The Value of Money, How to Stress-Test Your Portfolio, and Smart Options for High-Net-Worth Investors
On this week’s Best of Simply Money podcast, Bob and Steve take a step back from the usual market talk and get personal - asking a simple but powerful question: What does money really mean to you?
Is it security? Freedom? Maybe status? Everyone sees money differently, and Bob and Steve dig into how those views shape the financial decisions we make - often more with our hearts than our heads.
They also walk through how to stress-test your financial plan (without freaking out), and why emotions can sometimes throw logic out the window. Plus, hear how a solid plan can give you the freedom to live life on your terms - whether that’s retiring early, switching careers, or just sleeping better at night.
It’s a refreshingly real conversation about money, mindset, and making choices that actually fit your life.
Download and rate our podcast here.
Bob: Tonight, the value of money, the perfect portfolio for you, and more. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Steve Hruby. Tonight, we're not talking about the stock market, tax codes, interest rates, tariff headlines. We're going deeper into something more fundamental, something that shapes how you invest, how you spend, and even how you sleep at night. We're talking about the value of money and the value of money to you, not just how much you have, but what it's really worth to you. Because when you strip away all the noise, all the headlines, and all the market chatter, that's all that really matters.
Steve: Yeah, I mean, at the end of the day, whether you've got a million bucks, $5 million, $20 million, money means something different to each and every one of us. For some people, it's security. For others, it's status, maybe. For some, it's just financial freedom. But at the end of the day, unfortunately, oftentimes there's still anxiety tied to money, no matter how much we have.
Bob: Yeah, Steven, we see this all the time when we work with clients in our office. We see it firsthand. People with more money than they ever dreamed of, we find are still worrying about running out of money.
Steve: It really is remarkable because I will stress test the heck out of plans. I will say that you are going to live until you're 110 years old. You're going to spend more money than you ever thought you could. We're going to assume the markets have terrible timing, and they're still worried about running out, still afraid to retire.
Bob: Yeah, and I have some meetings like that as well. So, I mean, it really all comes down to we can run spreadsheets till we're blue in the face. We can stress test the you-know-what out of all these portfolios. But the emotional side of wealth is critically important. And we're kidding ourselves if we don't admit that it drives a lot of the decisions we make.
Steve: Oh, sure. I mean, part of our job is just to make sure that people don't make mistakes that they can't undo, people selling low and buying high after a market correction, for example, hoarding cash when they should be investing because maybe their wealth is more tied to security than anything else. But there's a massive opportunity cost of not letting those dollars work, inflation will eat those dollars alive, too much risk based on greed, perhaps, not enough risk based on fear. Money isn't necessarily a logical thing. It's an emotional thing.
Bob: Yeah. And it really sometimes comes down to not what you actually have. It's what you believe you have, again, based on how money ties into your values and your identity. And there are reasons for this. Maybe your parents grew up in the depression and passed that fear on to you. Maybe you're someone who built your wealth from scratch, and you feel guilty about spending it.
Steve: I've certainly seen that before. Somebody that comes from nothing, and then they start a small business that becomes very successful, and then they sell it, and they're like, "Oh, I have $15 million now. What do I do?"
Bob: Yeah. Or maybe you didn't build it from scratch. Maybe you did it the old-fashioned way. You just inherited.
Steve: Oh, wouldn't that be great? Yeah. Well, when you inherit, though, a lot of times people are afraid of blowing it, messing up, doing something outside of the wishes of those that they inherited the money from. So, there's always emotions tied to the relationship that we have with our money.
Bob: And the point we really want to drive home here, Steve, is what money actually buys is choices. Choices. The ability to choose how you spend your time. It also buys margin, breathing room when life throws us a curveball. For some, it buys dignity, not having to rely on anyone else for your financial support in the later years of life. It also buys you time. Paying someone else to free yourself from some things that you hate doing.
Steve: Yeah, exactly.
Bob: And then for others, access. Access to better healthcare, better education, or better opportunities for your family.
Steve: Yeah, I mean, it's a great point. That's kind of what I talk about when we build financial plans, and somebody's works well, and I have trouble blowing it up in the face of all the stress testing. What I explain to them is that now they have options. And I'm talking about things like, you know, people will come to me with simple questions like, "Hey, should I pay off my mortgage entirely? I want to be debt-free, or should I keep the money invested because I am one of the fortunate people that locked in at a low mortgage rate? Should I collect Social Security now, or should I wait? You know, I'm uncomfortable taking from my accounts, so I feel like I should collect it now." And honestly, at the end of the day, those conversations when people have options are quite nice because I'll be very honest and paint a picture of, all right, well, let's say that you do do a distribution to pay off your home at the end of the day. You know, and this is a real-world example.
Somebody at the end of their plan, they live below their means. They have incredible fixed income. They have some wealth that they build on their own. They inherited some assets. So, they have a nice chunk of change, but it's going to keep growing because they're not going to take it out as fast as they need to or as fast as they could be, I should say. So, their wealth is going to balloon to future value money, about $25 million by the end of their plan. And the difference between paying off their home and keeping the mortgage was about a million bucks at the end of the plan. And they said, "Okay, well, I don't care about that. So, I'm going to pay off my home." So, this is an example of how money gave them options. Same thing with Social Security. I meet with somebody just the other day, and the plan that we built was, "You're going to defer Social Security till full retirement age." And they collected two years earlier, and they're like, "Steve, are you going to be mad at me for this?" And I said, "No, we talked about it ahead of time. Your plan affords you options. Yes, better outcomes will happen if you live for a long time, and you would have deferred your Social Security. But the end of the day, who cares?" So, I really like when there's a robust plan and people have those options.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Steve Hruby. Steve, here's a trade-off that so many people miss. And it's something we tell clients all the time. You can always earn more money, but you can't earn more time. And yet people often protect their money way more fiercely than they protect their time.
Steve: Yeah, an example of that would be staying in a job that they don't like. That's another thing that I'll explain is, you know, if your plan is robust and you have a really bad day at work, you don't have to go back. Think about that. It buys you the option of not needing to go back to work. Somebody the other day was telling me that...I explained that to them about a year ago, and he's planning on continuing to work because he's earning more money than he's ever earned. But every morning he wakes up and just kind of sits at the side of the bed, and he looks at the floor, and he's like, "Should I just not go into work today?" He's actually thinking that. But, you know, sometimes people will put off vacations, for example, and unfortunately, maybe something happens to their health when they retire, and they don't get to take those vacations. They worry about spending money on their grandkids, you know, as if they'll get a second shot at those moments that they might miss spending with them instead of earning more. You know, it's important to make sure that you're not making sacrifices that you don't need to make.
Bob: I had a lady in my office yesterday, a widow who has nine grandchildren. And it was a wonderful meeting because she's been very responsible with her planning. We get together every year, and we review everything. And she came in yesterday and said, "Hey, Bob, I want to be able to take a grandparent trip every year with just one-on-one, me and each grandkid. Can I afford to do that?"
Steve: As in nine vacations in a year?
Bob: Yeah.
Steve: I love that question.
Bob: Yeah. I was very close to her late husband. He was one of my best friends. What a wonderful discussion that we had about that. She was fortunately in a position to be able to do it financially. But I'm like, "Not only can you afford to do it, you need to do that because that's time you can't get back." And she was relieved to have that option available to her. And she's going to be out booking some of those trips. And they're not major extravagant trips. It's just spending three or four days with your grandkid. And, you know, you're never going to get that time back.
Steve: She's not taking each of them to Disney World, one at a time?
Bob: No, no.
Steve: So, we mentioned something earlier about, you know, tying your money to your identity as well that there's risk in that because, you know, in the days of where we are with social media, you know, you might feel wealthy until your friend or somebody you know through social media buys a bigger house, joins a private club, starts talking about a new investment that you weren't invited into, and suddenly, your $3 million portfolio feels, I don't know, small. Tying your money to your identity is a little risky because there's always going to be somebody that has more.
Bob: Or trying to demonstrate the perception that they have more.
Steve: That's a good point.
Bob: Social media is wonderful at doing that.
Steve: Oh, it really is because it only shows the best parts of your life. You're not showing the miserable parts of your life on social media.
Bob: Everyone can quickly make themselves look like they're living the life of the rich and famous on Instagram. Here's the real-world questions to ask yourself. "What do I want my money to do? Not just for me, but for others. What am I afraid of when it comes to spending, investing, or giving? And if I had 10 years left to live, what would I stop doing now, and what would I start doing now?"
Steve: I like that question a lot because it kind of ties the perception back to, what does this money mean for me? What should I be doing with it while I still have time?
Bob: Here's the Allworth advice. What's great financial planning really about? Not just growing your net worth, but aligning your wealth with your why. Coming up next, is there such a thing as a perfect portfolio? We're going to get into that. 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 Steve Hruby. Hey, if you can't listen to "Simply Money" live every night, subscribe to get our daily podcast. Simply search "Simply Money" on the iHeartRadio app or wherever you find your podcasts. Coming up straight ahead at 6:43, how can you prepare for a financial crisis without being too conservative? That's one of the questions we'll dive into here in a few minutes. If you're listening to us and you have a nice nest egg in place, chances are you've already done a ton of things right. You've saved, you've invested, maybe you've sold a business or inherited wisely. But here's the million-dollar question. Is there such a thing as a perfect portfolio, Steve?
Steve: It's a good question, but there's the myth of perfection here. We get questions like this all the time. "Should I own more private equity? Is the 60/40 portfolio dead?" There was an article going around saying that some time ago. "What are the ultra-wealthy doing that I'm not...?" The big reveal here, I think, shouldn't come as a surprise is there really is no perfect portfolio. But there is the portfolio that's perfect for you. And this is built around your goals, your timeline, your tax situation, and, yeah, your emotions, they're tied to that as well. And that's what we're going to delve into.
Bob: At the risk of overly simplifying this, Steve, it really comes down to what we call a triangle, the triangle of risk, return, and liquidity. So, imagine a triangle, on one corner, you've got risk, on another return, and on the third corner, liquidity. How easily can you access your money? Most people want all three. Do you want low risk and full liquidity? Hello, cash and CDs. But don't expect real returns after inflation and taxes. Do you want high returns and full liquidity? Well, that's stock market territory, but you better be ready for some serious short-term volatility. Do you want high returns and low risk?
Steve: Yeah, that's the one.
Bob: That's the one.
Steve: I think that sounds great. What's the solution?
Bob: You're probably being sold something that's too good to be true.
Steve: Oh, bummer. Yeah, that's the unicorn investment. That one doesn't exist. I've had that question before. What's the thing that has the highest risk...or the highest return and the lowest risk? And it's kind of remarkable because, you know, that triangle just doesn't work out that way. You know, asset allocation is something we talk about all the time. It's the foundation of your investments, but not necessarily the finish line. You know, when I talk about that, that means a combination of stocks, bonds, maybe some alternative investments like real estate or private credit, maybe some cash positions, a diversified mix.
Bob: Well, what we're really talking about here is balancing all three of those things on the triangle. And people might be asking, well, how do the experts, how do the financial gurus arrive at a proper asset allocation? It really does come down to years and years of study of historical returns and volatility to help derive a portfolio that does give you the highest rate of return per unit of risk
Steve: Yeah, it's a risk-adjusted rate of return.
Bob: Yeah, it's that efficient frontier mixing risk in return. But we still find people might like the studies and the math behind that, but they still might not like that as a solution for their own personal portfolio.
Steve: Well, what else are you going to do? I mean, that's what it boils down to. Building a financial plan, I say it all the time, it helps understand your need to take risk, your ability to take risk. You know, there's questionnaires and just getting to know folks that help shine light on the tolerance. You know, the higher risk portfolio you have, the more reward you'll subject your money to over the long term, as long as it's broadly diversified. When I'm talking about an individual stock, that could be the highest risk. But in that situation, if something happens to that one company, you're in trouble. That's why we talk about these diversified mixes that have exposure to different asset classes within that 60/40, 70/30, 80/20, for example.
Bob: And you also might be asking yourself, "Do I just have too much cash sitting on the sidelines, sitting idle?" You know, another question, "Should I be using municipal bonds or tax-free bonds instead of corporate bonds? Can I tolerate some illiquidity in exchange for higher yield?" These are all smart questions. And this is where a portfolio does become and should become personal.
Steve: Oh, yeah, absolutely. I mean, there's tons of different avenues out there for saving. You know, when it comes to making decisions about the actual asset allocation and the investments used to build that mix, I think taxes need to be considered. This is a key part of financial planning. Financial planning isn't just investments, it's taxes, it's insurance, it's estate planning, it's retirement planning. And taxes are a big part of it because two investors with the same investment returns, they can actually end up with wildly different outcomes after taxes, depending on the vehicles that they're using to build these mixes.
Bob: Yeah. So, tax planning, and that's a huge part of what every investor should be doing. And I know it's a lot of the value that we add here for our clients here at Allworth Financial. Tax planning isn't just the cherry on top of portfolio management. It really does need to be baked into the cake. The perfect portfolio without a tax strategy, it's like building a race car and forgetting to put brakes on the car.
Steve: Yeah, that's a good example. I mean, let's say you're holding dividend-paying stocks in a taxable account. You're getting taxed every year, whether you need that income or not. So, maybe hold that in a tax-deferred account, or maybe you're sitting on a huge gain in a single stock. The idea of selling that can trigger a massive capital gain bill. So, sometimes people freeze, and they end up holding that stock. But there are strategies out there that can help you unwind a highly appreciated position. You know, fiduciary financial advisors offer solutions using covered call strategies, for example, to generate income off of a single position that they can then use to offset the tax gains of selling the stock. And if you lose on the call, then you can use those losses to offset the gains of selling the stock. So, there's ways to unwind a portfolio, for example, when we have a highly concentrated position.
Bob: And then a last major factor in portfolio construction, whether people want to admit it or not, it's our own behavior, our behavior. The best-performing portfolios are often not the ones chasing the highest return. They're the ones you can stick with and live with when markets get ugly. Why? Because consistency over time beats short-term brilliance or market timing. The "perfect portfolio" is one that keeps you in your seat when the roller coaster drops.
Steve: Yeah. And I think if we're taking tax planning into consideration here, you should be exploring...if you have assets and a taxable account, this is outside of your IRA. This is just a regular investment account. Tax loss harvesting should be happening. When volatility happens and some of your investments go down, maybe there's an opportunity to sell some of them to realize those losses and offset future gains. That means there's ways to win even in the face of volatility. So, not just sitting on the sidelines and doing nothing, but actively managing those losses to ensure that we're capitalizing on them to offset future gains is a big win, too.
Bob: Here's the Allworth advice. Is there such a thing as a perfect portfolio? No. But is there a perfectly aligned portfolio for your goals, your tax situation, and your temperament? Absolutely. But you've got to do the planning. Coming up next, what's the most important room to stage when you are preparing to sell your house? We'll reveal that answer and more coming up next. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with today our estate expert and good friend, Michelle Sloan, owner of RE/MAX Time. Michelle, thanks for making time for us today. Let's spend a few minutes talking about how to properly stage a home and get it ready to sell.
Michelle: You know, I think this is one of my favorite parts of the job that I talk to a lot of my clients about when they're getting ready to sell their home, how important staging is. And staging your home is very, very different than decorating your home for your own personal likes, and wants, and needs. So, less is more always. And so, when I tell clients you have to take everything off the kitchen counters, and that means everything, your knives, your tchotchkes, all the little things that you have, your spoon rest, and all those kinds of things. You want to show off the property and really not a lot of the extras that you bring to the property, because we want our buyers to feel that they can move their own stuff into the home and make it their own. So, less is more when you're staging. This is a new study that just came out. What room do you think is the most important room to stage in your home?
Bob: Well, you're talking to a meat-eating, you know, sports fan. So, I'm going to say the great room, television room, the place where I would watch sports and eat snacks.
Michelle: Actually, you know what? You are correct, sir.
Bob: See.
Michelle: You know what? Most people would pick the kitchen, maybe, or the bedroom, or the bathroom. And that's where you want to spend your money, but where you spend the most time. Congratulations, Bob. I'm so proud of you. You've been Really listening.
Bob: Hey, even a broken clock is correct twice a day. I...
Michelle: I mean, I wanted you to say kitchen so that you could be wrong. But, no.
Bob: Talk about why and how we stage that great room, entertainment room, whatever you want to call it.
Michelle: Yeah, absolutely. It's the emotional connection that matters, right? Nine out of 10 buyers are actually influenced by the staging. And, you know, most people spend that time where they plop down at the end of a big day, and they just want to relax. So, you want to make sure that the color in that room is a relaxing, neutral color. You don't have a bunch of wild things going on. You want to make sure that that room is neutral. And if you have the big comfy couch and it fits and it's not too much furniture in that room, it will be appealing to a buyer. And it's very, very interesting in my mind that according to buyer's agents, this is a new study by the National Association of Realtors, that 37% of buyer's agents said the living room is the most important room to stage, followed by the primary bedroom, and then the kitchen is number three. Pretty interesting, I think.
Bob: It is interesting because I would think...well, I'll leave it there. I think if you're talking to a married couple buying a home, I would think different things appeal to different partners, you know, that are buying a home together. So, all right, good stuff. Interesting study. What are some of the cost-effective, you know, touches, or add-ons, or improvements that folks need to be considering or making to get the highest price for their home, Michelle?
Michelle: The very first thing we want to always consider is the cleanliness of the home. Again, once we are staged and we have most of the personal items out of the home, we have most of the...if you decide to paint a room, do not, do not. I'm going to stress that. Do not go ahead and put pictures back up on the wall. Leave it naked. And it's okay to have naked walls when you are selling your home. And the other thing that you can do is get a new welcome mat. You know, that curb appeal is so very important. Buying a new welcome mat... I actually went out, I've got a new listing that just came on. And every once in a while, I will gift a new welcome mat. And that's just that everybody's going to go to your front door. You don't do that personally very often. So, don't forget to get a new welcome mat. It's new, it's fresh, and it will set the stage for that showing.
Some other really important things to do is maybe you don't make your bed on a daily basis. Well, when you are selling your home, you're going to make your bed every single day. You're going to make sure all of the dishes are out of your sink, and go ahead and get some new bedding. Get yourself a couple of new pillows. You can all take them with you. But if that primary bedroom is staged with a really nice blanket and a really nice comforter with great pillows, again, it's going to look nice and comfy, and that's what we want our buyers to see.
Bob: I'm surprised you even have to remind people to make their bed and clean the dishes out of the sink. I mean, you know, speaking as a caveman who can live that way for days on end, even I know to do that, Michelle.
Michelle: You know what? You'd be surprised. And 9 times out of 10, if a seller doesn't get a showing maybe for a day or two, they get a little lax, and they say, "Ugh, nobody's going to come today." And you know what? Someone will absolutely come. So, I guess if you want to make sure that you're going to have a lot of showings, leave your coffee cup in the sink and your cereal bowl or whatever.
Bob: All right. Well, hey, in the couple of minutes we have left, talk a little bit about the difference between staging your home versus decorating your home because there are key differences, right, Michelle?
Michelle: There really are. So, when we decorate our home, we decorate for our own personal preferences. Maybe it's important to you to have religious symbols around your home. You know, that is one of the more sensitive things that I talk to sellers about. We want to make sure that our home is staged in a way that we're not going to offend anyone, or not going to really show a lot of your own personality. We want to keep it as neutral as possible. And that means taking down all of the personal photos because I want a buyer to walk into the home and really see the home and not be worried about, "Oh, I think I went to high school with that person," or trying to figure out, you know, "Oh, those grandkids are so cute." And if they're looking at your grandkids, they're not looking at the home, and they're going to forget to look at the highlights that you've worked so hard to get ready. So, that's really the difference.
Bob: I think that's a great point. I've not been through a bunch of homes. We haven't moved a bunch of times, but I can tell you for a fact, Michelle, that I've gone into homes, you know, and as someone who...born and raised in Cincinnati and lived here my whole life. As you well know, Cincinnati is just a big small town. You know, everybody kind of knows everybody. I've walked into homes before, and I've looked at those pictures, and I'm like, "I know that person." And I think to your point, it takes the focus off of why you're there in the first place. So, yeah, great advice as always from our real estate expert, Michelle Sloan, owner of RE/MAX Time. Michelle, thanks again for making time for us today. You've been 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 Steve Hruby. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question and it'll come straight to us. All right, we've got a segment here. Ask the advisor. Let's roll with it, Steve.
Steve: First, we have Lynn in Madera.
Michelle: "Almost like we have another 2008. How do we plan for that with something too conservative?"
Steve: All right. So, this question is good. It's planning for a major financial crisis. I don't think this question is unfair by any means because at some point in the future, we will have some kind of a recession paired with a bear market. I don't know if it's going to be a 2008-level crisis, but we do need to make sure that our money is working for us so that our dollars keep up with inflation. Now, without knowing the specifics of Lynn's financial plan, you know, exact feedback is a little challenging to provide. But I will say that when you have that financial plan in order, it will help you understand what you need to do with your money to not only keep up with inflation, but meet your financial goals over the long term. That's why fiduciary financial planning firms will create financial plans. It's to help people understand that they need to stay the course in the face of a financial crisis.
Now, there are investment strategies that exist out there that can set ceilings and floors on investments. I'm talking about like a buffered ETF strategy. Something like this is potentially beneficial for somebody that needs to have their money in the markets to meet their goals, but they're terrified of the potential consequences of a downturn. When it comes to better outcomes over a long period of time, though, capping those gains can be a risk for the longevity of your plan. So, this is something I deploy only when people really need it to actually invest their money in the markets.
Bob: Let's go to Alex in Oakley. "How do I pass assets to my kids without a huge tax hit?" Well, Alex, I think it depends on who you want to avoid the tax hit on, you or your kids. So, there's different strategies to do that. One thing to remind you of and remind everybody of, there is a step up in cost basis for non-IRA, non-retirement plan assets, you know, stocks and bonds, things like that. So, a lot of people like to hold those long-term and make sure they pass those pieces of their portfolio onto their kids because there will be no tax exposure once you pass away. If you've got a portfolio largely concentrated in retirement funds, you know, that's where a lot of people will consider Roth conversions for a multiple of reasons. One of which is your tax rate during your lifetime, but we've got some clients that want to take care of that tax hit now during their lifetime so that they don't leave IRAs and qualified plans to their kids and have to have them pay the taxes down the road. So, it really depends on your own individual situation, and again, whether we're trying to avoid taxes for you or your kids or a combination of both.
Steve: And if you're fortunate enough to be rather wealthy in this day and age, the death tax that we've all heard of before is very high at this point. You need to have a large estate before that even comes into play. But then there's more unique strategies using life insurance policies tied to irrevocable trust. I'm talking about an ILIT, irrevocable life insurance trust, that you can actually use money to pay for that insurance policy within that trust account that will then be used to pay estate taxes on behalf of your estate when you're gone. So, this is for people that I'm talking [inaudible 00:31:14], you know, tens of millions of dollars. Strategies like that could certainly be beneficial. John in Fort Thomas.
John: What are the trade-offs between Roth conversions now versus later in retirement?
Bob: Well, John, the trade-offs you got to look at is your tax rate now, because when you can do a Roth conversion now, you got to pay the taxes today at the current tax rate, you know, based on what your other income is, if you're still working or...you know, the situations vary by client. So, you got to look at your tax situation today, you got to make some assumptions about what tax rates might be in the future, and then you also got to make some assumptions about the rate of return in the future. And then, you know, that's where some of this great financial planning and tax software comes in. We can model different scenarios to weigh those trade-offs. And none of this stuff is perfect, but, you know, it's kind of the garbage in, garbage out. If you're making good assumptions going in with good data, you can make the best possible decision you can make armed with the information we have available. That's what I'd recommend. You know, sit down and have a good fiduciary advisor, model out different scenarios for you. And there are definitely trade-offs. And oftentimes, Steve, I don't know if you agree, you know, when we actually sit down and run and model out these different scenarios, people will come up with an ending scenario that they feel comfortable with and feel comfortable pulling the trigger on. And sometimes that is doing nothing.
Steve: Oh, yeah, it is. Sometimes a Roth conversion doesn't make sense at a certain point in time. That's why they're very popular when you make that transition into retirement, because if you're somebody earning a lot of money currently, you could be putting those dollars tax-free, not tax-free, but tax-deferred into your 401(k), for example. And then once your income falls off, there's more of an opportunity to capitalize on larger Roth conversions when you make that transition into retirement.
Bob: All right. Speaking of 401(k)s, Sam in Batavia has a question, Steve.
Sam: I already maxed out my 401(k). What else can I do to reduce my taxes?
Steve: Well, nice job. That's wonderful. I'm glad to hear it. If you're married or planning with a partner, whoever else is in that household, perhaps they could be maxing a workplace retirement plan. If they're not, then maybe they're eligible for a traditional IRA contribution. Same thing with you. There are limits on how much you can earn and actually get a deductible contribution on that IRA. But we could be looking at things like a health savings account, for example. If you have a high deductible health plan, you could be putting money tax-deferred into that vehicle. Same thing with an FSA, but that's something that doesn't roll over the same way that an HSA does every year. There's also potential strategies for itemizing taxes. Let's say you have significant positions in a taxable account and you're also charitably inclined, maybe we could be doing some tax loss harvesting in the taxable account, or we could be using some of those assets to fund a donor-advice fund to itemize your taxes in a particular year. The thought process there is that you're bunching your tax filing strategies so you can itemize in one year and take standard deductions in alternating years. So, there are strategies you can deploy. Obviously, sit down and talk to a CFP, or a CPA, or both.
Bob: Coming up next, we're going to take a trip inside my own warped brain, my world of wealth. 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 Steve Hruby. All right, Steve, what I want to talk about today... You know, it's always important, but in light of a lot of the recent volatility we've had, I want to stress the importance and the critical importance of separating your investment in financial decisions from your own personal politics. It is critically important. And I'll give you a reason why. I had a guy come into my office earlier today. We've had three meetings together within the last 90 days. And I've worked with this gentleman for over 30 years. He's a very bright, very responsible guy, but he's been all over the map here in the last 90 days. And I think it's because of his political bias. He wanted to go to all cash. Then he wanted me to recommend, you know, the hottest tech stocks so he doesn't miss the AI revolution. He moved a lot of money to cash, and then he wants to get back in and talk about a long-term investment strategy. All the things that we tell people not to do, this guy has talked about it, thought about it, and to some extent done it all within the last 90 days. It's been crazy.
Steve: Yeah. It's interesting because no matter what side of the aisle you're on, you're still driven by fear and greed. And a lot of people think that the other political party is going to massacre the markets no matter what happens. But at the end of the day, we're not investing in politicians who can't actually move the markets as much as people think they can. We're investing in businesses, which drives the stock market. And businesses are driven by corporate greed. And that's a foundation of capitalism, and capitalism isn't going anywhere. So, letting political biases cloud your own judgments, whether it's on the fear side, thinking that everything is going to go bad or the greed side because your guy got in and putting all of your money into 100% stock when you're 85 years old, that's not necessarily the best approach for your money.
Bob: Well, and I find, you know, when the emotions run hot, you know, during times like this, oftentimes with highly technical, highly intelligent people, you know, doctors, engineers, people that are very, very smart, well-educated people, they like to think when it comes to the world of investing, they can figure out or they want to figure out how the whole macro economy works, the global economy works in the short term. And they think they have the absolute answer on what the way the world should work or will work. And they come up with some decisions that they want to make, which are completely irrational because you cannot anticipate how investors, companies, governments are all going to adapt and move and change depending on what's going on economically with interest rates, with geopolitical concerns. Trying to outthink the management and behavior of a global economy is a really dangerous place to go. And we got to avoid getting wrapped up in all that.
Steve: I think remembering that at the end of the day, the stock market's like walking up the stairs or playing with a yo-yo, things will trudge along forwards no matter what happens with politics. So, don't make big decisions based on emotions from that.
Bob: Thank you for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Steve: Yeah, I mean, at the end of the day, whether you've got a million bucks, $5 million, $20 million, money means something different to each and every one of us. For some people, it's security. For others, it's status, maybe. For some, it's just financial freedom. But at the end of the day, unfortunately, oftentimes there's still anxiety tied to money, no matter how much we have.
Bob: Yeah, Steven, we see this all the time when we work with clients in our office. We see it firsthand. People with more money than they ever dreamed of, we find are still worrying about running out of money.
Steve: It really is remarkable because I will stress test the heck out of plans. I will say that you are going to live until you're 110 years old. You're going to spend more money than you ever thought you could. We're going to assume the markets have terrible timing, and they're still worried about running out, still afraid to retire.
Bob: Yeah, and I have some meetings like that as well. So, I mean, it really all comes down to we can run spreadsheets till we're blue in the face. We can stress test the you-know-what out of all these portfolios. But the emotional side of wealth is critically important. And we're kidding ourselves if we don't admit that it drives a lot of the decisions we make.
Steve: Oh, sure. I mean, part of our job is just to make sure that people don't make mistakes that they can't undo, people selling low and buying high after a market correction, for example, hoarding cash when they should be investing because maybe their wealth is more tied to security than anything else. But there's a massive opportunity cost of not letting those dollars work, inflation will eat those dollars alive, too much risk based on greed, perhaps, not enough risk based on fear. Money isn't necessarily a logical thing. It's an emotional thing.
Bob: Yeah. And it really sometimes comes down to not what you actually have. It's what you believe you have, again, based on how money ties into your values and your identity. And there are reasons for this. Maybe your parents grew up in the depression and passed that fear on to you. Maybe you're someone who built your wealth from scratch, and you feel guilty about spending it.
Steve: I've certainly seen that before. Somebody that comes from nothing, and then they start a small business that becomes very successful, and then they sell it, and they're like, "Oh, I have $15 million now. What do I do?"
Bob: Yeah. Or maybe you didn't build it from scratch. Maybe you did it the old-fashioned way. You just inherited.
Steve: Oh, wouldn't that be great? Yeah. Well, when you inherit, though, a lot of times people are afraid of blowing it, messing up, doing something outside of the wishes of those that they inherited the money from. So, there's always emotions tied to the relationship that we have with our money.
Bob: And the point we really want to drive home here, Steve, is what money actually buys is choices. Choices. The ability to choose how you spend your time. It also buys margin, breathing room when life throws us a curveball. For some, it buys dignity, not having to rely on anyone else for your financial support in the later years of life. It also buys you time. Paying someone else to free yourself from some things that you hate doing.
Steve: Yeah, exactly.
Bob: And then for others, access. Access to better healthcare, better education, or better opportunities for your family.
Steve: Yeah, I mean, it's a great point. That's kind of what I talk about when we build financial plans, and somebody's works well, and I have trouble blowing it up in the face of all the stress testing. What I explain to them is that now they have options. And I'm talking about things like, you know, people will come to me with simple questions like, "Hey, should I pay off my mortgage entirely? I want to be debt-free, or should I keep the money invested because I am one of the fortunate people that locked in at a low mortgage rate? Should I collect Social Security now, or should I wait? You know, I'm uncomfortable taking from my accounts, so I feel like I should collect it now." And honestly, at the end of the day, those conversations when people have options are quite nice because I'll be very honest and paint a picture of, all right, well, let's say that you do do a distribution to pay off your home at the end of the day. You know, and this is a real-world example.
Somebody at the end of their plan, they live below their means. They have incredible fixed income. They have some wealth that they build on their own. They inherited some assets. So, they have a nice chunk of change, but it's going to keep growing because they're not going to take it out as fast as they need to or as fast as they could be, I should say. So, their wealth is going to balloon to future value money, about $25 million by the end of their plan. And the difference between paying off their home and keeping the mortgage was about a million bucks at the end of the plan. And they said, "Okay, well, I don't care about that. So, I'm going to pay off my home." So, this is an example of how money gave them options. Same thing with Social Security. I meet with somebody just the other day, and the plan that we built was, "You're going to defer Social Security till full retirement age." And they collected two years earlier, and they're like, "Steve, are you going to be mad at me for this?" And I said, "No, we talked about it ahead of time. Your plan affords you options. Yes, better outcomes will happen if you live for a long time, and you would have deferred your Social Security. But the end of the day, who cares?" So, I really like when there's a robust plan and people have those options.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Steve Hruby. Steve, here's a trade-off that so many people miss. And it's something we tell clients all the time. You can always earn more money, but you can't earn more time. And yet people often protect their money way more fiercely than they protect their time.
Steve: Yeah, an example of that would be staying in a job that they don't like. That's another thing that I'll explain is, you know, if your plan is robust and you have a really bad day at work, you don't have to go back. Think about that. It buys you the option of not needing to go back to work. Somebody the other day was telling me that...I explained that to them about a year ago, and he's planning on continuing to work because he's earning more money than he's ever earned. But every morning he wakes up and just kind of sits at the side of the bed, and he looks at the floor, and he's like, "Should I just not go into work today?" He's actually thinking that. But, you know, sometimes people will put off vacations, for example, and unfortunately, maybe something happens to their health when they retire, and they don't get to take those vacations. They worry about spending money on their grandkids, you know, as if they'll get a second shot at those moments that they might miss spending with them instead of earning more. You know, it's important to make sure that you're not making sacrifices that you don't need to make.
Bob: I had a lady in my office yesterday, a widow who has nine grandchildren. And it was a wonderful meeting because she's been very responsible with her planning. We get together every year, and we review everything. And she came in yesterday and said, "Hey, Bob, I want to be able to take a grandparent trip every year with just one-on-one, me and each grandkid. Can I afford to do that?"
Steve: As in nine vacations in a year?
Bob: Yeah.
Steve: I love that question.
Bob: Yeah. I was very close to her late husband. He was one of my best friends. What a wonderful discussion that we had about that. She was fortunately in a position to be able to do it financially. But I'm like, "Not only can you afford to do it, you need to do that because that's time you can't get back." And she was relieved to have that option available to her. And she's going to be out booking some of those trips. And they're not major extravagant trips. It's just spending three or four days with your grandkid. And, you know, you're never going to get that time back.
Steve: She's not taking each of them to Disney World, one at a time?
Bob: No, no.
Steve: So, we mentioned something earlier about, you know, tying your money to your identity as well that there's risk in that because, you know, in the days of where we are with social media, you know, you might feel wealthy until your friend or somebody you know through social media buys a bigger house, joins a private club, starts talking about a new investment that you weren't invited into, and suddenly, your $3 million portfolio feels, I don't know, small. Tying your money to your identity is a little risky because there's always going to be somebody that has more.
Bob: Or trying to demonstrate the perception that they have more.
Steve: That's a good point.
Bob: Social media is wonderful at doing that.
Steve: Oh, it really is because it only shows the best parts of your life. You're not showing the miserable parts of your life on social media.
Bob: Everyone can quickly make themselves look like they're living the life of the rich and famous on Instagram. Here's the real-world questions to ask yourself. "What do I want my money to do? Not just for me, but for others. What am I afraid of when it comes to spending, investing, or giving? And if I had 10 years left to live, what would I stop doing now, and what would I start doing now?"
Steve: I like that question a lot because it kind of ties the perception back to, what does this money mean for me? What should I be doing with it while I still have time?
Bob: Here's the Allworth advice. What's great financial planning really about? Not just growing your net worth, but aligning your wealth with your why. Coming up next, is there such a thing as a perfect portfolio? We're going to get into that. 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 Steve Hruby. Hey, if you can't listen to "Simply Money" live every night, subscribe to get our daily podcast. Simply search "Simply Money" on the iHeartRadio app or wherever you find your podcasts. Coming up straight ahead at 6:43, how can you prepare for a financial crisis without being too conservative? That's one of the questions we'll dive into here in a few minutes. If you're listening to us and you have a nice nest egg in place, chances are you've already done a ton of things right. You've saved, you've invested, maybe you've sold a business or inherited wisely. But here's the million-dollar question. Is there such a thing as a perfect portfolio, Steve?
Steve: It's a good question, but there's the myth of perfection here. We get questions like this all the time. "Should I own more private equity? Is the 60/40 portfolio dead?" There was an article going around saying that some time ago. "What are the ultra-wealthy doing that I'm not...?" The big reveal here, I think, shouldn't come as a surprise is there really is no perfect portfolio. But there is the portfolio that's perfect for you. And this is built around your goals, your timeline, your tax situation, and, yeah, your emotions, they're tied to that as well. And that's what we're going to delve into.
Bob: At the risk of overly simplifying this, Steve, it really comes down to what we call a triangle, the triangle of risk, return, and liquidity. So, imagine a triangle, on one corner, you've got risk, on another return, and on the third corner, liquidity. How easily can you access your money? Most people want all three. Do you want low risk and full liquidity? Hello, cash and CDs. But don't expect real returns after inflation and taxes. Do you want high returns and full liquidity? Well, that's stock market territory, but you better be ready for some serious short-term volatility. Do you want high returns and low risk?
Steve: Yeah, that's the one.
Bob: That's the one.
Steve: I think that sounds great. What's the solution?
Bob: You're probably being sold something that's too good to be true.
Steve: Oh, bummer. Yeah, that's the unicorn investment. That one doesn't exist. I've had that question before. What's the thing that has the highest risk...or the highest return and the lowest risk? And it's kind of remarkable because, you know, that triangle just doesn't work out that way. You know, asset allocation is something we talk about all the time. It's the foundation of your investments, but not necessarily the finish line. You know, when I talk about that, that means a combination of stocks, bonds, maybe some alternative investments like real estate or private credit, maybe some cash positions, a diversified mix.
Bob: Well, what we're really talking about here is balancing all three of those things on the triangle. And people might be asking, well, how do the experts, how do the financial gurus arrive at a proper asset allocation? It really does come down to years and years of study of historical returns and volatility to help derive a portfolio that does give you the highest rate of return per unit of risk
Steve: Yeah, it's a risk-adjusted rate of return.
Bob: Yeah, it's that efficient frontier mixing risk in return. But we still find people might like the studies and the math behind that, but they still might not like that as a solution for their own personal portfolio.
Steve: Well, what else are you going to do? I mean, that's what it boils down to. Building a financial plan, I say it all the time, it helps understand your need to take risk, your ability to take risk. You know, there's questionnaires and just getting to know folks that help shine light on the tolerance. You know, the higher risk portfolio you have, the more reward you'll subject your money to over the long term, as long as it's broadly diversified. When I'm talking about an individual stock, that could be the highest risk. But in that situation, if something happens to that one company, you're in trouble. That's why we talk about these diversified mixes that have exposure to different asset classes within that 60/40, 70/30, 80/20, for example.
Bob: And you also might be asking yourself, "Do I just have too much cash sitting on the sidelines, sitting idle?" You know, another question, "Should I be using municipal bonds or tax-free bonds instead of corporate bonds? Can I tolerate some illiquidity in exchange for higher yield?" These are all smart questions. And this is where a portfolio does become and should become personal.
Steve: Oh, yeah, absolutely. I mean, there's tons of different avenues out there for saving. You know, when it comes to making decisions about the actual asset allocation and the investments used to build that mix, I think taxes need to be considered. This is a key part of financial planning. Financial planning isn't just investments, it's taxes, it's insurance, it's estate planning, it's retirement planning. And taxes are a big part of it because two investors with the same investment returns, they can actually end up with wildly different outcomes after taxes, depending on the vehicles that they're using to build these mixes.
Bob: Yeah. So, tax planning, and that's a huge part of what every investor should be doing. And I know it's a lot of the value that we add here for our clients here at Allworth Financial. Tax planning isn't just the cherry on top of portfolio management. It really does need to be baked into the cake. The perfect portfolio without a tax strategy, it's like building a race car and forgetting to put brakes on the car.
Steve: Yeah, that's a good example. I mean, let's say you're holding dividend-paying stocks in a taxable account. You're getting taxed every year, whether you need that income or not. So, maybe hold that in a tax-deferred account, or maybe you're sitting on a huge gain in a single stock. The idea of selling that can trigger a massive capital gain bill. So, sometimes people freeze, and they end up holding that stock. But there are strategies out there that can help you unwind a highly appreciated position. You know, fiduciary financial advisors offer solutions using covered call strategies, for example, to generate income off of a single position that they can then use to offset the tax gains of selling the stock. And if you lose on the call, then you can use those losses to offset the gains of selling the stock. So, there's ways to unwind a portfolio, for example, when we have a highly concentrated position.
Bob: And then a last major factor in portfolio construction, whether people want to admit it or not, it's our own behavior, our behavior. The best-performing portfolios are often not the ones chasing the highest return. They're the ones you can stick with and live with when markets get ugly. Why? Because consistency over time beats short-term brilliance or market timing. The "perfect portfolio" is one that keeps you in your seat when the roller coaster drops.
Steve: Yeah. And I think if we're taking tax planning into consideration here, you should be exploring...if you have assets and a taxable account, this is outside of your IRA. This is just a regular investment account. Tax loss harvesting should be happening. When volatility happens and some of your investments go down, maybe there's an opportunity to sell some of them to realize those losses and offset future gains. That means there's ways to win even in the face of volatility. So, not just sitting on the sidelines and doing nothing, but actively managing those losses to ensure that we're capitalizing on them to offset future gains is a big win, too.
Bob: Here's the Allworth advice. Is there such a thing as a perfect portfolio? No. But is there a perfectly aligned portfolio for your goals, your tax situation, and your temperament? Absolutely. But you've got to do the planning. Coming up next, what's the most important room to stage when you are preparing to sell your house? We'll reveal that answer and more coming up next. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with today our estate expert and good friend, Michelle Sloan, owner of RE/MAX Time. Michelle, thanks for making time for us today. Let's spend a few minutes talking about how to properly stage a home and get it ready to sell.
Michelle: You know, I think this is one of my favorite parts of the job that I talk to a lot of my clients about when they're getting ready to sell their home, how important staging is. And staging your home is very, very different than decorating your home for your own personal likes, and wants, and needs. So, less is more always. And so, when I tell clients you have to take everything off the kitchen counters, and that means everything, your knives, your tchotchkes, all the little things that you have, your spoon rest, and all those kinds of things. You want to show off the property and really not a lot of the extras that you bring to the property, because we want our buyers to feel that they can move their own stuff into the home and make it their own. So, less is more when you're staging. This is a new study that just came out. What room do you think is the most important room to stage in your home?
Bob: Well, you're talking to a meat-eating, you know, sports fan. So, I'm going to say the great room, television room, the place where I would watch sports and eat snacks.
Michelle: Actually, you know what? You are correct, sir.
Bob: See.
Michelle: You know what? Most people would pick the kitchen, maybe, or the bedroom, or the bathroom. And that's where you want to spend your money, but where you spend the most time. Congratulations, Bob. I'm so proud of you. You've been Really listening.
Bob: Hey, even a broken clock is correct twice a day. I...
Michelle: I mean, I wanted you to say kitchen so that you could be wrong. But, no.
Bob: Talk about why and how we stage that great room, entertainment room, whatever you want to call it.
Michelle: Yeah, absolutely. It's the emotional connection that matters, right? Nine out of 10 buyers are actually influenced by the staging. And, you know, most people spend that time where they plop down at the end of a big day, and they just want to relax. So, you want to make sure that the color in that room is a relaxing, neutral color. You don't have a bunch of wild things going on. You want to make sure that that room is neutral. And if you have the big comfy couch and it fits and it's not too much furniture in that room, it will be appealing to a buyer. And it's very, very interesting in my mind that according to buyer's agents, this is a new study by the National Association of Realtors, that 37% of buyer's agents said the living room is the most important room to stage, followed by the primary bedroom, and then the kitchen is number three. Pretty interesting, I think.
Bob: It is interesting because I would think...well, I'll leave it there. I think if you're talking to a married couple buying a home, I would think different things appeal to different partners, you know, that are buying a home together. So, all right, good stuff. Interesting study. What are some of the cost-effective, you know, touches, or add-ons, or improvements that folks need to be considering or making to get the highest price for their home, Michelle?
Michelle: The very first thing we want to always consider is the cleanliness of the home. Again, once we are staged and we have most of the personal items out of the home, we have most of the...if you decide to paint a room, do not, do not. I'm going to stress that. Do not go ahead and put pictures back up on the wall. Leave it naked. And it's okay to have naked walls when you are selling your home. And the other thing that you can do is get a new welcome mat. You know, that curb appeal is so very important. Buying a new welcome mat... I actually went out, I've got a new listing that just came on. And every once in a while, I will gift a new welcome mat. And that's just that everybody's going to go to your front door. You don't do that personally very often. So, don't forget to get a new welcome mat. It's new, it's fresh, and it will set the stage for that showing.
Some other really important things to do is maybe you don't make your bed on a daily basis. Well, when you are selling your home, you're going to make your bed every single day. You're going to make sure all of the dishes are out of your sink, and go ahead and get some new bedding. Get yourself a couple of new pillows. You can all take them with you. But if that primary bedroom is staged with a really nice blanket and a really nice comforter with great pillows, again, it's going to look nice and comfy, and that's what we want our buyers to see.
Bob: I'm surprised you even have to remind people to make their bed and clean the dishes out of the sink. I mean, you know, speaking as a caveman who can live that way for days on end, even I know to do that, Michelle.
Michelle: You know what? You'd be surprised. And 9 times out of 10, if a seller doesn't get a showing maybe for a day or two, they get a little lax, and they say, "Ugh, nobody's going to come today." And you know what? Someone will absolutely come. So, I guess if you want to make sure that you're going to have a lot of showings, leave your coffee cup in the sink and your cereal bowl or whatever.
Bob: All right. Well, hey, in the couple of minutes we have left, talk a little bit about the difference between staging your home versus decorating your home because there are key differences, right, Michelle?
Michelle: There really are. So, when we decorate our home, we decorate for our own personal preferences. Maybe it's important to you to have religious symbols around your home. You know, that is one of the more sensitive things that I talk to sellers about. We want to make sure that our home is staged in a way that we're not going to offend anyone, or not going to really show a lot of your own personality. We want to keep it as neutral as possible. And that means taking down all of the personal photos because I want a buyer to walk into the home and really see the home and not be worried about, "Oh, I think I went to high school with that person," or trying to figure out, you know, "Oh, those grandkids are so cute." And if they're looking at your grandkids, they're not looking at the home, and they're going to forget to look at the highlights that you've worked so hard to get ready. So, that's really the difference.
Bob: I think that's a great point. I've not been through a bunch of homes. We haven't moved a bunch of times, but I can tell you for a fact, Michelle, that I've gone into homes, you know, and as someone who...born and raised in Cincinnati and lived here my whole life. As you well know, Cincinnati is just a big small town. You know, everybody kind of knows everybody. I've walked into homes before, and I've looked at those pictures, and I'm like, "I know that person." And I think to your point, it takes the focus off of why you're there in the first place. So, yeah, great advice as always from our real estate expert, Michelle Sloan, owner of RE/MAX Time. Michelle, thanks again for making time for us today. You've been 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 Steve Hruby. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question and it'll come straight to us. All right, we've got a segment here. Ask the advisor. Let's roll with it, Steve.
Steve: First, we have Lynn in Madera.
Michelle: "Almost like we have another 2008. How do we plan for that with something too conservative?"
Steve: All right. So, this question is good. It's planning for a major financial crisis. I don't think this question is unfair by any means because at some point in the future, we will have some kind of a recession paired with a bear market. I don't know if it's going to be a 2008-level crisis, but we do need to make sure that our money is working for us so that our dollars keep up with inflation. Now, without knowing the specifics of Lynn's financial plan, you know, exact feedback is a little challenging to provide. But I will say that when you have that financial plan in order, it will help you understand what you need to do with your money to not only keep up with inflation, but meet your financial goals over the long term. That's why fiduciary financial planning firms will create financial plans. It's to help people understand that they need to stay the course in the face of a financial crisis.
Now, there are investment strategies that exist out there that can set ceilings and floors on investments. I'm talking about like a buffered ETF strategy. Something like this is potentially beneficial for somebody that needs to have their money in the markets to meet their goals, but they're terrified of the potential consequences of a downturn. When it comes to better outcomes over a long period of time, though, capping those gains can be a risk for the longevity of your plan. So, this is something I deploy only when people really need it to actually invest their money in the markets.
Bob: Let's go to Alex in Oakley. "How do I pass assets to my kids without a huge tax hit?" Well, Alex, I think it depends on who you want to avoid the tax hit on, you or your kids. So, there's different strategies to do that. One thing to remind you of and remind everybody of, there is a step up in cost basis for non-IRA, non-retirement plan assets, you know, stocks and bonds, things like that. So, a lot of people like to hold those long-term and make sure they pass those pieces of their portfolio onto their kids because there will be no tax exposure once you pass away. If you've got a portfolio largely concentrated in retirement funds, you know, that's where a lot of people will consider Roth conversions for a multiple of reasons. One of which is your tax rate during your lifetime, but we've got some clients that want to take care of that tax hit now during their lifetime so that they don't leave IRAs and qualified plans to their kids and have to have them pay the taxes down the road. So, it really depends on your own individual situation, and again, whether we're trying to avoid taxes for you or your kids or a combination of both.
Steve: And if you're fortunate enough to be rather wealthy in this day and age, the death tax that we've all heard of before is very high at this point. You need to have a large estate before that even comes into play. But then there's more unique strategies using life insurance policies tied to irrevocable trust. I'm talking about an ILIT, irrevocable life insurance trust, that you can actually use money to pay for that insurance policy within that trust account that will then be used to pay estate taxes on behalf of your estate when you're gone. So, this is for people that I'm talking [inaudible 00:31:14], you know, tens of millions of dollars. Strategies like that could certainly be beneficial. John in Fort Thomas.
John: What are the trade-offs between Roth conversions now versus later in retirement?
Bob: Well, John, the trade-offs you got to look at is your tax rate now, because when you can do a Roth conversion now, you got to pay the taxes today at the current tax rate, you know, based on what your other income is, if you're still working or...you know, the situations vary by client. So, you got to look at your tax situation today, you got to make some assumptions about what tax rates might be in the future, and then you also got to make some assumptions about the rate of return in the future. And then, you know, that's where some of this great financial planning and tax software comes in. We can model different scenarios to weigh those trade-offs. And none of this stuff is perfect, but, you know, it's kind of the garbage in, garbage out. If you're making good assumptions going in with good data, you can make the best possible decision you can make armed with the information we have available. That's what I'd recommend. You know, sit down and have a good fiduciary advisor, model out different scenarios for you. And there are definitely trade-offs. And oftentimes, Steve, I don't know if you agree, you know, when we actually sit down and run and model out these different scenarios, people will come up with an ending scenario that they feel comfortable with and feel comfortable pulling the trigger on. And sometimes that is doing nothing.
Steve: Oh, yeah, it is. Sometimes a Roth conversion doesn't make sense at a certain point in time. That's why they're very popular when you make that transition into retirement, because if you're somebody earning a lot of money currently, you could be putting those dollars tax-free, not tax-free, but tax-deferred into your 401(k), for example. And then once your income falls off, there's more of an opportunity to capitalize on larger Roth conversions when you make that transition into retirement.
Bob: All right. Speaking of 401(k)s, Sam in Batavia has a question, Steve.
Sam: I already maxed out my 401(k). What else can I do to reduce my taxes?
Steve: Well, nice job. That's wonderful. I'm glad to hear it. If you're married or planning with a partner, whoever else is in that household, perhaps they could be maxing a workplace retirement plan. If they're not, then maybe they're eligible for a traditional IRA contribution. Same thing with you. There are limits on how much you can earn and actually get a deductible contribution on that IRA. But we could be looking at things like a health savings account, for example. If you have a high deductible health plan, you could be putting money tax-deferred into that vehicle. Same thing with an FSA, but that's something that doesn't roll over the same way that an HSA does every year. There's also potential strategies for itemizing taxes. Let's say you have significant positions in a taxable account and you're also charitably inclined, maybe we could be doing some tax loss harvesting in the taxable account, or we could be using some of those assets to fund a donor-advice fund to itemize your taxes in a particular year. The thought process there is that you're bunching your tax filing strategies so you can itemize in one year and take standard deductions in alternating years. So, there are strategies you can deploy. Obviously, sit down and talk to a CFP, or a CPA, or both.
Bob: Coming up next, we're going to take a trip inside my own warped brain, my world of wealth. 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 Steve Hruby. All right, Steve, what I want to talk about today... You know, it's always important, but in light of a lot of the recent volatility we've had, I want to stress the importance and the critical importance of separating your investment in financial decisions from your own personal politics. It is critically important. And I'll give you a reason why. I had a guy come into my office earlier today. We've had three meetings together within the last 90 days. And I've worked with this gentleman for over 30 years. He's a very bright, very responsible guy, but he's been all over the map here in the last 90 days. And I think it's because of his political bias. He wanted to go to all cash. Then he wanted me to recommend, you know, the hottest tech stocks so he doesn't miss the AI revolution. He moved a lot of money to cash, and then he wants to get back in and talk about a long-term investment strategy. All the things that we tell people not to do, this guy has talked about it, thought about it, and to some extent done it all within the last 90 days. It's been crazy.
Steve: Yeah. It's interesting because no matter what side of the aisle you're on, you're still driven by fear and greed. And a lot of people think that the other political party is going to massacre the markets no matter what happens. But at the end of the day, we're not investing in politicians who can't actually move the markets as much as people think they can. We're investing in businesses, which drives the stock market. And businesses are driven by corporate greed. And that's a foundation of capitalism, and capitalism isn't going anywhere. So, letting political biases cloud your own judgments, whether it's on the fear side, thinking that everything is going to go bad or the greed side because your guy got in and putting all of your money into 100% stock when you're 85 years old, that's not necessarily the best approach for your money.
Bob: Well, and I find, you know, when the emotions run hot, you know, during times like this, oftentimes with highly technical, highly intelligent people, you know, doctors, engineers, people that are very, very smart, well-educated people, they like to think when it comes to the world of investing, they can figure out or they want to figure out how the whole macro economy works, the global economy works in the short term. And they think they have the absolute answer on what the way the world should work or will work. And they come up with some decisions that they want to make, which are completely irrational because you cannot anticipate how investors, companies, governments are all going to adapt and move and change depending on what's going on economically with interest rates, with geopolitical concerns. Trying to outthink the management and behavior of a global economy is a really dangerous place to go. And we got to avoid getting wrapped up in all that.
Steve: I think remembering that at the end of the day, the stock market's like walking up the stairs or playing with a yo-yo, things will trudge along forwards no matter what happens with politics. So, don't make big decisions based on emotions from that.
Bob: Thank you for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.