Why Smart People Make Dumb Money Decisions
On this week’s Best of Simply Money podcast, Bob and Brian explore why even the smartest people can make lousy financial decisions — and what you can do to avoid the same traps.
Then, why Gen X may be facing the toughest retirement landscape yet… and what can still be done about it.
Plus, building your personal brand in retirement, and you ‘Ask the Advisor.’
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Bob: Tonight, why smart people still make dumb money decisions. You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right. Have you ever made a financial decision that, looking back, made zero sense even though you knew better? We've all been there. Here's the twist. The smarter you are, the more likely you are to make some of the worst money decisions ever. And if you've built real wealth, well, the stakes only get higher, Brian.
Brian: Yeah. So what we know here is that brains are not bulletproof. One of the biggest myths in finance, Bob, is this idea that being smart means I'm never going to make a financial mistake in my life. That's just not the case. And research shows it. So this surfaces in a lot of ways in flawed decision. We tend to get confident in ourselves and kind of double down on it. So one of the things we run across is something called confirmation bias. This is when we find ourselves seeking out groups or people or searching everything until we find the opinion that we already have. And then we can go, "See, see, see? I know I was right." This isn't just a financial thing. This surfaces in a lot of areas. It surfaces in politics, in family discussions, and so forth. It's one of the challenges, though, that can cause us to make bad financial decisions and get us in trouble.
Bob: Well, Brian, you mentioned politics and you took the words out of my mouth. I think with this very divided political environment we're in and the way the whole media business is structured now, we can all live in our little echo chambers and only consume news and information that fits our preconceived biases. And that only feeds that confirmation bias. And I've seen that confirmation bias just grow, and grow, and grow, I'd say, over the last 10 years. And it's something we really got to be aware of.
Brian: Yeah, there's a lot of passion out there, too, because that's just where, honestly, my personal opinion is that our political leadership and our media is making an awful lot of money and gaining an awful lot of power out of keeping us angry and terrified at all times. And this leads to conversations at the dinner table that you didn't want to have. It leads to decisions maybe made with your spouse where you're having arguments over things that really may not have been that important to you, but for whatever reason, we're all just kind of geared to fight first nowadays. So the best thing to do is whenever you're faced with one of these challenges is take a breath, sleep on things, don't make a decision right now, but just make sure you're not doing something just off the cuff just because you feel the pressure to make that decision.
Bob: Here's another behavior we come across a lot and that we'll just call that the state of inertia. And we go back to Newton's first law of motion. An object in motion will stay in motion. An object at rest will stay at rest, Brian. And we find that to be a common thing among especially highly intelligent, high-net-worth people. In other words, doing nothing, even when you know you need to act, it happens. When the stakes are high, the fear of making a wrong move just becomes paralyzing and people do nothing. This comes up all the time, especially in the area of estate planning.
Brian: Yeah, procrastination is always... Whenever there's a big scary decision to be made, it's easier not to do anything. I look at this option and it's got pros and cons. And here's another option and there's pros and cons there. You know what? I'm going to talk about this. I'll think about this some other time because I just can't make a choice. And you're right. This leads to situations where clients will walk in with a will that was written 35, 40 years ago and maybe doesn't include half the children that they now have because they didn't know the steps to take and they were busy that week and can't get to it. And then that stretches into months and years and frankly, decades. But that can also obviously lead to problems.
That's when we'll hear from eventually we'll hear from the heirs where they had a situation that they'll come in and they'll say, I don't want to do this to my children. Mom and Dad just didn't get around to organizing things to make it easy. And we had to go through an awful lot to get things retitled. Things had to go through probate that could have been easily avoided and that kind of thing. And they'll say, I don't want to do this for my children. And we'll give them a checklist here. Go do these things and it'll take them themselves months to complete it. These decisions are hard, but they're not going to go away. And it does it does involve some discipline. It's really no different, honestly, than personal training or a diet or whatever. If you want the results, you've got to put in the work.
Bob: Another emotional behavior or emotionally-driven behavior we got to fight against is that feeling of overconfidence. And Brian, I'm sure you've been there. I've been there, too, with clients and really personally as well. You know, we're all very smart, we're well read, we've done research and we think we can outsmart everything out there. In other words, I built this business from nothing, I know I can manage my own investments. Or, I can perform orthopedic surgery or brain surgery, certainly, I know how to allocate an investment portfolio. I don't need a second opinion. I don't need any help. I know what I'm doing, on and on and on.
Brian: Yeah. And because YouTube videos, right? I can do surgery because there's a YouTube video on there about how to do it. And not that what we do every day is rocket science. It's not simple either. But at the same time, if there were a list, Bob, of steps everyone should take, right? If it was just a checklist process, these are all good things and here's all the bad things to avoid. If it was the same for everybody, then, yeah, you could do it. Everybody would do their financial planning off of a blog somewhere that has that checklist to follow.
I think the notion that a lot of people have is that I'm a hard worker, I'm willing to do more research than the next guy. So if I just look at this next page about cryptocurrency and how to make a bazillion dollars, then I'm going to be all set. And none of that leads to good places. I can remember when I got started in this industry, it used to be about my guy or my lady who gave me a good stock tip 20 years ago and then we just hang on that. I remember my dad and my uncles would pass around their brokers that would give them this great stock idea. And none of them were good for maybe one or two in a row.
And eventually that kind of colored my career. And I started off at the very beginning thinking that that's all I need to do, just be the guy with the hot stock. Well, none of that works. And I quickly figured out that it's all about planning because that's what people really are worried about. Am I going to run out of money? That's all anybody cares about, not the hot stock tip from yesterday. But there is this notion that if I just do a little more research than the next guy, and I know I'm capable of that because I'm smarter than the next guy, then I'm going to be bulletproof. And that's just not the case.
Bob: You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
All right. We've identified a couple of mindset-driven behaviors that we all experience. Brian, let's get into what we need to do about it. It starts with a mindset shift, right?
Brian: Yeah. Enough complaining about what the problem is. What do we do about it? Let's be proactive. So first off, let's accept that intelligence is not a defense against your emotion. Emotion is going to drive the day in a lot of cases. And just being a smart person, which most people certainly are, not everybody but a lot of people certainly are, but that often is not enough to fight off the emotion. So think about Warren Buffett. Warren Buffett is probably the most emotionless investor in history. That's how he got to where he is. So the reason he's done that is he's built systems and he has a trusted team around him to help him override his instincts and help him figure out when he might be going a little too far down a rabbit hole of his own creation.
Bob: So that gets into one of the things we always recommend for our clients here at Allworth, build an actual personal investment policy. What does that mean? It's like having a written blueprint for how you're going to invest. We assess what kind of assets you have, your tax situation, how much risk you're comfortable with, when to rebalance. Having a written plan, and the benefit when emotions run hot, like what when we experience volatility, a la the first couple of weeks in April, people can go back and refer to their actual plan. And that keeps people from making emotional or headline-driven decisions in a rush and keeps us on track and avoids big time mistakes that we can't oftentimes recover from if we make them.
Brian: And I don't view this investment policy statement. Some of you might be recognizing those words as big fancy talk from a committee meeting or something like that. We're not really talking about a big formal laid-out policy that is separate from your financial plan. And oftentimes it can be just part of your financial plan. Because if you have a financial plan, that means you've looked at, here's where we are right now and we need to get to here in 5, 10, 15, 20 years. That's really the basic point of a plan. Along the way, stuff is going to happen. Life is going to happen. The market's going to happen. How will we react when it does?
If you've done a proper plan, then you know you will have stress tested your goals. You will have figured out, okay , if nothing bad happens, then here's how it looks. But if crazy stuff happens in the short run, this is the impact and here's when we need to worry. But more importantly, here's when we don't have to worry because we've done the stress test. So, again, just make sure that you understand what you're trying to accomplish in the first place. That can be an investment policy.
Bob: Another thing we'd like to talk to clients about with Brian is to purposely and intentionally introduce a little friction or short term delay to making big decisions when it comes to money. For example, you know, feel like dumping a stock that you've got a large position in, set a at least a 24- to 48-hour rule, you know, internally saying, hey, I'm not going to make that decision until I sleep on it. Let a little time pass. Maybe get some advice. Pray about it. Make sure you discuss it with your spouse. Something where you're not just making that mouse click and making a huge financial decision. It can often help people. Just to have that 24 to 48 hours.
Brian: That's yeah, that's the slow your roll rule. Just make sure you're not moving in something just within pure passion and no logic. You have to have a little mixture of both. Something else, and when you come up with these ideas, bring in a devil's advocate. Bounce it off somebody. Smart people actually love being challenged intellectually, right. People love to have discussions about, you know, politics and just ideas they have and that kind of thing. But financially, we don't like to do that at all. We are all raised that finances were to be kept private within the family and so forth. So we never really talk to each other and we wind up in our own little echo chambers when it comes to big, huge financial decisions, which makes things an awful lot harder.
So look for somebody out there that you can bounce these ideas. Obviously a spouse who should probably be in the mix anyway on these bigger decisions. Maybe you have an advisor or even a peer, just somebody you know, is thinks similarly to you and has the same kind of similar challenges, that kind of thing. Say, hey, I was thinking about this. What am I not seeing? I'm too close to my own trees so I can't see the whole forest. Help me understand what I might be missing. And this isn't about getting yourself talked out of something. That's, you know, it could be a great idea, but it's about just hearing a counterpoint that you may not have thought about from somebody who's an arm's length away. Super, super helpful for business owners who are used to calling the shots solo as well.
Bob: Here's one last piece of advice and something I think virtually nobody does, but this is a great idea for those that do some journaling and writing things down, schedule an annual what we call a bias review. In other words, once a year, ask yourself, did I ignore advice because it didn't match my viewpoint or my presupposition? Did I delay action because I was uncomfortable? Did I trust my gut when I should have run the numbers first? Those are great questions to ask and write those answers down because oftentimes it will save you from some mistakes and put you in a better position, you know, in which to make decisions moving forward.
Brian: Yeah, and work with a fiduciary advisor. A good advisor is not there to be smarter than you. They're there to help outmaneuver your biases. We all have them. Advisors have them too. We make the same human mistakes. We just know exactly the dumb things that we're doing while we're doing them.
Bob: Here's the Allworth advice. The most financially successful people we know don't go it alone. They build teams, they build systems and structure because they know that at the end of the day, they're just human like everyone else. If you're on deck for retirement, what's your biggest worry? See what your peers say about it next. You're listening to Simply Money presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Hey, if you can't listen to Simply Money every night, subscribe to get our daily podcast. You can listen the following morning during your commute, maybe at the gym. And if you think your friends could use some financial advice, tell them about us as well. Search Simply Money on the iHeart app or wherever you find your podcasts.
How much risk should you really be taking if you already have enough to retire comfortably? We'll answer that question and more coming up at 6:43.
Tonight, Brian, we pay homage to Gen X, the folks who were born between 1965 and 1980. They're inching closer and closer to retirement and they've seen it all. Dot com bubbles, the 2008 crash, COVID, inflation, you name it. But the biggest concern right now that Gen Xers seem to have as retirement looms isn't just about money, it's health care.
Brian: Yep. You're talking about me, Bob. I am Gen X. And I think you might be as well. But it's funny. I remember whenever that topic comes up, I still feel like the first time I heard Gen X was talking about my generation, how we were going to change the world and so forth. And now I'm the establishment and all the ones behind me are going to change the world.
So anyway, I think every generation past the '90s, honestly, has come up through chaos. The '80s and the '90s, in my opinion, that was the anomaly because really nothing bad happened for 20 straight years. And this drives a lot of the generational differences between opinions on how things should work.
Baby boomers didn't see a whole lot of bad stuff during their primary earnings years and their primary savings years. And then starting around 2000, we started to see a heck of a lot more chaos as things returned to the mean. So, but a lot of people out there are worried about this. So Gen Xers are feeling like they are behind. About 14% of Americans between 44 and age 59 believe they've saved enough. This is coming from a Schroeder survey that was done recently.
Bob: That's a low number.
Brian: That is a very low number, but it kind of reflects, you know, when I talk to my peers, I know that a lot of them are concerned about these things. And we don't talk numbers because that's, again, that's not something we do in this country. But you can kind of see behind their eyes that they've got some concerns. Most are estimating they're going to need over a million dollars, but the average Gen Xer, Bob, expects to retire with about 600,000. So that's quite a gap to cross there.
Bob: Well, and add to that the fact, you know, studies we see say that, you know, a couple retiring today at age 65 could need, on average, about $300,000 just to cover medical expenses over the rest of their lifetime. And Brian, that number doesn't even include long-term care, which as we know, can wipe out a nest egg in very short order if you're unprepared.
Brian: Yeah. And let's be really clear about that. So when we talk about this all the time, $300,000 for it to cover health care, that's about $100,000 of that is just going to be the premiums themselves over 30 years on Medicare and some kind of supplemental policy, with the rest being out-of-pocket expenses, doctor's visits and all those kinds of things. But again, let's reiterate, I want to say this very loudly. That is not the cost of long-term care. If that occurs to someone, that's going to be itself about another $300,000 based off of approximately $115,000 2.5 year stay. So why is Generation X feeling this so strongly?
First generation ever to pretty much mostly retire without pensions, right. So a lot of our parents, a lot of our grandparents retired with pensions. And that became their definition of what retirement is. I'm going to turn on my pension and I'll get my check and I'll go fishing. Well, this generation is the first to where the majority will have to make their own pension. And you can't do that overnight. That has to have been done over your entire working career. Plus, Bob, it's also the sandwich generation helping kids and often parents. This is going to go on for a very long time. Many generations are going to go through this because of life expectancy being so much longer. You've got kids that you're trying to get started. You've got your parents that may need your help as well. So that's double financial duty. That's going to suck up a lot of your own retirement planning.
Bob: Yeah, another thing adding to some of the stress for this generation of pre-retirees is we've had some volatile income years. I mean, flat wages during the 2000s, two major recessions and a pretty big bout with inflation have made saving considerably harder. And now they're staring down these rising health costs and all the sandwich generation stuff. It's a lot to overcome. But we got to keep encouraging these folks, don't just bury your head in the sand and just declare defeat. You got to make some adjustments here and get things back in order before it becomes too late.
Brian: So let's talk about that. What can we do about it? First off, estimate your own health care costs. Talk to a fiduciary financial advisor, somebody who understands Medicare and long-term care planning and preferably has worked with a lot of individuals and clients who have gone through these, who have gone before you. I think that's the most value any advisor can bring is to be able to say, here are what people who look like you, but are a little bit older, further down the path, here's how they dealt with it.
So but some tactical things, if you are eligible, a health savings account's one of the best tools out there, triple tax protected, tax-deductible contributions, tax-free growth and tax-free withdrawals for medical expenses. Also consider, don't buy, but consider long-term care insurance. Learn about it. If you're going to do it, the earlier you do it, the lower the premiums are going to be. And don't hold off into your 60s if you're concerned. What other ideas you have Bob?
Bob: Well, one idea is to stay healthy. You know, one of the ways to combat these, you know, looming health care costs is don't let yourself get in a situation where you're vastly overweight and are dealing with, you know, adult onset diabetes. Maybe cut back on the alcohol and the smoking. Get some exercise. You know, put yourself in a situation where you are healthy and that has a lot of benefits, financial benefits and just overall lifestyle and happiness benefits. The key here is to stay healthy so that you bring down these future health care costs as much as you can. Obviously there are things that are out of our control, but there's still a lot of things that are in our control and we need to take advantage of that.
Here's the Allworth advice. A solid retirement plan doesn't just grow your money, it protects you from the rising costs of health care.
All right, you've made your money. Now what? Next, how to build a personal brand that keeps you relevant after dialing it down a bit following a successful career. You're listening to Simply Money presented by Allworth Financial on 55K KRC, THE Talk Station.
You're listening to Simply Money, presented by Allworth Financial. I'm Bob Sponseller along with Brian James, and we're joined right now by our career expert and our good friend, Julie Bawke, who's going to talk to us today about building a personal brand as you start to wind down a very successful career, but you're not quite yet ready yet to get completely out of the workforce.
Julie, I'm sure you are counseling a lot of people in this area right now. Tell us what that looks like out there.
Julie: You know, when we start to get to that point where we have to really think about what's next, we see the end of the road work-wise. The most important thing to do is start building your post-work life while you're still working because the, I'm going 80 miles an hour and then I'm going to throw the brakes on fully is really jarring. It is not the healthiest way I'd go about it. And it's why, over the years, many people who have poured everything into their careers die soon after retirement because they've lost their sense of purpose. And so, you don't wait until the last day to start thinking about your next stage. You think about it before so that you're actually retiring to something instead of just from something.
Bob: You talked about high achievers and we deal with a lot of those here at Allworth. You know, you're going 80 miles an hour to quote, you know, what you just said, it's very hard to be going 89, 90 miles an hour and then hit stop and come up and say, well, now what do I do? What are the, what are some of the biggest challenges you face as you counsel folks when they're trying to rewire, so to speak, instead of just retire?
Julie: So the people that have the hardest time with this transition are people who solely or mostly identify with their careers. So we see this in Washington with politicians hanging on on both sides way too long. And that happens in the private sector as well. And so, the more you identify as Joe Blow from the Jones Company and the more as your primary source of your identity, the harder that, the harder that moving away is going to be.
And so, moving into thinking about what do you want to be known as after you retire? So it could be, you could be a thought leader on something. You could have an area of expertise that served you well in your career. So it's switching that mindset from I'm the person in charge to I potentially I'm going to coach and mentor and be an example for those in charge. And we overstay our welcome because we, no one really recognizes... it's like your parent never recognizes themselves when it's time to give up driving, but everybody around you sees it way before you do.
And so, it's really, you know, it's really important to have those people around you that help you think about, how can I take what I've accomplished in the last 40 years, take a piece of that that really, really lights my fire and then how can I build around that so that I'm not necessarily stopping all work after I retire, but maybe I'm drilling down to the stuff I'm best at. And I focus on growing that while I'm also doing other things I'm interested in.
Brian: Julie, one of the things that we almost always come up with when helping someone figure out how to retire is we discover that they've spent almost no time thinking about what life is going to be like, you know, kind of what you were just hinting at, what will life be like when I'm not the big person in the room anymore. And they start to think, you know, a lot of people kind of get distracted by the idea that I'm just exhausted. I got nothing left to make it to the finish line. And they start to think about, you know, I just want to be done. And then we point out there's an awful lot of time, you know, that you're going to have to spend doing nothing.
And one of the things that they'll start to think is that, well, I'll just, I can work on an arrangement. I'll work less hours doing the same job. That always seems to end badly in my opinion. That's why I'd like to your opinion, because, you know, the people still dump the same amount of stuff on your desk because you are determined to be that person. You are the person who does the things and nobody cares that you're only working 20 hours a week nowadays. So my advice is to go somewhere where you can use your skills, but still be the dumbest person in the room in terms of not being that person. Does that make, am I giving good advice there? Do you ever run across that situation?
Julie: No, you absolutely are giving great advice. We absolutely do not give enough attention to how to make that transition. And everybody I know over 60 says, this is way harder than I thought it was going to be. Because I really thought that I was just going to go sit on the porch somewhere. Well, after a few weeks of doing that at most, you realize that by 7:30, 8:00, you've had your coffee, you've caught up all the things you'd like to read in the morning. Maybe you can play golf a couple of days a week, but that's not probably going to be enough.
And so starting to imagine how you're going to spend your week and start to say, you know, maybe I might like to work, I might like to try something new, or I might like to take a section of what I've done in the past and really build maybe a practice around it where I work, where I only say yes to the things that I'm absolutely going to love and look forward to. And I think at this stage of life, there's a really big question. You have to understand the difference between what you can do and what you want to do. And here's a real big difference because we get really caught up in well, I could you do this, or I could do this. But the truth is you don't want to do all those things equally.
So getting really clear around if I could spend, if I'm only going to spend two days a week in active work related to what I did in the past, what would I do during those days? What would I do and what would I avoid? What would I say yes to? What would I say no to? And then how am I going to fill the rest of that time? If you don't actively plan how to fill your time, then you will fall back into what you know.
And it gets to, I said earlier, if you don't have a good relationship with your partner and home is not a place where you want to spend more time or you don't have anything in the community you're involved in, in any way, if you've been a 100% work person, retirement is going to be very, very painful for you. And so, instead of kicking the can down the road and waiting until the day when it's become obvious to everyone, maybe except you, that it's time for you to go, you have to start thinking about your graceful exit. And then what are you most pat... What do you most firmly want to do in this last section of your life? Because really that's what it is. Can I recommend a book? "Wisdom at Work," "Wisdom at Work" by Chip Conley. Is the best book I've read to help you go through that and figure that out. How do you transform yourself into a wise mentor instead of a doer?
Bob: You're listening to Simply Money, presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to Simply Money, presented by Allworth Financial. I'm Bob Sponseller along with Brian James. You have a financial question for us? 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.
Speaking of questions, Brian, the first one comes from Dan in Mount Washington and he asked, "How much risk should I really be taking if I already have enough to retire comfortably?"
Brian: Yeah, this is a great question because it comes up every single time we do a financial plan for somebody. If you've put yourself in a strong position, then you might find yourself feeling like you've got more than enough to make it and you don't have to take any risk. And that's a perfectly logical, as long as you've done the research and made sure you've done some stress testing and those kinds of things, then it's very fair to say I don't need to take much risk. I want to put this in super safe investments and maybe just keep up with inflation and otherwise not worry about it. And that's a perfectly sound financial plan as long as the math works.
Now what you will wrestle with at some point, you're going to go, wait a minute, this money is going to sit here for 20, 25, 30 years and I'm going to spend the interest, but otherwise it's just going to kind of sit there and aren't I kind of taking it out of my kid's mouths if I don't let it grow? So a lot of times people come to that conclusion and the answer intends to be somewhere in the middle. I don't need to lock it down and bury it in the backyard, but I also don't need to throw caution to the wind. So maybe I'll take a sort of mid-range risk position. So I'm still growing it over time. But again, it all comes down to stress testing and understanding those, the possible outcomes of that.
Bob: Well, and it's not just the financial outcomes, but how can you sleep at night and actually enjoy your retirement without worrying about money every day?
Brian: That's right. The pendulum swings both ways, right? You'll have those sleepless nights when we're having scary headlines, but also you'll question yourself when the market is going great guns. Both of those things will happen several times throughout the remainder of your life. So again, just set your course according to what you're comfortable with.
Next question, Don in Montgomery asks, "What's a smarter way that I can plan for long-term care rather than just buying insurance?" What do you think of that, Bob?
Bob: Well, I'd say that Don, you know, obviously not buying insurance, you're self insuring and yeah, there's a lot of ways to do that if you get out in front of it, you know, ahead of time and plan. One way, and Brian talked about this in a prior segment, take full advantage of that health savings account. If you're in a high deductible healthcare plan, you can suck that money away pre-tax, let it grow. Don't spend it every year. Let that stuff stockpile so you've got that $300,000 to $400,000 account built up on a tax-free basis and you've got that sitting there, you know, ready to use when the time comes for healthcare expenses in retirement.
You know, another thing is to set aside a separate account that you're building just for healthcare expenses. And a good way to do that on a tax-efficient way is to, is to have an account separate from your retirement plan, your 401k and IRAs, that is in a tax-efficiently managed portfolio where you can draw that money out for healthcare costs and not jack up your tax exposure when you do it. So those are two thoughts off the top of my head, Brian.
Brian: Yeah, and Bob, I would add on the front end of this, before you even get to those steps, I would understand your situation to begin with. There's a lot of people out there... Well,the headlines are scary, of course, because that makes for good, keeps your eyes on the screen and reading things. But there's a lot of people out there who are going to be able to self-insure. If you're somebody who has made it to retirement with a million, million and a half, maybe, you know, maybe more than that, then that math that has gotten you to that point is going to continue. Your assets are going to continue to grow.
You may be able to self-insure and don't think that when we say you're going to need to spend an extra $100,000 on long-term care, that that's layered on top of all your other expenses. Remember long-term care is a stay in a nursing home. You're not going to the grocery store anymore. You're not going, you're not traveling. You're not doing all those other things. You may have sold the house. The mortgage may be gone. You won't have property taxes, housing expenses. It's not a pure $100,000 layered on top. You may very well be able to fund it without worrying about insurance, but understand your situation to begin with, then worry about whether you need to take steps.
Bob: Well, what you just explained is running some different scenarios based on assumptions so that you're going into this with eyes wide open and you actually have a plan, not just leaving it to chance.
All right, Brian, Michael in Fort Thomas asks, "What's the best way to pass a vacation property to my kids without causing drama?"
Brian: Yeah. This is so first off, Michael, I want to thank you for defending us in Fort Thomas from those people in Fort Wright. I was wonder if they shoot at each other down there, but anyway, a good way to send vacation property to kids, where I would start here, honestly, make sure your kids want that property. I think everybody needs to be open-minded that something that means a lot to you. It may mean a lot to your children, but it may not mean as much if you're not there. If the family truly loves wherever this destination is and they want to go for the memories and all that, then that's fantastic. But it's very often that I hear that somebody inherited something that they just don't value. We remember we loved going there with Mom and Dad, but we've been there our entire lives. Mom and Dad aren't here anymore. So it's just, it just doesn't have the same meaning.
So before you get too wound up in deciding how they're going to own it, make sure your children want to own it in the first place. Bring them into the conversation, determine whether they want that, then you can take appropriate steps. You may find that they say, we love it, we appreciate you taking us here and that's this benefit we've had, but after it's gone, we don't think we'll use it. There's your answer and be okay that you've made them happy. You're going to give them cash by selling it and they can do what they want with it rather than burdening with something that they were being too polite to tell you they didn't want. Have that conversation first.
Bob: I totally agree. I mean, all these complex trusts and all that can be great, but it really comes down to proactive communication with your family, you know, knowing what everybody wants in advance. And that's so key.
All right, Brian, here's another one for you. Vicky in Blue Ash asks, "Should I set up a trust, even if I'm not planning to leave a huge inheritance?"
Brian: Very, very common question, right, Bob? We hear this very frequently. People associate a decent amount of money with, I must have a trust in the mix here. Trusts are rarely bad. That's not the case that I'm going to make here, but they also sometimes can be a sledgehammer to kill a gnat. You know, it really kind of depends. A lot of times you can accomplish what you need to by simply naming your beneficiaries. If you have a simple situation, a couple of kids, maybe, they're adults, they're doing fine on their own and you trust them to make good decisions and it's pretty obvious, you know, who's going to inherit all the money, you may not need a trust just because there's a lot of money involved.
In my mind, trusts come in when there are different concerns, there are moving parts. Perhaps this is a second marriage and there's, you know, the two spouses have their own sets of kids. You have to, you do have to be very careful. That's where you can get some very unexpected outcomes if you don't pay attention to that. But that's a whole show in itself.
But otherwise, just because you have money doesn't mean you have to have a trust. Just make sure you understand what it is that you want. A trusted attorney will advise you. I got to be very careful here. We are not attorneys, but we can kind of share some stories. So, but at the same time, don't assume you must have a trust.
Bob: All right. Coming up next, we hear the bottom line from Brian where he's going to teach us about blending Roth and regular contributions within your 401k plan. You're listening to Simply Money, presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to Simply Money, presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, Brian, give us your bottom line.
Brian: So my bottom line here, Bob, I want to talk about something that comes up very frequently when we're sitting with clients and people who are within maybe two, three years of retiring. A lot of times they'll point out that, hey, you know what? I feel like I don't have a lot on the Roth side. I feel like I should have some tax-free stuff. Brian, what do you think? And my answer is usually, look, you didn't make a mistake, right? You probably started your career, if you're looking at retiring right now, you probably started your career back when the only thing you could do in your 401k was pre-tax. And that's what you did. And good job.
So, but people now, nowadays, 401k Roth, I'm not talking Roth IRA. You can also do it inside a 401k, 403b nowadays. That's fairly ubiquitous. It's mostly available over the last five to seven years, it seems like. So people are questioning, I've only got a couple years left. I've got a good pile built up on my pre-tax side, but I really don't have any on the Roth side. What should I do about that? Should I start putting in the Roth?
Well, there's a couple moving parts to that. First off, remember, Roth IRA, Roth 401k or IRA contributions are not deductible. So if you're in a high bracket, which is a good chance of that, because you're in your prime, your peak earning years, you're going to be paying taxes on those dollars, not additional taxes. You just don't get an induction, right? So that would be a downside to it. The other thing I would suggest to think about is if Roth is on your mind, and it really should be for everybody, it may not make sense right now, but it should be on the horizon to at least consider, consider and learn about. What I might suggest is maybe try to start building up some cash somewhere else in a taxable account. And what you might do with this taxable account after you retire, there will be likely a window of time where you have a very low bracket. So you, your spouse have retired, you're not bringing in salaries like you used to because you don't have to anymore. Maybe you're, you can pay the bills with savings for a little while and not even turn on Social Security.
That is a time where you will be in the lowest bracket that you've seen in decades. And that's the time to be thinking about Roth conversions. So now where we're sitting here, two, three, four years out from retirement, it may behoove you to build up some savings in a taxable, not traditional, or not IRA, not pre-tax, not Roth, just a plain old taxable account with which you will pay the taxes on Roth conversions when you reach that point where you're in that low bracket again. So it doesn't have to be contributed now to get you some Roth access. If you plan now, you can trigger that later and in that window of time where things get a little bit cheaper for you, you can do some significant Roth conversions. The window there is when you've started your low income tax years and until you reach your required minimum distribution age, which is either 73 or 75, depending on when you were born. That's my bottom line.
Bob: All right, Brian, and just piggybacking off of that. And I've seen this a few times myself, and I'm sure you have as well. Sometimes very high-earning people in the peak earning years, right before they retire, they hear about Roth 401k and they just automatically gravitate to that. And we got to remind folks that, you know, the Roth 401k works great, you know, putting after tax contributions in, it works better and better the longer runway you have to allow that money to grow. And if you're in a very high tax bracket, we oftentimes tell people just stick with what you're doing. Take the pre-tax approach and then do what you just talked about, you know, set aside that after tax non-retirement plan asset, you know, to do the tax planning with, because if you pay too much taxes, more than you should be, in those very high-earning years, you know, we're kind of working in reverse of what we're trying to do in terms of tax efficiency.
Brian: Yeah, I think that's a great point. It does come up. People question it, but understand the pros and cons of it.
Bob: Thanks for listening. You've been listening to Simply Money, presented by Allworth Financial on 55 KRC, THE Talk Station.
Brian: Yeah. So what we know here is that brains are not bulletproof. One of the biggest myths in finance, Bob, is this idea that being smart means I'm never going to make a financial mistake in my life. That's just not the case. And research shows it. So this surfaces in a lot of ways in flawed decision. We tend to get confident in ourselves and kind of double down on it. So one of the things we run across is something called confirmation bias. This is when we find ourselves seeking out groups or people or searching everything until we find the opinion that we already have. And then we can go, "See, see, see? I know I was right." This isn't just a financial thing. This surfaces in a lot of areas. It surfaces in politics, in family discussions, and so forth. It's one of the challenges, though, that can cause us to make bad financial decisions and get us in trouble.
Bob: Well, Brian, you mentioned politics and you took the words out of my mouth. I think with this very divided political environment we're in and the way the whole media business is structured now, we can all live in our little echo chambers and only consume news and information that fits our preconceived biases. And that only feeds that confirmation bias. And I've seen that confirmation bias just grow, and grow, and grow, I'd say, over the last 10 years. And it's something we really got to be aware of.
Brian: Yeah, there's a lot of passion out there, too, because that's just where, honestly, my personal opinion is that our political leadership and our media is making an awful lot of money and gaining an awful lot of power out of keeping us angry and terrified at all times. And this leads to conversations at the dinner table that you didn't want to have. It leads to decisions maybe made with your spouse where you're having arguments over things that really may not have been that important to you, but for whatever reason, we're all just kind of geared to fight first nowadays. So the best thing to do is whenever you're faced with one of these challenges is take a breath, sleep on things, don't make a decision right now, but just make sure you're not doing something just off the cuff just because you feel the pressure to make that decision.
Bob: Here's another behavior we come across a lot and that we'll just call that the state of inertia. And we go back to Newton's first law of motion. An object in motion will stay in motion. An object at rest will stay at rest, Brian. And we find that to be a common thing among especially highly intelligent, high-net-worth people. In other words, doing nothing, even when you know you need to act, it happens. When the stakes are high, the fear of making a wrong move just becomes paralyzing and people do nothing. This comes up all the time, especially in the area of estate planning.
Brian: Yeah, procrastination is always... Whenever there's a big scary decision to be made, it's easier not to do anything. I look at this option and it's got pros and cons. And here's another option and there's pros and cons there. You know what? I'm going to talk about this. I'll think about this some other time because I just can't make a choice. And you're right. This leads to situations where clients will walk in with a will that was written 35, 40 years ago and maybe doesn't include half the children that they now have because they didn't know the steps to take and they were busy that week and can't get to it. And then that stretches into months and years and frankly, decades. But that can also obviously lead to problems.
That's when we'll hear from eventually we'll hear from the heirs where they had a situation that they'll come in and they'll say, I don't want to do this to my children. Mom and Dad just didn't get around to organizing things to make it easy. And we had to go through an awful lot to get things retitled. Things had to go through probate that could have been easily avoided and that kind of thing. And they'll say, I don't want to do this for my children. And we'll give them a checklist here. Go do these things and it'll take them themselves months to complete it. These decisions are hard, but they're not going to go away. And it does it does involve some discipline. It's really no different, honestly, than personal training or a diet or whatever. If you want the results, you've got to put in the work.
Bob: Another emotional behavior or emotionally-driven behavior we got to fight against is that feeling of overconfidence. And Brian, I'm sure you've been there. I've been there, too, with clients and really personally as well. You know, we're all very smart, we're well read, we've done research and we think we can outsmart everything out there. In other words, I built this business from nothing, I know I can manage my own investments. Or, I can perform orthopedic surgery or brain surgery, certainly, I know how to allocate an investment portfolio. I don't need a second opinion. I don't need any help. I know what I'm doing, on and on and on.
Brian: Yeah. And because YouTube videos, right? I can do surgery because there's a YouTube video on there about how to do it. And not that what we do every day is rocket science. It's not simple either. But at the same time, if there were a list, Bob, of steps everyone should take, right? If it was just a checklist process, these are all good things and here's all the bad things to avoid. If it was the same for everybody, then, yeah, you could do it. Everybody would do their financial planning off of a blog somewhere that has that checklist to follow.
I think the notion that a lot of people have is that I'm a hard worker, I'm willing to do more research than the next guy. So if I just look at this next page about cryptocurrency and how to make a bazillion dollars, then I'm going to be all set. And none of that leads to good places. I can remember when I got started in this industry, it used to be about my guy or my lady who gave me a good stock tip 20 years ago and then we just hang on that. I remember my dad and my uncles would pass around their brokers that would give them this great stock idea. And none of them were good for maybe one or two in a row.
And eventually that kind of colored my career. And I started off at the very beginning thinking that that's all I need to do, just be the guy with the hot stock. Well, none of that works. And I quickly figured out that it's all about planning because that's what people really are worried about. Am I going to run out of money? That's all anybody cares about, not the hot stock tip from yesterday. But there is this notion that if I just do a little more research than the next guy, and I know I'm capable of that because I'm smarter than the next guy, then I'm going to be bulletproof. And that's just not the case.
Bob: You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
All right. We've identified a couple of mindset-driven behaviors that we all experience. Brian, let's get into what we need to do about it. It starts with a mindset shift, right?
Brian: Yeah. Enough complaining about what the problem is. What do we do about it? Let's be proactive. So first off, let's accept that intelligence is not a defense against your emotion. Emotion is going to drive the day in a lot of cases. And just being a smart person, which most people certainly are, not everybody but a lot of people certainly are, but that often is not enough to fight off the emotion. So think about Warren Buffett. Warren Buffett is probably the most emotionless investor in history. That's how he got to where he is. So the reason he's done that is he's built systems and he has a trusted team around him to help him override his instincts and help him figure out when he might be going a little too far down a rabbit hole of his own creation.
Bob: So that gets into one of the things we always recommend for our clients here at Allworth, build an actual personal investment policy. What does that mean? It's like having a written blueprint for how you're going to invest. We assess what kind of assets you have, your tax situation, how much risk you're comfortable with, when to rebalance. Having a written plan, and the benefit when emotions run hot, like what when we experience volatility, a la the first couple of weeks in April, people can go back and refer to their actual plan. And that keeps people from making emotional or headline-driven decisions in a rush and keeps us on track and avoids big time mistakes that we can't oftentimes recover from if we make them.
Brian: And I don't view this investment policy statement. Some of you might be recognizing those words as big fancy talk from a committee meeting or something like that. We're not really talking about a big formal laid-out policy that is separate from your financial plan. And oftentimes it can be just part of your financial plan. Because if you have a financial plan, that means you've looked at, here's where we are right now and we need to get to here in 5, 10, 15, 20 years. That's really the basic point of a plan. Along the way, stuff is going to happen. Life is going to happen. The market's going to happen. How will we react when it does?
If you've done a proper plan, then you know you will have stress tested your goals. You will have figured out, okay , if nothing bad happens, then here's how it looks. But if crazy stuff happens in the short run, this is the impact and here's when we need to worry. But more importantly, here's when we don't have to worry because we've done the stress test. So, again, just make sure that you understand what you're trying to accomplish in the first place. That can be an investment policy.
Bob: Another thing we'd like to talk to clients about with Brian is to purposely and intentionally introduce a little friction or short term delay to making big decisions when it comes to money. For example, you know, feel like dumping a stock that you've got a large position in, set a at least a 24- to 48-hour rule, you know, internally saying, hey, I'm not going to make that decision until I sleep on it. Let a little time pass. Maybe get some advice. Pray about it. Make sure you discuss it with your spouse. Something where you're not just making that mouse click and making a huge financial decision. It can often help people. Just to have that 24 to 48 hours.
Brian: That's yeah, that's the slow your roll rule. Just make sure you're not moving in something just within pure passion and no logic. You have to have a little mixture of both. Something else, and when you come up with these ideas, bring in a devil's advocate. Bounce it off somebody. Smart people actually love being challenged intellectually, right. People love to have discussions about, you know, politics and just ideas they have and that kind of thing. But financially, we don't like to do that at all. We are all raised that finances were to be kept private within the family and so forth. So we never really talk to each other and we wind up in our own little echo chambers when it comes to big, huge financial decisions, which makes things an awful lot harder.
So look for somebody out there that you can bounce these ideas. Obviously a spouse who should probably be in the mix anyway on these bigger decisions. Maybe you have an advisor or even a peer, just somebody you know, is thinks similarly to you and has the same kind of similar challenges, that kind of thing. Say, hey, I was thinking about this. What am I not seeing? I'm too close to my own trees so I can't see the whole forest. Help me understand what I might be missing. And this isn't about getting yourself talked out of something. That's, you know, it could be a great idea, but it's about just hearing a counterpoint that you may not have thought about from somebody who's an arm's length away. Super, super helpful for business owners who are used to calling the shots solo as well.
Bob: Here's one last piece of advice and something I think virtually nobody does, but this is a great idea for those that do some journaling and writing things down, schedule an annual what we call a bias review. In other words, once a year, ask yourself, did I ignore advice because it didn't match my viewpoint or my presupposition? Did I delay action because I was uncomfortable? Did I trust my gut when I should have run the numbers first? Those are great questions to ask and write those answers down because oftentimes it will save you from some mistakes and put you in a better position, you know, in which to make decisions moving forward.
Brian: Yeah, and work with a fiduciary advisor. A good advisor is not there to be smarter than you. They're there to help outmaneuver your biases. We all have them. Advisors have them too. We make the same human mistakes. We just know exactly the dumb things that we're doing while we're doing them.
Bob: Here's the Allworth advice. The most financially successful people we know don't go it alone. They build teams, they build systems and structure because they know that at the end of the day, they're just human like everyone else. If you're on deck for retirement, what's your biggest worry? See what your peers say about it next. You're listening to Simply Money presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Hey, if you can't listen to Simply Money every night, subscribe to get our daily podcast. You can listen the following morning during your commute, maybe at the gym. And if you think your friends could use some financial advice, tell them about us as well. Search Simply Money on the iHeart app or wherever you find your podcasts.
How much risk should you really be taking if you already have enough to retire comfortably? We'll answer that question and more coming up at 6:43.
Tonight, Brian, we pay homage to Gen X, the folks who were born between 1965 and 1980. They're inching closer and closer to retirement and they've seen it all. Dot com bubbles, the 2008 crash, COVID, inflation, you name it. But the biggest concern right now that Gen Xers seem to have as retirement looms isn't just about money, it's health care.
Brian: Yep. You're talking about me, Bob. I am Gen X. And I think you might be as well. But it's funny. I remember whenever that topic comes up, I still feel like the first time I heard Gen X was talking about my generation, how we were going to change the world and so forth. And now I'm the establishment and all the ones behind me are going to change the world.
So anyway, I think every generation past the '90s, honestly, has come up through chaos. The '80s and the '90s, in my opinion, that was the anomaly because really nothing bad happened for 20 straight years. And this drives a lot of the generational differences between opinions on how things should work.
Baby boomers didn't see a whole lot of bad stuff during their primary earnings years and their primary savings years. And then starting around 2000, we started to see a heck of a lot more chaos as things returned to the mean. So, but a lot of people out there are worried about this. So Gen Xers are feeling like they are behind. About 14% of Americans between 44 and age 59 believe they've saved enough. This is coming from a Schroeder survey that was done recently.
Bob: That's a low number.
Brian: That is a very low number, but it kind of reflects, you know, when I talk to my peers, I know that a lot of them are concerned about these things. And we don't talk numbers because that's, again, that's not something we do in this country. But you can kind of see behind their eyes that they've got some concerns. Most are estimating they're going to need over a million dollars, but the average Gen Xer, Bob, expects to retire with about 600,000. So that's quite a gap to cross there.
Bob: Well, and add to that the fact, you know, studies we see say that, you know, a couple retiring today at age 65 could need, on average, about $300,000 just to cover medical expenses over the rest of their lifetime. And Brian, that number doesn't even include long-term care, which as we know, can wipe out a nest egg in very short order if you're unprepared.
Brian: Yeah. And let's be really clear about that. So when we talk about this all the time, $300,000 for it to cover health care, that's about $100,000 of that is just going to be the premiums themselves over 30 years on Medicare and some kind of supplemental policy, with the rest being out-of-pocket expenses, doctor's visits and all those kinds of things. But again, let's reiterate, I want to say this very loudly. That is not the cost of long-term care. If that occurs to someone, that's going to be itself about another $300,000 based off of approximately $115,000 2.5 year stay. So why is Generation X feeling this so strongly?
First generation ever to pretty much mostly retire without pensions, right. So a lot of our parents, a lot of our grandparents retired with pensions. And that became their definition of what retirement is. I'm going to turn on my pension and I'll get my check and I'll go fishing. Well, this generation is the first to where the majority will have to make their own pension. And you can't do that overnight. That has to have been done over your entire working career. Plus, Bob, it's also the sandwich generation helping kids and often parents. This is going to go on for a very long time. Many generations are going to go through this because of life expectancy being so much longer. You've got kids that you're trying to get started. You've got your parents that may need your help as well. So that's double financial duty. That's going to suck up a lot of your own retirement planning.
Bob: Yeah, another thing adding to some of the stress for this generation of pre-retirees is we've had some volatile income years. I mean, flat wages during the 2000s, two major recessions and a pretty big bout with inflation have made saving considerably harder. And now they're staring down these rising health costs and all the sandwich generation stuff. It's a lot to overcome. But we got to keep encouraging these folks, don't just bury your head in the sand and just declare defeat. You got to make some adjustments here and get things back in order before it becomes too late.
Brian: So let's talk about that. What can we do about it? First off, estimate your own health care costs. Talk to a fiduciary financial advisor, somebody who understands Medicare and long-term care planning and preferably has worked with a lot of individuals and clients who have gone through these, who have gone before you. I think that's the most value any advisor can bring is to be able to say, here are what people who look like you, but are a little bit older, further down the path, here's how they dealt with it.
So but some tactical things, if you are eligible, a health savings account's one of the best tools out there, triple tax protected, tax-deductible contributions, tax-free growth and tax-free withdrawals for medical expenses. Also consider, don't buy, but consider long-term care insurance. Learn about it. If you're going to do it, the earlier you do it, the lower the premiums are going to be. And don't hold off into your 60s if you're concerned. What other ideas you have Bob?
Bob: Well, one idea is to stay healthy. You know, one of the ways to combat these, you know, looming health care costs is don't let yourself get in a situation where you're vastly overweight and are dealing with, you know, adult onset diabetes. Maybe cut back on the alcohol and the smoking. Get some exercise. You know, put yourself in a situation where you are healthy and that has a lot of benefits, financial benefits and just overall lifestyle and happiness benefits. The key here is to stay healthy so that you bring down these future health care costs as much as you can. Obviously there are things that are out of our control, but there's still a lot of things that are in our control and we need to take advantage of that.
Here's the Allworth advice. A solid retirement plan doesn't just grow your money, it protects you from the rising costs of health care.
All right, you've made your money. Now what? Next, how to build a personal brand that keeps you relevant after dialing it down a bit following a successful career. You're listening to Simply Money presented by Allworth Financial on 55K KRC, THE Talk Station.
You're listening to Simply Money, presented by Allworth Financial. I'm Bob Sponseller along with Brian James, and we're joined right now by our career expert and our good friend, Julie Bawke, who's going to talk to us today about building a personal brand as you start to wind down a very successful career, but you're not quite yet ready yet to get completely out of the workforce.
Julie, I'm sure you are counseling a lot of people in this area right now. Tell us what that looks like out there.
Julie: You know, when we start to get to that point where we have to really think about what's next, we see the end of the road work-wise. The most important thing to do is start building your post-work life while you're still working because the, I'm going 80 miles an hour and then I'm going to throw the brakes on fully is really jarring. It is not the healthiest way I'd go about it. And it's why, over the years, many people who have poured everything into their careers die soon after retirement because they've lost their sense of purpose. And so, you don't wait until the last day to start thinking about your next stage. You think about it before so that you're actually retiring to something instead of just from something.
Bob: You talked about high achievers and we deal with a lot of those here at Allworth. You know, you're going 80 miles an hour to quote, you know, what you just said, it's very hard to be going 89, 90 miles an hour and then hit stop and come up and say, well, now what do I do? What are the, what are some of the biggest challenges you face as you counsel folks when they're trying to rewire, so to speak, instead of just retire?
Julie: So the people that have the hardest time with this transition are people who solely or mostly identify with their careers. So we see this in Washington with politicians hanging on on both sides way too long. And that happens in the private sector as well. And so, the more you identify as Joe Blow from the Jones Company and the more as your primary source of your identity, the harder that, the harder that moving away is going to be.
And so, moving into thinking about what do you want to be known as after you retire? So it could be, you could be a thought leader on something. You could have an area of expertise that served you well in your career. So it's switching that mindset from I'm the person in charge to I potentially I'm going to coach and mentor and be an example for those in charge. And we overstay our welcome because we, no one really recognizes... it's like your parent never recognizes themselves when it's time to give up driving, but everybody around you sees it way before you do.
And so, it's really, you know, it's really important to have those people around you that help you think about, how can I take what I've accomplished in the last 40 years, take a piece of that that really, really lights my fire and then how can I build around that so that I'm not necessarily stopping all work after I retire, but maybe I'm drilling down to the stuff I'm best at. And I focus on growing that while I'm also doing other things I'm interested in.
Brian: Julie, one of the things that we almost always come up with when helping someone figure out how to retire is we discover that they've spent almost no time thinking about what life is going to be like, you know, kind of what you were just hinting at, what will life be like when I'm not the big person in the room anymore. And they start to think, you know, a lot of people kind of get distracted by the idea that I'm just exhausted. I got nothing left to make it to the finish line. And they start to think about, you know, I just want to be done. And then we point out there's an awful lot of time, you know, that you're going to have to spend doing nothing.
And one of the things that they'll start to think is that, well, I'll just, I can work on an arrangement. I'll work less hours doing the same job. That always seems to end badly in my opinion. That's why I'd like to your opinion, because, you know, the people still dump the same amount of stuff on your desk because you are determined to be that person. You are the person who does the things and nobody cares that you're only working 20 hours a week nowadays. So my advice is to go somewhere where you can use your skills, but still be the dumbest person in the room in terms of not being that person. Does that make, am I giving good advice there? Do you ever run across that situation?
Julie: No, you absolutely are giving great advice. We absolutely do not give enough attention to how to make that transition. And everybody I know over 60 says, this is way harder than I thought it was going to be. Because I really thought that I was just going to go sit on the porch somewhere. Well, after a few weeks of doing that at most, you realize that by 7:30, 8:00, you've had your coffee, you've caught up all the things you'd like to read in the morning. Maybe you can play golf a couple of days a week, but that's not probably going to be enough.
And so starting to imagine how you're going to spend your week and start to say, you know, maybe I might like to work, I might like to try something new, or I might like to take a section of what I've done in the past and really build maybe a practice around it where I work, where I only say yes to the things that I'm absolutely going to love and look forward to. And I think at this stage of life, there's a really big question. You have to understand the difference between what you can do and what you want to do. And here's a real big difference because we get really caught up in well, I could you do this, or I could do this. But the truth is you don't want to do all those things equally.
So getting really clear around if I could spend, if I'm only going to spend two days a week in active work related to what I did in the past, what would I do during those days? What would I do and what would I avoid? What would I say yes to? What would I say no to? And then how am I going to fill the rest of that time? If you don't actively plan how to fill your time, then you will fall back into what you know.
And it gets to, I said earlier, if you don't have a good relationship with your partner and home is not a place where you want to spend more time or you don't have anything in the community you're involved in, in any way, if you've been a 100% work person, retirement is going to be very, very painful for you. And so, instead of kicking the can down the road and waiting until the day when it's become obvious to everyone, maybe except you, that it's time for you to go, you have to start thinking about your graceful exit. And then what are you most pat... What do you most firmly want to do in this last section of your life? Because really that's what it is. Can I recommend a book? "Wisdom at Work," "Wisdom at Work" by Chip Conley. Is the best book I've read to help you go through that and figure that out. How do you transform yourself into a wise mentor instead of a doer?
Bob: You're listening to Simply Money, presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to Simply Money, presented by Allworth Financial. I'm Bob Sponseller along with Brian James. You have a financial question for us? 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.
Speaking of questions, Brian, the first one comes from Dan in Mount Washington and he asked, "How much risk should I really be taking if I already have enough to retire comfortably?"
Brian: Yeah, this is a great question because it comes up every single time we do a financial plan for somebody. If you've put yourself in a strong position, then you might find yourself feeling like you've got more than enough to make it and you don't have to take any risk. And that's a perfectly logical, as long as you've done the research and made sure you've done some stress testing and those kinds of things, then it's very fair to say I don't need to take much risk. I want to put this in super safe investments and maybe just keep up with inflation and otherwise not worry about it. And that's a perfectly sound financial plan as long as the math works.
Now what you will wrestle with at some point, you're going to go, wait a minute, this money is going to sit here for 20, 25, 30 years and I'm going to spend the interest, but otherwise it's just going to kind of sit there and aren't I kind of taking it out of my kid's mouths if I don't let it grow? So a lot of times people come to that conclusion and the answer intends to be somewhere in the middle. I don't need to lock it down and bury it in the backyard, but I also don't need to throw caution to the wind. So maybe I'll take a sort of mid-range risk position. So I'm still growing it over time. But again, it all comes down to stress testing and understanding those, the possible outcomes of that.
Bob: Well, and it's not just the financial outcomes, but how can you sleep at night and actually enjoy your retirement without worrying about money every day?
Brian: That's right. The pendulum swings both ways, right? You'll have those sleepless nights when we're having scary headlines, but also you'll question yourself when the market is going great guns. Both of those things will happen several times throughout the remainder of your life. So again, just set your course according to what you're comfortable with.
Next question, Don in Montgomery asks, "What's a smarter way that I can plan for long-term care rather than just buying insurance?" What do you think of that, Bob?
Bob: Well, I'd say that Don, you know, obviously not buying insurance, you're self insuring and yeah, there's a lot of ways to do that if you get out in front of it, you know, ahead of time and plan. One way, and Brian talked about this in a prior segment, take full advantage of that health savings account. If you're in a high deductible healthcare plan, you can suck that money away pre-tax, let it grow. Don't spend it every year. Let that stuff stockpile so you've got that $300,000 to $400,000 account built up on a tax-free basis and you've got that sitting there, you know, ready to use when the time comes for healthcare expenses in retirement.
You know, another thing is to set aside a separate account that you're building just for healthcare expenses. And a good way to do that on a tax-efficient way is to, is to have an account separate from your retirement plan, your 401k and IRAs, that is in a tax-efficiently managed portfolio where you can draw that money out for healthcare costs and not jack up your tax exposure when you do it. So those are two thoughts off the top of my head, Brian.
Brian: Yeah, and Bob, I would add on the front end of this, before you even get to those steps, I would understand your situation to begin with. There's a lot of people out there... Well,the headlines are scary, of course, because that makes for good, keeps your eyes on the screen and reading things. But there's a lot of people out there who are going to be able to self-insure. If you're somebody who has made it to retirement with a million, million and a half, maybe, you know, maybe more than that, then that math that has gotten you to that point is going to continue. Your assets are going to continue to grow.
You may be able to self-insure and don't think that when we say you're going to need to spend an extra $100,000 on long-term care, that that's layered on top of all your other expenses. Remember long-term care is a stay in a nursing home. You're not going to the grocery store anymore. You're not going, you're not traveling. You're not doing all those other things. You may have sold the house. The mortgage may be gone. You won't have property taxes, housing expenses. It's not a pure $100,000 layered on top. You may very well be able to fund it without worrying about insurance, but understand your situation to begin with, then worry about whether you need to take steps.
Bob: Well, what you just explained is running some different scenarios based on assumptions so that you're going into this with eyes wide open and you actually have a plan, not just leaving it to chance.
All right, Brian, Michael in Fort Thomas asks, "What's the best way to pass a vacation property to my kids without causing drama?"
Brian: Yeah. This is so first off, Michael, I want to thank you for defending us in Fort Thomas from those people in Fort Wright. I was wonder if they shoot at each other down there, but anyway, a good way to send vacation property to kids, where I would start here, honestly, make sure your kids want that property. I think everybody needs to be open-minded that something that means a lot to you. It may mean a lot to your children, but it may not mean as much if you're not there. If the family truly loves wherever this destination is and they want to go for the memories and all that, then that's fantastic. But it's very often that I hear that somebody inherited something that they just don't value. We remember we loved going there with Mom and Dad, but we've been there our entire lives. Mom and Dad aren't here anymore. So it's just, it just doesn't have the same meaning.
So before you get too wound up in deciding how they're going to own it, make sure your children want to own it in the first place. Bring them into the conversation, determine whether they want that, then you can take appropriate steps. You may find that they say, we love it, we appreciate you taking us here and that's this benefit we've had, but after it's gone, we don't think we'll use it. There's your answer and be okay that you've made them happy. You're going to give them cash by selling it and they can do what they want with it rather than burdening with something that they were being too polite to tell you they didn't want. Have that conversation first.
Bob: I totally agree. I mean, all these complex trusts and all that can be great, but it really comes down to proactive communication with your family, you know, knowing what everybody wants in advance. And that's so key.
All right, Brian, here's another one for you. Vicky in Blue Ash asks, "Should I set up a trust, even if I'm not planning to leave a huge inheritance?"
Brian: Very, very common question, right, Bob? We hear this very frequently. People associate a decent amount of money with, I must have a trust in the mix here. Trusts are rarely bad. That's not the case that I'm going to make here, but they also sometimes can be a sledgehammer to kill a gnat. You know, it really kind of depends. A lot of times you can accomplish what you need to by simply naming your beneficiaries. If you have a simple situation, a couple of kids, maybe, they're adults, they're doing fine on their own and you trust them to make good decisions and it's pretty obvious, you know, who's going to inherit all the money, you may not need a trust just because there's a lot of money involved.
In my mind, trusts come in when there are different concerns, there are moving parts. Perhaps this is a second marriage and there's, you know, the two spouses have their own sets of kids. You have to, you do have to be very careful. That's where you can get some very unexpected outcomes if you don't pay attention to that. But that's a whole show in itself.
But otherwise, just because you have money doesn't mean you have to have a trust. Just make sure you understand what it is that you want. A trusted attorney will advise you. I got to be very careful here. We are not attorneys, but we can kind of share some stories. So, but at the same time, don't assume you must have a trust.
Bob: All right. Coming up next, we hear the bottom line from Brian where he's going to teach us about blending Roth and regular contributions within your 401k plan. You're listening to Simply Money, presented by Allworth Financial on 55 KRC, THE Talk Station.
You're listening to Simply Money, presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, Brian, give us your bottom line.
Brian: So my bottom line here, Bob, I want to talk about something that comes up very frequently when we're sitting with clients and people who are within maybe two, three years of retiring. A lot of times they'll point out that, hey, you know what? I feel like I don't have a lot on the Roth side. I feel like I should have some tax-free stuff. Brian, what do you think? And my answer is usually, look, you didn't make a mistake, right? You probably started your career, if you're looking at retiring right now, you probably started your career back when the only thing you could do in your 401k was pre-tax. And that's what you did. And good job.
So, but people now, nowadays, 401k Roth, I'm not talking Roth IRA. You can also do it inside a 401k, 403b nowadays. That's fairly ubiquitous. It's mostly available over the last five to seven years, it seems like. So people are questioning, I've only got a couple years left. I've got a good pile built up on my pre-tax side, but I really don't have any on the Roth side. What should I do about that? Should I start putting in the Roth?
Well, there's a couple moving parts to that. First off, remember, Roth IRA, Roth 401k or IRA contributions are not deductible. So if you're in a high bracket, which is a good chance of that, because you're in your prime, your peak earning years, you're going to be paying taxes on those dollars, not additional taxes. You just don't get an induction, right? So that would be a downside to it. The other thing I would suggest to think about is if Roth is on your mind, and it really should be for everybody, it may not make sense right now, but it should be on the horizon to at least consider, consider and learn about. What I might suggest is maybe try to start building up some cash somewhere else in a taxable account. And what you might do with this taxable account after you retire, there will be likely a window of time where you have a very low bracket. So you, your spouse have retired, you're not bringing in salaries like you used to because you don't have to anymore. Maybe you're, you can pay the bills with savings for a little while and not even turn on Social Security.
That is a time where you will be in the lowest bracket that you've seen in decades. And that's the time to be thinking about Roth conversions. So now where we're sitting here, two, three, four years out from retirement, it may behoove you to build up some savings in a taxable, not traditional, or not IRA, not pre-tax, not Roth, just a plain old taxable account with which you will pay the taxes on Roth conversions when you reach that point where you're in that low bracket again. So it doesn't have to be contributed now to get you some Roth access. If you plan now, you can trigger that later and in that window of time where things get a little bit cheaper for you, you can do some significant Roth conversions. The window there is when you've started your low income tax years and until you reach your required minimum distribution age, which is either 73 or 75, depending on when you were born. That's my bottom line.
Bob: All right, Brian, and just piggybacking off of that. And I've seen this a few times myself, and I'm sure you have as well. Sometimes very high-earning people in the peak earning years, right before they retire, they hear about Roth 401k and they just automatically gravitate to that. And we got to remind folks that, you know, the Roth 401k works great, you know, putting after tax contributions in, it works better and better the longer runway you have to allow that money to grow. And if you're in a very high tax bracket, we oftentimes tell people just stick with what you're doing. Take the pre-tax approach and then do what you just talked about, you know, set aside that after tax non-retirement plan asset, you know, to do the tax planning with, because if you pay too much taxes, more than you should be, in those very high-earning years, you know, we're kind of working in reverse of what we're trying to do in terms of tax efficiency.
Brian: Yeah, I think that's a great point. It does come up. People question it, but understand the pros and cons of it.
Bob: Thanks for listening. You've been listening to Simply Money, presented by Allworth Financial on 55 KRC, THE Talk Station.