. But they saw that $2 million accumulated amount, and their default provision was, "I got enough. I'm rich." And it's not the case when you start looking, again, at what are you actually going to spend during retirement.
Brian: Yeah. And I think the other pivot point there that comes up is, what will you do with that vacuum of time? Right? So, we spend what we spend on travel and all these other things while we're working, because we're shoehorning it in with all the other stuff we have to do that's consuming time. Well, sooner or later, you and possibly a spouse are going to have more time than you've ever had. When we get bored, we tend to spend. That's not a bad thing necessarily, as long as you see it coming ahead on the railroad tracks. So make sure you're budgeting for it. If you go to the beach twice a year now, while you're both working full time, well, then what will that be when nobody has to go anywhere anymore? Will it be four times, six times, eight times? Budget for it.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, let's pivot a little bit. Sometimes I think people can know they got a bunch of money, they know it's enough, but they're still feeling anxious. You know, people worry. The bigger that net worth becomes, they allow themselves to get consumed by every jot and tittle in the financial markets, you know, a 3% pullback. Some people can act and behave like the whole world's coming to an end. And they're wondering, am I missing something? You know, with taxes, there's always things to worry about. And sometimes we just have to counsel people kinda off the ledge, as far as you don't really need to worry so much. Your plan is solid. It's intact. We still got well over a 90% probability of success of pulling off all your goals. Sometimes it's more of just an emotional reaction, the higher that pile of money, value-wise, becomes.
Brian: Yeah. I think, and speaking of emotions, the saddest times I've had in my office with people, believe it or not, are not when we realize that their plan isn't going to work. Maybe they have to work a little bit longer, or, you know, there, just something else drastic needs to change. That's sad, but at the same time, that usually happens when people are young enough to react to it and deal with it. The saddest times, Bob, are when people come in and they realize they could have retired five, six, seven years ago. There's nothing you can do about that. They missed out on their grandkids growing up, things that they thought they maybe wanted to do, but they simply never took the time to take stock and realize what they had built for themselves. And again, that's why a financial plan comes in so importantly, because that's gonna help you know exactly what you can get away with and what you can't.
Bob: That leads us into a few key questions. I think these are great questions to ask yourself, or sit with an advisor and talk about. Let's get into some of these questions, you know, in terms of, well, how do we address this whole topic, in practicality, in real life? Question number one, can you clearly identify how much income you'll need each year, and what source that income is coming from? That's a great question to ask. It's a loaded question, but one that needs to be answered.
Brian: Yeah, and this goes back to what I was referring to earlier. Figure out where it goes on a monthly basis now. What you're spending now is gonna come awful close to what you're gonna be spending in retirement, for probably the vast majority of it. That's probably at least 80% of it. The rest of it is, again, like I said, think about what you'll do when you have time, and then budget for it appropriately. But the whole point is have a target.
Bob: Here's another great question to ask yourself. If the market dropped 20% this year, how would that impact your lifestyle? Would you need to cut spending, delay a vacation or a trip, or do you have a guardrail strategy in place? Another great conversation to have with yourself, your spouse, or with your advisor.
Brian: Yeah, and we call this stress testing. So, in other words, let's build a financial plan, and figure out what course are we on right now? How's it coming? Are we doing okay? If the baseline scenario is okay, that's great. Everybody agrees that if nothing bad ever happens again, then here's how we're gonna look. Then right next to that, run another one, and just make 20% of your net worth go poof. Doesn't matter how. You gambled it away, the market took it, doesn't make any difference. Just run the numbers again with less money, and see if you're still okay. That's a stress test, and it's important to do.
Bob: Here's another great question to ask. Are you confident that your portfolio is set up not just for growth, but for tax efficiency, volatility, and long-term care needs? It comes back to that stress test that you talked about, but also tax efficiency.
Brian: Asset location is very important. Asset location, what that means is what kind of an account? It's one thing to own XYZ stock, but what kind of account is it sitting in? That's gonna dictate how you're gonna react to it. So, for example, I have a lot of clients that maybe inherited assets, or they sold a business, or whatever, and there's a decent-sized pile of money that is not tax-sheltered. It didn't come from employment, 401(k), that kinda thing, so it's not in an IRA. That means it's gonna get taxed every year. And very frequently, especially in the case of inheritances, people don't have the cost basis. I have active conversations with people who might be listening to this right now going, going, "Yep, he's talking about me," where people don't know the cost basis, so we don't know the tax impact, and they're always resistant to sell those assets because of that concern. The problem, though, is, and what I have to tell them, is, look, if we're saying we're not gonna sell them, then we don't own them. I can't account for them in your financial plan if they are walled off. They don't help you. If your goal is to sit there and let it go to your kids with a stepped-up cost basis, then that's fine, except for that makes it impossible for us to count it as a cash-flowable asset for you. So we need to think about how we react to this.
Bob: Yeah, the point Brian and I are trying to drive home here is if you can't answer that short list of questions that we just went through, then we'll say, even if you're in the top 5% in the country, by net worth, you're probably still in that "comfortable but uncertain" category. And uncertainty is never a good thing, and that's what we wanna try to help all of you get out of, that uncertain...bring certainty and a plan into your life. Here's the Allworth advice: To some, being rich is just having a pile of money, but being financially independent is having a plan. And in the long run, the plan is oftentimes worth more than the money itself. A healthy emergency fund is smart, but what about having too much cash? We're gonna break down that, and how to avoid it 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" every night, subscribe and get our daily podcast. You can listen the following morning, during your commute, or at the gym, or out on your walk. Just search "Simply Money" on the iHeart app, or wherever you find your podcasts.
Straight ahead at 6:43, the one document every high-income family needs, but very few ever create. All right, Brian. We all know there's great comfort in having a bunch of cash. It feels safe, it's accessible, it never drops 20% like the stock market can, but holding too much cash, that comfort can come with a big cost.
Brian: Yeah, oftentimes we see this when people inherit cash or somehow come into a windfall. And it's always interesting to me, and this happens especially a little bit more when the market is a little bit wobbly, but it's always interesting to me that somehow, in somebody's brain, that they know they inherited, let's say, $250,000 in cash, somehow that has now become the emergency fund. They didn't decide that they needed $250,000 liquid. It just is liquid, and therefore that's the amount they need, and they're hesitant to do anything with it. Which is always an interesting conundrum for me, because cash is of course the least efficient asset you can have. It's important, and you can put it in things that get a return, but an emergency fund doesn't need to cover five years' worth of expenses. We're really looking for more like a year, or possibly two years, depending on how you feel about things, minus anything you know you're going to spend. If you know you're gonna, if you gotta buy a car for $50,000, $60,000, maybe more, replace the roof or the HVAC, or those different kinds of things, then carve that out first, and then the rest of it can be your cash. But use the tool for what it is. That enables you to do a bunch more things, rather than just sit on it.
Bob: Brian, I don't know about you, but I find sometimes, when people sell that business or have that big inheritance come through, and that big pile of cash is sitting there, it's not so much sometimes that people get too conservative. They see that pile of cash is their slush fund. You know, they got, in the back of their mind, "Well, I can put in a pool. I can take four cruises next year. I can give a bunch of money away." They don't wanna do anything with that cash, and really don't wanna talk to us about it, because in their mind, that's the money they can go blow on certain things in a short... Do you ever run into that?
Brian: Absolutely. All the time. But I will say, I'm a big proponent of doing the things that you want to do that make you happy, provided that your plan supports it. So I'll never stand in the way of somebody who wants to do those things to make their living situation for them and their families a better situation, however that is, but they gotta understand what the impact is. That's my main goal.
Bob: For sure. And that's a great lead-in to some of the dangers that we're gonna talk about here, of holding too much cash for too long. The first danger, obviously, is inflation erosion. And again, we're talking about, Brian, within the context of a fully developed, comprehensive financial plan. So we gotta run the model and say, hey, wherever your money, is cash, stocks, bonds, what have you, pension, social security, do you have enough money to generate the cash flow you need to generate for the rest of your life, indexed for inflation? Because inflation is just compounding year after year in the background, and a lot of people misunderstand or don't wanna think about the impact inflation has, in terms of eroding that large capital base.
Brian: Right, and a lot of people have a general understanding of inflation, but haven't really applied that to their own situation. In other words, what does it mean for my own expenses? Because every situation is a different set of puzzle pieces. Everybody spends differently and has different resources, so inflation's going to affect them differently. But Bob, I wanna also point out that I think a lot of people assume, and I know when I talk to my clients who are in this situation, they say, "I know you think I should invest this, but..." and I always stop them there and I say, "Yeah, of course. That's the default. Yes. We can always invest." But, that's not the first thing that comes to mind. What are the other things in your life that are screaming for money, whether you know it or not? Perhaps there's an expense coming up that we need to cover. Maybe there's a mortgage or some other kind of debt out there that we could use to blow it all up at once. Perhaps we keep it liquid, to wait for that period of time between when you retire and you turn on your social security spigots, to use that cash to do Roth conversions when you are in the lowest bracket that you have been in in decades. There are other things to do than invest it, before we just officially decide that.
Bob: Yeah, because to make those Roth conversions really work, and really sing and hum, so to speak, you gotta pay the taxes.
Brian: Yep.
Bob: And it's great to have some cash sitting there. All right, well, let's get into a second risk of holding too much cash for too long, and that's just missed growth. For example, over the last 20 years, a basic 60% stock, 40% bond portfolio has returned roughly 7% annually. Holding large amounts of cash means you're just flat out missing out on that opportunity to grow and compound your wealth at a rate higher than inflation on an after-tax basis. It's a missed opportunity.
Brian: Yeah, and the way compounding works, the way that snowball effect really kicks in, those early years, when I'm speaking early in retirement, right? There's different phases in life. Just like the first dollar you put into your 401(k) when you were in your 20s, that's the most valuable dollar you'll ever own, because it has spawned many, many more dollars over the 40 years that it grew. Well, you're in the same situation, even if you're retired, because we're still looking for 25, 30 years for this money to grow. So don't take a time-out for three years to decide what to do with that pile of cash. Come up with a plan, prioritize your goals, and then execute.
Bob: And then the final risk we wanna cover here in this segment is just emotional decision-making, making basic financial decisions purely on emotion. And we see this sometimes with families who have built a significant amount of wealth, or inherited a large amount of money. They get very, very conservative after a market pullback or correction, say 2008, or shoot, even in 2022, and they just stayed in cash. It's like, again, I got this big pile of money. I never wanna see that dollar amount drop at any time, for any reason. And that's not because of logic. It's because of fear. And again, if your financial plan will support a boatload of cash, and everything's gonna work out fine, we're not gonna talk you into taking risk you don't need to take. But oftentimes, we find things, Brian, find time, the opposite is true. Sitting there, you can feel comfortable in the short term, but when you project that plan out long-term, without earning any rate of return on that cash, you could see some dangerous things happen later on in life.
Brian: Bob, I'm gonna throw a baseball analogy at you.
Bob: I love those.
Brian: I know you're a baseball fan.
Bob: Bring it.
Brian: I know you're a huge baseball fan, so...
Bob: Lay it on me.
Brian: You know, you're watching a game, and you're in between pitches, or new batter up to the plate, and you see the outfielders pull that little card out of their pocket. What are they doing? They are reading the notes that they have on that batter, so that they can anticipate what the play might be. And they know, if I get a fly ball, I gotta go to this base for this runner, or the guy on second is pretty quick, so I may not be able to... They're thinking ahead of time. Financial planning is absolutely no different. If I find myself with an abundance of cash at some point, here are the five things that I would like to do with it, in order that I will accomplish them. In other words, first, my emergency fund is X amount of dollars. Once I've got that goal, you know, check the box, that goal is done. Now, any dollar amount over that emergency fund amount can be applied to anything else. Maybe it's the mortgage. It could be Roth conversions. It could be helping your kids, whatever. But once, if you have a plan put in place first, then you can easily execute on your goals, because you already prioritized them.
Bob: Yeah. And in the few minutes we got less left in this segment, there are some great alternatives that we can use here, to not take a bunch of risk with that money sitting in cash, but still earn a healthy, respectable rate of return. Things like laddered treasuries, you know, where you're getting yields way above what you're gonna get in a checking account or savings account or money market account. Things like buffered ETFs or structured notes, where you can get a piece of participation in the market, and have that downside covered. There's ways to blend strategies to still kinda be in the game, get a healthy rate of return, and not be subject to big market decline impacting your portfolio.
Brian: Yeah. I think a lot of people get confused by the term ladder. What that means is you're spreading the time out. So, I'll have five bonds coming due in one year, then two years, three years, four years, five years. That way, you've kinda locked in an interest rate [inaudible 00:19:17] always have fresh cash coming due to be reinvested.
Bob: Yeah. In other words, you can be conservative without being a 100% idle. Cash has its place, but it's about where and when you deploy that. Here's the Allworth advice: Holding too much cash without a plan might feel safe, but over time, you could be just going broke safely. Coming up next, some great advice from our estate planning expert, Dan Perry, from the law firm of Wood + Lamping. 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 estate planning expert, Dan Perry from the law firm of Wood + Lamping. Dan, first of all, thanks for making time for us today. And I know you wanna talk today about estate planning, the importance of having one, and then maybe even debunking some of the more common myths out there when it comes to estate planning.
Dan: Yeah, that's right. Again, thanks for having me. Happy to be here. You know, what I say is estate planning is, just real simply, is about making a plan for what happens to your property, whether that's your money, your home, your car, even your pets, after you pass away, or if you can't make decisions for yourself. It's not just for the wealthy. It's really for everyone over the age of 18 who wants to protect their family, and ensure their wishes are followed. And I like to think of estate planning encompassing four key pieces, the first being a last will and testament. And that's just a document that says who gets your assets and who takes care of your kids if they happen to be minors at the time of your death. And without a will, a court is gonna decide, which can, of course, lead to delays and disputes. Another key piece is a trust. And I like to explain trust as containers that hold your assets, and are managed by someone you choose, to avoid a court process called probate. Trusts can also save on taxes, or protect money for your kids. A third key piece would be a power of attorney. And that names someone to handle your finances if you're incapacitated, such as after an accident, for example. And a final key piece would be a healthcare directive. And that says who makes medical decisions for you, and what care you want if you can't speak for yourself, such as if you're in a coma. And...
Brian: Dan, thanks for breaking it down like that. That really, this topic can get overwhelming. And Bob and I are, of course, not attorneys, so we don't draft documents or anything like that. But as certified financial planners, these topics come up all the time, and we help people understand exactly how to arrange it. I wanna drill into one comment you made about trust, because I think every other day, I have this conversation with people who had a trust written up. And it makes logical sense. I have a trust. I paid money for it to exist. I should now name it as the beneficiary of everything, or the owner of everything, and so that the objectives of the trust will be carried out. Where this comes up as an issue sometimes is when we kinda knee-jerk, name the trust as the beneficiary of IRAs or 401(k)s, tax-advantaged money, and that can sometimes make a mess, in terms of denying, in worst-case scenario, denying beneficiaries their right to spread that tax impact of liquidating that pre-tax IRA or 401(k) over 10 years. How do you address that? How can we safely make sure a trust can serve its purpose, as well as protect that benefit?
Dan: Sure, absolutely. So as you may know, as you probably know, the tax laws changed significantly in this regard a few years ago. And a spouse named as a beneficiary in a IRA has the ability to stretch that benefit out over their lifetime, upon them reaching age 72. But a non-spouse beneficiary doesn't have that right. And when...a lot of clients wanna name their trust as a beneficiary, and the problem with that is if it doesn't have special language in the trust document itself, what we lawyers call it as see-through language, if it's not seeing through the trust agreement, to the specific named beneficiaries, it can create a situation where the non-spouse beneficiaries, such as an adult child, can't withdraw that benefit over a 10-year period. And it can create a much larger taxable event when they inherit that account.
Brian: So, see-through is the key word. I appreciate that. Is there a way... Now, obviously, somebody who's concerned about this should check with the attorney who drafted the document. But is there, I mean, are they literally looking for the word "see-through" in the document, or is there a special section? Where is this language hidden usually?
Dan: So, the language is usually hidden in a article or a paragraph that describes, that says "retirement accounts." And the language is going to usually reference a section of the Internal Revenue Code on how the trustee is going to view these retirement benefits. So, if you're listening to this and wondering if there's see-through language in your trust, try to find a section titled "retirement accounts." And it almost always will have the see-through language, and will say "see-through to the individual beneficiaries." Something along those lines.
Bob: Hey, Dan, I know you see all kinds of situations come past your desk, you know, as part of your practice. I know probably most of the listeners out there are thinking to themselves, "Hey, I've got some kind of estate plan, in some way, shape, or form. I got this covered." What are some of the things or situations you come across every day in your practice, some of the landmines out there, that people might not be aware of, you know, due to the fact that they just didn't cross all the T's and dot all the I's, you know, in terms of actually implementing a good estate planning strategy?
Dan: So, the one I see the most is people that believe that they're done when they complete their plan. Because, you know, as we all know, life changes. You know, there's marriage, perhaps divorce, kids, starting a new business, and your plan needs to keep up with those changes. You know, for example, I had a client who wrote a will in his 30s, and he named his wife as a beneficiary of that will. And after their divorce, he never updated it. However, in Ohio, divorce operates as what's called a revocation of any provision going to the ex wife. But it can also create a situation of ambiguity in the will on who is to receive the property that was to go to the wife when they were married. And that can create some problems, so [crosstalk 00:26:07]
Brian: So, that would send it back through probate then, wouldn't it? Wouldn't that result in them saying there's no beneficiary, therefore...?
Dan: It would either... Yeah, it would either go back to there's no beneficiary, or, this falls through what's called the residuary clause of the will. But again, that's ambiguity that a court has to weigh out.
Brian: Hey, one more question that comes up very frequently. A lot of times, we have clients come in, they bring their stack of papers and statements and trust documents. And they'll kinda casually throw out, "Well, we set up this trust, you know, because it's gonna protect us in the event of long-term care needs, or if we ever need to be on Medicaid" or something like that. That's almost like a, that's just thrown out there. And I know it is not that, not nearly that simple, if it's even possible at all. Can you weigh in a little bit on how a trust, and whether a trust can truly protect in a situation like that?
Dan: So, trusts can be designed to protect for Medicaid, Medicaid planning purposes. In general, those trusts have to be what's called irrevocable trusts. And the person who set up the trust, such as a settlor, is what they're called, cannot act as the trustee of that trust. And more importantly, for trusts to really protect for Medicaid planning purposes, the trust has to be funded with the person's assets at least five years prior to applying for Medicaid. So, I hear that a lot from clients as well. And it's, I always say, "Well, slow down. Let's take a look at what the trust actually says, and what assets have you funded to this trust?"
Brian: Okay, one more quick one in the last few seconds here. What about nursing homes? What if it's not a case where we're trying to impoverish to get to Medicaid stage?
Dan: If we're not trying to impoverish a person to get to a Medicaid stage, there's really no benefit for an irrevocable trust for Medicaid purposes. There could be a benefit for irrevocable trust for tax planning, if their estate is valued over $13.9 million, for example. But if it's for, if we're just, if we're not looking at those two issues, or any kind of asset protection, an irrevocable trust, in my experience, just isn't providing that benefit.
Bob: A lot of good things to think about and consider as we review our estate plan, you know, and I think the key point is, is review it, at a minimum, of every three to five years. Great stuff from Dan Perry, our estate planning expert with the law firm of Wood + Lamping. 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 have a financial question you'd like for us to answer, there's a red button you can click while you're listening to the show, right there on the iHeart app. Simply record your question, and it will come straight to us.
All right. When we talk to families who've done a great job building wealth, one of the most common things we hear is this. Something like, "Hey, we don't wanna spoil the kids, but we do wanna help them." Enter the family mission statement, or what some like to call a "wealth letter." Brian, this is an excellent topic that I wanna get into, and I'm anxious to hear your perspectives on this, because I have some as well.
Brian: So, yeah, the wealth letter is just really sitting down and figuring out what does money mean to me. And a lot of times, it's most impactful in a situation where maybe you are the first generation who had a significant amount of wealth over and above what you needed to pay the bills. Mom and dad might have done a great job, you know, raising you and getting you off on your feet and everything, such a great job that you're in a position to have more than you need, and therefore you have to prioritize how you're gonna spend it. Some people like the creature comforts, and they choose to spend on that, and there's nothing wrong with that. You know, free country. Our only concern is that the financial plan work. Other people think very differently about it. I have obligations to families, to charities and other things. I have, I've been given so much, I need to give back a little more. Lots of people are solidly in the middle, and there's no right, wrong, or indifferent to any of it, but those are the kinda values that you would pass along, you know, via something like a wealth letter, which essentially is just really documenting, "Here's what I believe, and here's how we got in this position, and here's what I wanna pass on to you children," as opposed to, "Here's a big pile of money."
Bob: I think this is an excellent idea to go through, and a lot of families don't do this, and I think it's a potential miss. Here's what we mean by that wealth letter. Here's a couple questions that you could just sit down, think about with your spouse. And it doesn't have to be a one-time thing. This can be a letter that evolves over time, but here are some of the big questions to write down answers to. What does money mean to our family? What are our responsibilities with money, as a family? What legacy do we wanna leave behind? Not just in dollars, but in character?
Brian: You know, Bob, we often hear about situations where a significant amount of wealth was passed from one generation to the next, and, you know, sometimes that includes a business, for example. And a lot of times, that second and third generation, you know, may be perfectly well-meaning people, but they did not have to put in the same blood, sweat, and tears, and elbow grease into building that business that the original generation did. And that's not their fault, but they tend to view it a little bit differently, and it can be tough to pass that drive on to someone who didn't have to do it in order to survive. So, it can be very, very important to make sure that everybody knows the history of the family, where did this come from, and what is their obligation in keeping it moving forward? So, let's talk about a local example here, Bob. We know a family from Hyde Park. They put a whole letter together, that went all the way through their entrepreneurial story, and it starts with an old shoe store down in Over-the-Rhine, and now they go through it every Thanksgiving, to remind everybody of where it all came from. And again, this goes back four and five generations. It's a great story, and I think that's a great place to, Thanksgiving's a great time to come together, not only be thankful for the situation that you're in, but also remind everybody how you got there in the first place.
Bob: Well, and the key thing I love about that story, and that example from the family in Cincinnati, is they're not waiting for them to die, to leave a piece of paper behind. They're talking about it at the Thanksgiving dinner table. In other words, they're living it out now. They're talking about their family history and their value now, when everyone's seated at the table, and they can hear mom and dad and grandma and grandpa talk about it today. That is a powerful way to actually pass down these values and live them out, instead of just leaving a document behind that says, basically, it might be like, "Hey, do what I say, not what I necessarily did." That tends to sometimes fall on deaf ears.
Brian: Yeah, and a lot of, you might be hearing this, going, "Okay, do I need another document? I already gotta worry about my will and my trust and all these other things." Those estate planning documents are about how. Those are the, that's the instruction manual for how your assets are to be distributed, according to whatever you have, and whatever the goals are, whatever... This one is about the why. There is no legal requirement that you put it together, but it will help your descendants understand exactly why you made the decisions you did.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, talk about what you've seen. Have you seen actual clients of yours go through anything like this, either in written form, or conversation with family, or both? You know, can you cite maybe an example that you've seen your clients do, that have really warmed your heart, and made you feel real good about the future of a family, based on this kind of planning?
Brian: You know, when you ask me that question, the one that comes to mind immediately, I have a family who, every year, they get together and they do estate planning gifts. This is a fairly common type of situation. If an elderly couple has more than they need, and they're concerned about estate taxes, then what they'll do is they'll use what's called the annual gift exclusion. You can give anybody a certain amount. I'm thinking of a family that does annual gift exclusions, meaning they use the annually available amount that they can give to their families without any repercussions for taxes, gift taxes, anything like that. And a lot of families do this, but a lot of times, it's just a check in the mail, which just means it's money that falls from the sky, and the recipients simply stick it in the bank or blow it on something or whatever, and have no appreciation for it. But the family I'm thinking of makes a production over the holidays. Everybody sits down for holiday Thanksgiving, or possibly Christmas dinner, and they will talk about, again, as many do, they'll talk about why they're thankful of their situation, what it is about their situation that they're truly grateful for, and then what they're going to do with that money that's coming from the generations above. And that is a tradition that will continue on in this family. It already has for several generations.
Bob: Great stuff. Here's the Allworth advice. A family mission statement won't show up on a balance sheet, but it may be the most valuable document you ever create. Coming up next, we've got Brian's bottom line. Brian's gonna spend a few minutes talking to us about Roth conversions, and he does a wonderful job counseling clients through this. I'm excited to hear his take on the whole Roth conversion topic. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Man: All right. Let's get this thing moving.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James, and it's time for Brian's bottom line. Brian, fill up...give us some wisdom about Roth conversions, as seen through the eyes of Brian James.
Brian: Well, Roth conversions are an amazingly powerful tool, that not a lot of people understand the pros and cons to. But what we're talking about, of course, for a long time, if you have had a job over the last several decades, and you had a 401(k), most likely, that was a traditional, or pre-tax 401(k), because it's just what you did. It was the only choice for a very long time. Roth came to be in the early 2000s, literally the year 2000. That was IRAs, and then eventually it found its way into 401(k)s. Now, Roth, of course, means that you are paying taxes up front. This doesn't mean more tax. You're not gonna get an extra tax bill. You're simply just not getting it deducted from your income at the payroll level. But you'll pay taxes on it now, and you'll invest it in something, and it'll grow to whatever it grows to over time. You're gonna pull it out completely tax-free. That means that there are no capital gains, no dividends, no kind of ordinary income tax at all, and there are no required minimum distributions. So, when you are 73 or 75, depending on your year of birth, you're not gonna have to deal with those kinds of things, with being forced to take money out and pay taxes on it. And, most beneficially, your kids will inherit it tax-free. Not only that, when they inherit, Roth IRAs or Roth 401(k)s are subject to the same 10-year rule, meaning it has to be completely liquidated, for anybody who passes after 2020, the heirs have 10 years to totally liquidate that Roth IRA or 401(k). But what that means, though, if you think about it, that means those heirs can let it grow an additional 10 years completely tax-free, because they don't have to empty that bucket until then.
Bob: The benefits of all this are obviously many, and it's lucrative, but walk us through, how do you actually guide somebody through this process of saying, Brian, this all sounds great. How do I do this? How do I decide the amount to do, when to do it? Walk us through your process.
Brian: Yeah. So, first of all, acknowledge the fact that you are voluntarily writing a fat check to the IRS, that is often sometimes in the mid to high five digits, depending on what we're trying to accomplish. So, I'm thinking of somebody who, of course, had a lucrative career, maybe 30, 40 years of work, the end of which was in the higher tax brackets. And then they retire, and we've got cash set aside to pay the bills for a while. Now, all of a sudden, they're in a really, really low tax bracket, because they literally have no income. This is before you turn on social security and other income streams. Maybe you can hold off as well if there's a benefit to it. But take advantage of those low tax brackets. Don't just be happy paying no taxes. Turn that around. Pay low taxes, not no, but low taxes, to get those Roth conversions done now. And then you can turn the ship around. All the growth that will happen inside the account from then on out will be tax-free. But again, you are definitely sacrificing a good chunk up front. That is a sacrifice. There's a break-even point out into the future. But, in the right situation, it can be an extremely powerful tool to control the income taxation of your hard-earned assets.
Bob: Good stuff, Brian. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.