- Why Smart Investors Still Make Rookie Mistakes 0:00
- The Hidden Tax Trap of Mutual Funds 2:25
- Concentrated Stock Positions: Risks & Solutions 5:31
- Estate Planning Essentials: Avoiding Hidden Costs 8:35
- Buffered ETFs Explained: Protection with Flexibility 11:23
- The Retirement Red Zone: Spending in the First 10 Years 19:53
- Why “Set It and Forget It” Fails Over 60 25:49
- How to Freeze Your Credit in 5 Minutes 32:56
The #1 Mistake Even Smart Investors Make — And How to Fix It
On this week's Best of Simply podcast, Bob and Brian uncover the most common mistake even successful savers make with their money — and it’s not what you’d expect. Learn why having multiple accounts without a strategy could be sabotaging your financial future.
They also break down how to manage concentrated stock positions, the role of buffered ETFs in today's volatile markets, and why the first 10 years of retirement spending matter more than you think. Plus, a 5-minute task that could save you thousands in fraud protection. Don't miss these actionable insights to help secure your money now and for years to come!
Download and rate our podcast here.
ob: Tonight, the number one mistake that successful savers and investors make. You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James.
You've done a great job building up that nest egg. You think you've done everything right. So, why are you still making rookie mistakes with your money? The mistake we're talking about, a bad strategy, or perhaps, no strategy at all, Brian.
Brian: Yeah, sometimes, Bob, people accumulate accounts, but not a plan. In other words, "I have stuff, I have a lot of stuff, but I have nowhere to put my stuff. And there's no organization to all my stuff." But I'm going to push back on one word you said in there. I don't think this is a rookie mistake. A rookie mistake, in my opinion, is never having saved all this stuff in the first place.
And we see people every now and then who come in their 50s and say they're ready to start retirement planning. And things don't work that way. You can work around that, but that's not what we're talking about today. What we're talking about today is somebody who has put all that energy in there. They got a 401(k) account, brokerage accounts, investment accounts, some old IRAs, old retirement plans from former employers they've never done anything about, and there's no sense of coordination to it. So, this is not quite a rookie mistake. This is a little bit of...we'll call it a double A, or maybe a triple A mistake.
Bob: Or maybe a football team without a playbook. You might win a few plays, but you're not going to win the long game. And, yeah, I agree with you. Getting that money saved is the real objective. We can always help people recover, but we can't create money out of thin air for people.
Brian: That's right. And it's not only about money, this is about time. Because if you're not making these decisions, you don't have a plan, you're losing time. The saddest thing that I hear every now and then, and, Bob, I'm sure you see this happen occasionally too, you know a lot of times we'll have, you know, maybe a client's kid, or somebody, come in who just hasn't had a sit down to talk about finances. And they'll pull out their old 401(k) or their IRA or something that they set up when they were super young.
Now, they're maybe in their mid-late 20s. And what's the first thing we see, Bob? It was never invested. It's been sitting in some kind of money market fund because they made the assumption that, "All I got to do is throw money into this account and it will magically do a thing." But they've never taken the step to decide how to invest it. Meaning, they've also never learned about the market, so the ups and downs of the markets they have participated in it at all. That's kind of an extreme example, but that's a big thing. That's just an illustration of how we can lose time with these kinds of things. What other examples do you have, Bob.
Bob: Well, a good example is mutual funds. You know, we see a lot of folks come in that have owned, and rightly so, mutual funds for decades. And they've been diligent and saving and investing. And I think they've just missed, a lot of times, the evolution of the financial services industry, I'll say, over the last 10 to 15 years. What do I mean by that? Tax management. Holding mutual funds in a taxable account can be a very tax-efficient way of moving forward, especially when you're trying to convert this into a cash flow.
And, Brian, this is a good time to remind folks that the capital gains rate this year in 2025 for a married, filing, joint couple is 0% if they have taxable income under $96,700. So, there are opportunities there if we can get under the hood and look at the entire situation where we can help people make that gradual conversion from tax-inefficient mutual funds, to more tax efficient ETFs, and save people a lot of money, not only this year, but set up a strategy for down the road that will be much more tax efficient when it comes time to generate income from a portfolio in retirement years.
Brian: Yeah, and I want to make sure that we hit on an important point within there because we're talking about a couple different things, mutual funds and exchange-traded funds and those kinds of things. And some of you may have learned this the hard way over the decades, a mutual fund must, by law, distribute any gains it has in December of every year.
So, worst case scenario, let's say you buy a mutual fund on December 1st, and it sold something earlier in the year. Maybe it's a... Here's an extreme example. If they sold their Apple position or a portion thereof that they've been sitting on for 20 years, that's got a fat, juicy gain in it. And if you didn't own the fund until December 1st of this year, but you own it during December, then you are going to receive a distribution on that fund of that giant, fat, juicy gain, even though you didn't benefit from it.
So, a lot of people out there, you're probably nodding your head going, "Oh, that's why I get that big, stupid 1099 that I didn't see coming." And there's always a big change in December. Mutual funds have to distribute those gains. But a lot of times, you also might be stuck with them because you yourself are in a higher-income situation, therefore, you can't pull the trigger and sell it.
But like Bob was just saying, if you maneuver yourself, and a lot of times this happens, you know, right after retirement, if you've got the ability to maybe give yourself a low-income year after you retire, no more salaries, maybe the income is minimal, best case scenario, you're living off of savings or something, you're literally not in a bracket. You don't pay any taxes because you're not in a bracket. So, that's a great opportunity to pull the trigger and eat some of these capital gains and minimize the taxes as much as possible. And then, move to something more tax-efficient, such as an exchange-traded fund that does not have that capital gain annual requirement.
Bob: Yes, shifting capital gains or Roth conversions or both, it's something to definitely take a look at, you know, during those intervening years between the time you retire and you're in a very low tax bracket, and when those required minimum distributions rear their ugly head at age 73. Brian, here's something else we see all the time, concentrated stock positions. And we know why, you know folks work for a company their whole life. And lo and behold, 60% of your net worth is tied up in one stock. That's not a strategy, that's a potential liability. And the good news is there are a lot of creative solutions out there, direct indexing, charitable giving strategies. Brian, get into some of those things that we like to talk, you know, clients through, and help them with these concentrated stock positions.
Brian: Yeah, we're fortunate to live in an area here, Bob, where there are a lot of Fortune 500 companies that have been very successful. And it's always interesting to me after doing this this job for several decades, you can tell where somebody lives by what they own. Cincinnati people tend to own P&G and Smuckers and some of the other stuff that the P&G has spit out over the years. Fantastic company, but like we always say, sitting on one huge position is much more of a liability than a benefit. So, what can I do about it?
Well, there are some creative solutions out there. Something called direct indexing is a tool that more high-net-worth families are starting to look at because that's a way that you can spread your risks out by owning these individual stocks. And one way to get into that, remember we're talking about a concentrated position, there are things called exchange funds, where you can take your giant position, contribute it to a pooled fund full of other people just like you who also have concentrated positions, and rather than everybody sitting on their one, concentrated position, you all have pulled your big, fat piles of stock, and now, you each own a share of it.
So, it's not going to be a perfect replica of the S&P 500 index, but generally speaking, there it's a pile of pretty well respected companies. That's how people end up with these concentrated positions. That is a way that you can move your money around, reduce the risk of that concentrated position, but you haven't sold anything, you've simply contributed to a different pile in exchange for a share of the larger pile. So, there's also, if you're just worried about the prices... Yeah, Bob, I think you've got some experience with things like collars. Can you tell us a little bit about that.
Bob: Yeah, collars is simply where you have some option trades tied to an individual stock position, where you can protect the downside. You know, they're called put options, where you can buy put protection or insurance on your large stock position, and you can, oftentimes, pay for that protection by selling an out-of-the money call position. So, you limit your upside growth in that stock, but you take that premium, you know, in other words, the premium you took in by selling that call option, and that helps pay for that downside protection. It's a wonderful way to mitigate the huge risk that's inherent in having a ton of your net worth tied up into one company.
And, Brian, going back to those exchange funds, I'm finding that when we talk to folks about this, most people have never even heard of such a thing, much less being aware that it can be done through your financial advisor. That's a real opportunity for people to take a closer look at because it can change the game powerfully from a tax standpoint.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. Brian, let's not forget about a state planning in the midst of all this retirement planning.
Brian: Yeah, so one big thing to remember, and a lot of people, you know, kind of bank on this, what lies behind all of this right now is something called a step up in cost basis. So, yes, if you have a huge gain built into something, and you let you hang on to it until you pass, and your heirs inherit it as part of the settlement of your state, then they will get a step up in cost basis. You might be on the receiving end of this too, those of you listening out there who may have inherited something, where the cost basis, "the purchase price," it's as if you purchased it the day that your benefactor passed away. The date of death prices is what's known as the is the cost basis when you inherit stock.
Now, the other hand, the other side of this is you have to be super careful. If it's a deathbed gift, in other words, at the end of life, somebody hands you a pile of stock, then you have also inherited their cost basis that could go back decades. We see sometimes where stocks have been passed down for, you know, two, maybe even three generations. Nobody has any record, but there was some...you know, at the holidays, everybody gets a pile of stock while you're also getting a very low cost basis with that. So, be very mindful of that and understand what your situation really is.
Also, make sure you have these assets titled correctly. And that means, not only is it in your name, probably is anyway, you're not having this conversation, but where does it go after you pass. The simplest thing that everyone, everybody ought to do, is take all of your individual accounts, and even your joint accounts, and name beneficiaries. I'm talking about not only investments, but also banks. The investments world we call it a TOD, transfer on death. The bank calls it a POD, payable on death. But it's the same thing. You are simply naming beneficiaries so that those assets do not have to pass through probate. All the heirs need to do is produce a death certificate and open accounts in their own names, or if it happens to be an IRA, that's got its own beneficiary on it too, so you'd open an inherited IRA, jump through some of those hoops. But these are things to plan now, not last second.
Bob: We just went through a lot of stuff here quickly. And the thing we want to remind folks, you don't need to go it alone. A good financial plan pulls in investment strategy, it coordinates that with tax planning, estate planning, risk management, everything. And a good, fiduciary advisor should be able to sit down and help you map out an actual plan and an actual strategy. Here's the Allworth advice, wealth without a strategy is just expensive guessing. Get coordinated, get clarity, and get your plan on paper.
Coming up next, if the market drops 10%, would your portfolio be okay? We're going to talk about buffered ETFs, and why they could be a smarter way to ride out the storm. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. And if you think your friends could use some financial advice, tell them about us as well. Just search "Simply Money" on the iHeart app, or wherever you find your podcast.
Straight ahead at 6:43, why the set it and forget it approach might fail you after age 60. All right, tonight, we're going to delve into a strategy that more investors are asking about lately, buffered ETFs. What are they, and why do they even matter, Brian?
Brian: What are they, Bob? Well, at the very core of buffered ETF is an exchange-traded fund, right? So, an exchange-traded fund is a very collective term. It's like saying Kleenex is the word for tissues. An exchange-traded fund does not really tell you anything about what's underneath it. It could be an index fund, it could be a pile of bonds, it could be a whole lot of different things. So, these are very specific types of exchange-traded funds or ETFs that offer some level of downside protection. These are set up to limit your losses to a certain point. You know, the buffer might be 10%, the market goes down 15 %, and my statement is only going to...I will see that it only took a 10% hit. There is a there is a stop to the downside.
Now, of course, you know, there's no free rides here, Bob. There's also a cap to the upside. So, what you're doing is you're setting buffers on the downside and on the upper side. But the benefit of these, though, is that they're exchange-traded funds, they trade all day, every day. So, you're not locking yourself into any kind of time structure, those kinds of things. So, these are for people who are really just kind of looking for in the short-run, you know, maybe I'm about to retire, I'm about to transition, things are going to happen here. Maybe I want to have something in my portfolio to take the stress off that the market may not cooperate when I need it to.
Bob: Yeah, and, you know, in terms of implementing a strategy like this, you know, I know what our folks here at Allworth do, it's not just buying one of these buffered ETFs, it's building a portfolio of them that work together and developing an actual strategy. And I will add this too, this is not a do-it-yourself proposition, in my opinion. These things have different caps, they have, you know, higher fees in a lot of cases. You got to watch the taxes, the tax impact of trading in and out of these things. It can get pretty complicated in a hurry, but it is a very good strategy that does give you a lot of flexibility as opposed to some of the other things out there that people use to mitigate investment risk like indexed annuities, or things like that, which are embedded with, you know, extremely high fees, surrender charges, lock up periods. This is a lot more flexible approach to manage some downside risk in your portfolio.
Brian: Yeah, and we're definitely not saying that everybody should run out and get these. These are things to understand and consider, maybe adding to your portfolio if you happen to check the right boxes. But, you know, in those index-based annuities, we don't think annuities are evil by any stretch of the imagination, they're tools right. A tool is just used for a specific purpose. If you've got the purpose, use the tool. If I got a hammer in my hand, I can build a birdhouse with it, or I can hit somebody in the head. So, these different investment products serve different purposes.
The scary thing about annuities in this case is that they do lock up. You don't have the ability to pull out whenever you might want as opposed to a buffered ETF, which again, they trade all day, every day. So, you could change your position pretty quickly. Now, we're certainly not advocating that you do that because Bob already kind of hinted at it. If you happen to have a gain in one of these, and you go ahead and sell it out, then that's most likely going to be a short-term gain because we're trying to use these to ride out a shorter-term market period, and you build a gain, and that's a short-term gain, which is taxable as income.
Bob: Well, and, Brian, that's why I like these things, again, for certain situations, because of the flexibility that's embedded in this strategy. If we have a change in the economic environment, you know, a big change in interest rates, or tax law, or a market correction, you can adjust on the fly and protect that downside risk, and then, change and adapt the portfolio as economic conditions change, or your personal financial goals, liquidity goals, spending goals might change. So, it's a great strategy because it can it can evolve and adapt to the changing things going on in the economy or with the client's personal situation. Brian, I know you've talked to clients about, you know, buffered ETFs yourself in your practice. Can you give us an example maybe where this has been a good fit for somebody, and where did you use it, you know, with an actual client?
Brian: So, I've been doing this almost three decades now, and in the past, bonds or fixed income were kind of the agreed-upon rudder for the portfolio to keep things on the straight and narrow. But over the past several decades, we've seen bonds move more in the direction of the overall stock market. So, that doesn't mean bonds are bad investment either. But at the same time, this is another alternative where you can put a little bit in there to kind of straighten out the overall ups and downs of the portfolio.
And like I mentioned, the specific scenarios I'm thinking of where we have used this is where, for example, perhaps, let's say, we have two spouses. One spouse makes all the financial decisions. The other spouse is kind of arm's length away, only wants to be involved when he or she has to be. Well, if the financial-deciding spouse passes away, all of a sudden, surviving spouse, you know, unexpectedly, has to get up to speed really, really quick on things, you know. And they may be super nervous about the ups and downs of the market. They need a cycle or two to maybe get used to it. So, that's a case where buffered ETFs can temporarily lessen the stress that that person might be feeling because they don't know the ups and downs of the market.
So, we've used those in those cases because it is a shorter-term scenario, and then, they can get used to kind of dip a toe in the water, get used to the ups and downs, and then, we can talk about whether it continues to be necessary. These are not, and really nothing, nothing is set it and forget about it forever. That's not the case here. These aren't magical things that guarantee upside and no downside. That's not the point. It offsets the stuff that drives the upside because that anything invested in the stock market, of course, is going to have its bumps, and buffered ETFs can smooth it out without forcing you to make a long-term commitment to them.
Bob: You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponsler along with Brian James. Brian, in the example that you cited, which I think is a good one, I think the key here is you were talking to folks that had, you know, maybe limited experience with the ups and downs of the financial markets and the stock market. And I run across people that just...they know they need to earn a positive return on their money that outpaces inflation, but they just do not want to be 60%, 70%, 80% in stocks, which we know is the asset class that outperforms everything else over the long-term. But sometimes people don't care about that. They say, "Look, that's fine, I get it, but I don't want to sit there and watch my portfolio decline by 20 % or 15 % even in the short-term. I want some protection embedded in my portfolio, and that could be a great place for these.
And you brought up bonds. I mean look 2022 was a great example. Historically, you know, the old traditional approach to asset allocation just put a bunch of money in bonds and that'll cushion the blows, so to speak. That did not work so well in 2022 when the Federal Reserve raised interest rates, you know, seven times in one year. Bonds took a hit. Stocks took a hit. A lot of things took a hit. And that's where something like a buffered ETF strategy could have helped people weather that albeit, short-term storm, and had them not in a situation where they're upset or panicking about their portfolio.
Brian: Yeah, so I want to throw out one quick thought because you went started to go down this path of settling for, you know, something that beats inflation versus just trying to grow as much as I can. If I've got a financial plan, then that means I know what I need, and I may not need as much growth as I wanted in my 20s and 30s. If I have a certain rate of growth that makes my plan work, then it's okay to put these things in there to buffer around that. But that means I will not keep up with the overall market and I don't have to.
Bob: Here's the Allworth advice, you don't need to risk everything to grow. There are smarter ways to play defense. Next, we'll show you how to make smart spending moves that secure your financial future in the first 10 years of retirement. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. If you're newly retired, or planning to retire soon, this next segment is for you. Because how you spend in the first 10 years of that retirement period can determine how long your money lasts. And we're talking about something I think a lot of us have heard about or read about. There's been TV commercials about it. The retirement red zone, Brian, what is that?
Brian: Well, Bob, the retirement red zone is that time, that couple of years where you start going, "Ah, pretty soon, I'm going to have to turn on this money machine and make it work for me, so that I can quit getting out of bed when I don't want to anymore." So, this is the most vulnerable stretch of your life. And you're making a transition from saving to spending. And that is a huge mental shift.
Bob, I think that you've seen this too, but a lot of clients really, really struggle with the idea that, "I have to rely on my own savings. I've never done that before." It's a huge psychological hurdle to get over because we all have ground into our heads over decades, "I have got to save, save, save. I cannot touch these dollars. That's not allowed. It's a failure if I tap into my retirement savings." That is a massive hurdle. We all tend to hide behind that in terms of, "I just got to keep working, got to keep working." And some people work well beyond, when they could have retired, because they're too scared to tap into those retirement assets. Again, that's where a written financial plan comes in.
Bob: Well, and there's another risk to all this. We don't see this a ton, but some people, Brian, they retire, and they're not working, maybe they're a little bored, they're looking for something to do, so they're like, "All right, we're going to splurge on some things. Three or four big trips, remodel the kitchen, giving money to kids." And you know what? Before long, they've depleted a lot of money in a very short amount of time. Again, we don't see that a lot, you know, often, but it does happen. And sometimes, we got to talk people off the ledge from doing too much too soon.
Brian: Right. And that's an understandable desire. "I've been working my rear end off. If I'm married, my spouse and I have been, you know, just hitting it so hard. And we're just tired. And we want to celebrate and do some things. And we feel like we've been successful." And that's great. You should do that. And the last person who should be discouraging you from doing that is your financial advisor. However, all of you need to agree on, "This is what we can get away with, but here's what we can't."
And so, that's where a full projection will come into play. In other words, taking a look at what your resources are, which is your streams of income that might be social security, could be pension, maybe there's an inheritance, or some real estate out there, something like that that's spitting out income for you. And then, looking at your piles of assets, these are your IRAs and your investments, you've got piles of money and streams of income. And then, a long discussion about, "What do we actually need this to do?" That's living expenses, the stuff we have to deal with the rest of our lives. That's, perhaps, there's still a mortgage in the mix or you're supporting kids or maybe your own parents or whatever. Let's figure out what these costs are.
Now that we have a combination of the resources and the needs, we can run some projections. And across those projections, we will mix up the rates of return on the market. Because there's something called sequence of returns risk, which simply means that if the market takes a hit early in my retirement, that's going to have a bigger impact than if it happens later. And this is something that happened to a lot of people in 2021 when we went over the cliffs for a little while in 2022.
Bob: Yeah, this sequence of return risk is real and it's counterintuitive. I mean, I was shocked to see the impact of this when I first started to look at this, you know, many years ago. And even very experienced, very intelligent clients have a hard time grasping this at first blush. Because when you're accumulating money, you know, saving money, you really don't care what the year-by-year return is. You care about what the average return is because you're not spending any money from your 401(k).
Once you start to convert this, you know, mass of accumulated wealth into a paycheck, you know, to replace your paycheck, volatility matters. And even if your long-term return is identical to what it was when you were saving and investing, if that return gets volatile in the short-term while you're pulling money out every month or every quarter every year, that money, once it's pulled out, cannot be replaced at all. And that's why you've got to manage this sequence of return risk a lot, what you were starting to talk about in your example of cash flow planning.
Brian: Yeah, a good financial professional, and anybody worth their salt in this industry is going to help you come up with a spending strategy, where everyone agrees upon, "Here's what we need, and here's where we're going to get it from. We're going to hit the Roth IRA first, or maybe we're going to hit the traditional IRA first, or perhaps it's something else entirely, but we have a plan. And if something happens, as life tends to do because God has a sense of humor, so if something zigs when we wanted to zag, well, then we know how we're going to handle that." That lessens the stress a lot and it prevents us from making bad decisions.
Taxes play a massive role in this, Bob, because, you know, obviously, different things get taxed differently. And depending on your own situation, as well as the overall situation we've got in the country, we may want to choose from one account versus another so that we can maximize the efficiency of those taxable distributions.
Bob: Well, and having that first one to two years of spending, one to two years of planned spending completely out of harm's way, you know, in a high-yield savings account or short-term bonds or something like that can help cushion the blow as well, and it's critical that you develop a strategy to get that in place. Here's the Allworth advice, your early retirement year set the pace. Spend smart, and your money will last.
Next, why automated investing can fail you when you need it most. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. You have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right there on the good, old iHeart app. Simply record your question, and it will come straight to us.
Straight ahead, a five minute task that could save you from financial fraud. And the good news, it's totally free. All right, if you're over 60 and still relying on a set it and forget it approach with your investments, we need to talk. Look, target-date funds, auto-rebalancing, and low-maintenance portfolios, Brian, they're all great when you're saving, but once you retire, it can quickly become an entirely different ballgame.
Brian: That's right, Bob. And then, the reason that happens is because now, your money has a different job description. Your pile of money's job description for probably 30, maybe even 40 years, was just to grow, just be a bigger pile. And that's all I need for the first chunk of my life. But now that we've successfully created that pile and transitioned into retirement or are transitioning, now, it's about cash flow. Isn't it, Bob? We need more than just a bigger pile. So, it becomes about, "Which accounts are we going to hit first?" And that triggers certain taxes. Later down the road, you'll be dealing with required minimum distributions, you have to work that in. And certain methods that you follow to simply pay your bills can cause things like Medicare premiums to spike. That's something called IRMAA, which is I-R-M-A-A, is one of these fancy acronyms that everybody learns about once they retire, which simply means that if two years ago I had a bunch of income, then I might see a spike in my Medicare premiums. And that's never a fun thing. Sometimes it's unavoidable, but it's better to see these things coming on the horizon. So, what about Social Security, Bob? You had anybody with any issues they're getting that settled in?
Bob: Well, we always have to run the number. I mean, again, people always ask...you know, and it's human nature, is for as soon as somebody is willing to write you a check every month, you know, the default position is, "Yep, sign me up."
Brian: Give me, give me, give me.
Bob: "I want to take it. Send me that money." But the point you brought up, it's important to run some projections on how that's going to impact your income taxes, your future Medicare premiums, all that kind of stuff. And that's why it's important to do some advanced planning.
And, Brian, I want to get your take on target-date funds. Because we run into a lot of folks that come to us, you know, to hire us to do this kind of planning for them. And, you know, they always come to us, or usually come to us with that default, you know, position in their 401(k) plan, a retirement fund. You and I haven't talked a whole lot and kick this back and forth. I'm interested in your thoughts on the pros and cons of target-date funds, especially, as someone enters these retirement years.
Brian: Now, in contrary to the way we kicked off this segment, I do think there are some times where a set it and forget it approach is okay. If you're a young person and you're just getting started with that 401(k) and it's literally got a few hundred few thousand dollars in it, a target-date fund can be a perfect solution. However, even in this case, if that's what you're looking at, look under the hood, just make sure you know what it owns. So, it may look like a super aggressive fund. It's targeted for 20, 65, 40 years from now. I saw one the other day, Bob, that had 20% bonds in it, and that's not something a 20-year-old needs. Twenty-year-old needs a definitely a set it forget it aggressive approach.
Now, on the other hand, when you're on the back end of this... I like to use a golf analogy here. That 20-year-old is standing on the tee of a 600-yard golf hole, and there is little debate about which club they need to pull out of the bag. The big, fat one that they're going to swing out of their shoes. It's okay. You're going to be in the rough, you know, you'll miss the fairway from time to time, but you can recover. Now, the closer I get to the green when I'm 50-yards, 60-yards out, now I got a choice, "What am I hitting today? Which way is the wind going? Which club do I hate? Which club do I think I have to have confidence in?" You've got to be more specific the closer you get to the goal. And so, that's what we're talking about here. Target-date funds don't deliver on that requires for specificity when I get super close to that goal of mine.
Bob: Yeah, I love that golf analogy because it's hitting pretty close to home. Now, you're talking about my golf game, Brian. I mean I stand out there on the tee with a 500 and some yard par five. I pull out the driver, well-intentioned, but I hit that little 70-yard worm burner and hack it to the left. I got no shot of getting to that green anywhere in regulation, and it puts me behind the eight ball even before I get started. And I think that's a good analogy to use for your, you know, 25-year-old client. So, let's talk about what we do suggest. You know, when we talk about a withdrawal strategy and the coordination and everything we're talking about to get people set up the right way for retirement income.
Brian: Yeah, so I think a lot of this has to do with, "What outcome do I want?" There are some people out there, Bob, who are in a situation where, "You know what? I don't really care about taxes. Maybe I don't have kids, and taxes are going to be what they are. I would rather live my life. I'm not really worried about tax efficiency." And that's an okay, as long as people understand, you know, what is the tax impact of your various decisions going to be. That is an okay outcome. What I would say is not okay is having no idea what's going to happen and just saying, "I really don't care," and throwing caution to the wind and kind of ignoring all of the impacts. But, yeah, some people say, "You know what? I'm not worried about taxation on my requirement of distributions down the road. It's just not important to me."
On the other hand, there are others who will say, "You know what? I just don't trust this government. I feel like taxes are going to go up, and I want to do everything I can to control." So, in that case, you might be a person who chooses to pull your taxation forward. In other words, you know, a lot of times, people will retire in their 60s, and maybe have some savings or some cash set aside they can live off of. And they are sitting on, you know, some years where they are not in a bracket at all. They're literally not paying taxes because there's literally no income, maybe a little bit spit out from a money market fund or something like that. To me, that is not something to be celebrated. That is a missed opportunity because we ought to be filling the 10%, the 22%, maybe even the 24 % bracket with Roth conversions. And that's what I mean when I say pulling taxation forward, not waiting until I'm 73 or 75, when my requirement of distributions come in and I got no choice, but rather, converting, proactively paying taxes now, spending some of that money I've got on the sidelines to buy the tax freedom of my pre-tax dollars before I have to pay the piper.
Bob: Good stuff, Brian. And here's the thing, this doesn't have to be overly complex, it just has to be intentional. You don't need 20 different accounts, but you do need one cohesive plan, and that plan does need to be built to evolve. Because life after 60 isn't static, things change, your money should be flexible enough to change with it.
Here's the Allworth advice, retirement isn't the finish line, it's just the next phase, and your investments need to graduate along with you. Next, one of the simplest and smartest things you can do today to protect yourself and your family. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. Let's talk about something that could literally take you five minutes, but save you thousands of dollars, potentially, and that's freezing your credit. Brian, this is so simple, it's free to do. This is the closest thing to a no brainer. We're probably going to talk about here as far as I know.
Brian: Yeah, freezing your credit simply means, ain't nobody going to open a credit line in your name, including you. So, what this means is you're contacting the various credit bureaus, and you are jumping through their hoops to have your credit frozen, meaning, nobody can apply for anything. Obviously, you don't want to do this right around when you're...if you're going to be, you know, actually needing your credit, you're going to have a mortgage or something like that. But the good thing is, this is not a permanent decision. You're simply freezing it for the time being. You also, of course, have the have the right to unfreeze it when you do need it. But like you said, it is a very, very easy way to protect yourself from somebody stealing your identity.
Bob: Yeah, let's make sure we separate freezing your credit from identity-theft protection, you know, some service that you pay for and subscribe to. And we're not saying, don't do that too. What we're saying is just freezing your credit. If you're in a situation where you just know you're not going to need or want to borrow any money anymore, or for the foreseeable future, this, again, is a no brainer. Because most identity theft starts with a new credit application. Somebody is trying to impersonate you and borrow money in your name. And the credit freeze stops that at the source. No lender can approve your line of credit without your explicit permission to unlock your report. Brian, I've done this personally, you know, for myself, and it's beautiful. It's like putting a padlock on your front door. It doesn't stop people from trying, but it sure does stop them from, you know, getting in.
Brian: Yeah, and I would throw out there, too, don't think just about yourself. Let's not be selfish here. You've got family and other people you worry about. So, if you've got kids out there, then here's a way to kill two birds with one stone. First thing, put them on as authorized users on your credit card. That's going to allow them to start building credit because they're going to inherit your score when they become independent. As soon as you've done that, freeze their credit. Don't just freeze yours, freeze theirs too. Because they have Social Security numbers, they're living beings who can have credit as well, their identities get stolen, too. And because they're not as connected, of course, as the adults in the situation, a lot of times, that can't surface until it's way too late. Kids will find out years later when they're applying for, you know, sometimes student loans or a mortgage down the road, that there's been some debt that's been unpaid forever, and that nobody has any idea what it is. So, that's why it's important to freeze these things.
And, Bob, I would throw out there too, another way that people are stealing identities is by looking at places where you already have some kind of a presence, right? If you're a client of a bank, then you have the ability to do online banking. If you haven't set it up, that means anyone can do it who has the right amount of information for you. I have a lot of clients that'll say, "You know what? I don't trust the Internet. I just don't wanna do these kinds of things." And that's all fine. You don't have to use it, but I would still suggest, set up the online profile because that way, if somebody changes the password, you're gonna get notified on your phone, in the mail, and a lot of different ways versus if you never set it up at all, and you'll never hear that somebody has done that. You can also do that with the federal government. They have a system called ID.me. That is another way that is gonna be right, you know, for people stealing identity. So, own those things. You don't have to use them, but I would definitely own them and get them set up yourself so that you know that you did it.
Bob: Well, and from a practical standpoint... Again, this is easy to do, but you do have to go online to do this. So, there are three credit bureaus out there, Equifax, Experian, and TransUnion. And you do need to take the steps, and it's very quick and it's very free. You got to freeze your credit at each bureau. And, Brian, you know, we talk about the sandwich generation all the time. This is a good 5 to 10 minute exercise that we should sit down with our kids to do, and then, maybe at the same time, or in a follow-up meeting, sit down with our parents and do this.
People sometimes in their 70s or 80s, and for good reason, they don't know what's real and fake out there. We counsel them about identity theft all the time. The last thing somebody in their mid-80s wants to do is sit down, you know, under their own devices by themselves and navigate through these credit bureau websites. This is a good thing to do for our parents and for our kids to just lock everything up at the same time. It's quick and easy to do.
Brian: Yeah, simple steps. There are a lot of things out there that we can do that don't require a whole lot of energy. And this is really an easy one. Pour a cup of coffee and jump on these three websites and go lock your credit and that of those you love.
Bob: Here's the Allworth advice. A credit freeze is one of the easiest, smartest ways to guard your identity. Do it and do it today. Thanks for listening. You've been listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You've done a great job building up that nest egg. You think you've done everything right. So, why are you still making rookie mistakes with your money? The mistake we're talking about, a bad strategy, or perhaps, no strategy at all, Brian.
Brian: Yeah, sometimes, Bob, people accumulate accounts, but not a plan. In other words, "I have stuff, I have a lot of stuff, but I have nowhere to put my stuff. And there's no organization to all my stuff." But I'm going to push back on one word you said in there. I don't think this is a rookie mistake. A rookie mistake, in my opinion, is never having saved all this stuff in the first place.
And we see people every now and then who come in their 50s and say they're ready to start retirement planning. And things don't work that way. You can work around that, but that's not what we're talking about today. What we're talking about today is somebody who has put all that energy in there. They got a 401(k) account, brokerage accounts, investment accounts, some old IRAs, old retirement plans from former employers they've never done anything about, and there's no sense of coordination to it. So, this is not quite a rookie mistake. This is a little bit of...we'll call it a double A, or maybe a triple A mistake.
Bob: Or maybe a football team without a playbook. You might win a few plays, but you're not going to win the long game. And, yeah, I agree with you. Getting that money saved is the real objective. We can always help people recover, but we can't create money out of thin air for people.
Brian: That's right. And it's not only about money, this is about time. Because if you're not making these decisions, you don't have a plan, you're losing time. The saddest thing that I hear every now and then, and, Bob, I'm sure you see this happen occasionally too, you know a lot of times we'll have, you know, maybe a client's kid, or somebody, come in who just hasn't had a sit down to talk about finances. And they'll pull out their old 401(k) or their IRA or something that they set up when they were super young.
Now, they're maybe in their mid-late 20s. And what's the first thing we see, Bob? It was never invested. It's been sitting in some kind of money market fund because they made the assumption that, "All I got to do is throw money into this account and it will magically do a thing." But they've never taken the step to decide how to invest it. Meaning, they've also never learned about the market, so the ups and downs of the markets they have participated in it at all. That's kind of an extreme example, but that's a big thing. That's just an illustration of how we can lose time with these kinds of things. What other examples do you have, Bob.
Bob: Well, a good example is mutual funds. You know, we see a lot of folks come in that have owned, and rightly so, mutual funds for decades. And they've been diligent and saving and investing. And I think they've just missed, a lot of times, the evolution of the financial services industry, I'll say, over the last 10 to 15 years. What do I mean by that? Tax management. Holding mutual funds in a taxable account can be a very tax-efficient way of moving forward, especially when you're trying to convert this into a cash flow.
And, Brian, this is a good time to remind folks that the capital gains rate this year in 2025 for a married, filing, joint couple is 0% if they have taxable income under $96,700. So, there are opportunities there if we can get under the hood and look at the entire situation where we can help people make that gradual conversion from tax-inefficient mutual funds, to more tax efficient ETFs, and save people a lot of money, not only this year, but set up a strategy for down the road that will be much more tax efficient when it comes time to generate income from a portfolio in retirement years.
Brian: Yeah, and I want to make sure that we hit on an important point within there because we're talking about a couple different things, mutual funds and exchange-traded funds and those kinds of things. And some of you may have learned this the hard way over the decades, a mutual fund must, by law, distribute any gains it has in December of every year.
So, worst case scenario, let's say you buy a mutual fund on December 1st, and it sold something earlier in the year. Maybe it's a... Here's an extreme example. If they sold their Apple position or a portion thereof that they've been sitting on for 20 years, that's got a fat, juicy gain in it. And if you didn't own the fund until December 1st of this year, but you own it during December, then you are going to receive a distribution on that fund of that giant, fat, juicy gain, even though you didn't benefit from it.
So, a lot of people out there, you're probably nodding your head going, "Oh, that's why I get that big, stupid 1099 that I didn't see coming." And there's always a big change in December. Mutual funds have to distribute those gains. But a lot of times, you also might be stuck with them because you yourself are in a higher-income situation, therefore, you can't pull the trigger and sell it.
But like Bob was just saying, if you maneuver yourself, and a lot of times this happens, you know, right after retirement, if you've got the ability to maybe give yourself a low-income year after you retire, no more salaries, maybe the income is minimal, best case scenario, you're living off of savings or something, you're literally not in a bracket. You don't pay any taxes because you're not in a bracket. So, that's a great opportunity to pull the trigger and eat some of these capital gains and minimize the taxes as much as possible. And then, move to something more tax-efficient, such as an exchange-traded fund that does not have that capital gain annual requirement.
Bob: Yes, shifting capital gains or Roth conversions or both, it's something to definitely take a look at, you know, during those intervening years between the time you retire and you're in a very low tax bracket, and when those required minimum distributions rear their ugly head at age 73. Brian, here's something else we see all the time, concentrated stock positions. And we know why, you know folks work for a company their whole life. And lo and behold, 60% of your net worth is tied up in one stock. That's not a strategy, that's a potential liability. And the good news is there are a lot of creative solutions out there, direct indexing, charitable giving strategies. Brian, get into some of those things that we like to talk, you know, clients through, and help them with these concentrated stock positions.
Brian: Yeah, we're fortunate to live in an area here, Bob, where there are a lot of Fortune 500 companies that have been very successful. And it's always interesting to me after doing this this job for several decades, you can tell where somebody lives by what they own. Cincinnati people tend to own P&G and Smuckers and some of the other stuff that the P&G has spit out over the years. Fantastic company, but like we always say, sitting on one huge position is much more of a liability than a benefit. So, what can I do about it?
Well, there are some creative solutions out there. Something called direct indexing is a tool that more high-net-worth families are starting to look at because that's a way that you can spread your risks out by owning these individual stocks. And one way to get into that, remember we're talking about a concentrated position, there are things called exchange funds, where you can take your giant position, contribute it to a pooled fund full of other people just like you who also have concentrated positions, and rather than everybody sitting on their one, concentrated position, you all have pulled your big, fat piles of stock, and now, you each own a share of it.
So, it's not going to be a perfect replica of the S&P 500 index, but generally speaking, there it's a pile of pretty well respected companies. That's how people end up with these concentrated positions. That is a way that you can move your money around, reduce the risk of that concentrated position, but you haven't sold anything, you've simply contributed to a different pile in exchange for a share of the larger pile. So, there's also, if you're just worried about the prices... Yeah, Bob, I think you've got some experience with things like collars. Can you tell us a little bit about that.
Bob: Yeah, collars is simply where you have some option trades tied to an individual stock position, where you can protect the downside. You know, they're called put options, where you can buy put protection or insurance on your large stock position, and you can, oftentimes, pay for that protection by selling an out-of-the money call position. So, you limit your upside growth in that stock, but you take that premium, you know, in other words, the premium you took in by selling that call option, and that helps pay for that downside protection. It's a wonderful way to mitigate the huge risk that's inherent in having a ton of your net worth tied up into one company.
And, Brian, going back to those exchange funds, I'm finding that when we talk to folks about this, most people have never even heard of such a thing, much less being aware that it can be done through your financial advisor. That's a real opportunity for people to take a closer look at because it can change the game powerfully from a tax standpoint.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. Brian, let's not forget about a state planning in the midst of all this retirement planning.
Brian: Yeah, so one big thing to remember, and a lot of people, you know, kind of bank on this, what lies behind all of this right now is something called a step up in cost basis. So, yes, if you have a huge gain built into something, and you let you hang on to it until you pass, and your heirs inherit it as part of the settlement of your state, then they will get a step up in cost basis. You might be on the receiving end of this too, those of you listening out there who may have inherited something, where the cost basis, "the purchase price," it's as if you purchased it the day that your benefactor passed away. The date of death prices is what's known as the is the cost basis when you inherit stock.
Now, the other hand, the other side of this is you have to be super careful. If it's a deathbed gift, in other words, at the end of life, somebody hands you a pile of stock, then you have also inherited their cost basis that could go back decades. We see sometimes where stocks have been passed down for, you know, two, maybe even three generations. Nobody has any record, but there was some...you know, at the holidays, everybody gets a pile of stock while you're also getting a very low cost basis with that. So, be very mindful of that and understand what your situation really is.
Also, make sure you have these assets titled correctly. And that means, not only is it in your name, probably is anyway, you're not having this conversation, but where does it go after you pass. The simplest thing that everyone, everybody ought to do, is take all of your individual accounts, and even your joint accounts, and name beneficiaries. I'm talking about not only investments, but also banks. The investments world we call it a TOD, transfer on death. The bank calls it a POD, payable on death. But it's the same thing. You are simply naming beneficiaries so that those assets do not have to pass through probate. All the heirs need to do is produce a death certificate and open accounts in their own names, or if it happens to be an IRA, that's got its own beneficiary on it too, so you'd open an inherited IRA, jump through some of those hoops. But these are things to plan now, not last second.
Bob: We just went through a lot of stuff here quickly. And the thing we want to remind folks, you don't need to go it alone. A good financial plan pulls in investment strategy, it coordinates that with tax planning, estate planning, risk management, everything. And a good, fiduciary advisor should be able to sit down and help you map out an actual plan and an actual strategy. Here's the Allworth advice, wealth without a strategy is just expensive guessing. Get coordinated, get clarity, and get your plan on paper.
Coming up next, if the market drops 10%, would your portfolio be okay? We're going to talk about buffered ETFs, and why they could be a smarter way to ride out the storm. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. And if you think your friends could use some financial advice, tell them about us as well. Just search "Simply Money" on the iHeart app, or wherever you find your podcast.
Straight ahead at 6:43, why the set it and forget it approach might fail you after age 60. All right, tonight, we're going to delve into a strategy that more investors are asking about lately, buffered ETFs. What are they, and why do they even matter, Brian?
Brian: What are they, Bob? Well, at the very core of buffered ETF is an exchange-traded fund, right? So, an exchange-traded fund is a very collective term. It's like saying Kleenex is the word for tissues. An exchange-traded fund does not really tell you anything about what's underneath it. It could be an index fund, it could be a pile of bonds, it could be a whole lot of different things. So, these are very specific types of exchange-traded funds or ETFs that offer some level of downside protection. These are set up to limit your losses to a certain point. You know, the buffer might be 10%, the market goes down 15 %, and my statement is only going to...I will see that it only took a 10% hit. There is a there is a stop to the downside.
Now, of course, you know, there's no free rides here, Bob. There's also a cap to the upside. So, what you're doing is you're setting buffers on the downside and on the upper side. But the benefit of these, though, is that they're exchange-traded funds, they trade all day, every day. So, you're not locking yourself into any kind of time structure, those kinds of things. So, these are for people who are really just kind of looking for in the short-run, you know, maybe I'm about to retire, I'm about to transition, things are going to happen here. Maybe I want to have something in my portfolio to take the stress off that the market may not cooperate when I need it to.
Bob: Yeah, and, you know, in terms of implementing a strategy like this, you know, I know what our folks here at Allworth do, it's not just buying one of these buffered ETFs, it's building a portfolio of them that work together and developing an actual strategy. And I will add this too, this is not a do-it-yourself proposition, in my opinion. These things have different caps, they have, you know, higher fees in a lot of cases. You got to watch the taxes, the tax impact of trading in and out of these things. It can get pretty complicated in a hurry, but it is a very good strategy that does give you a lot of flexibility as opposed to some of the other things out there that people use to mitigate investment risk like indexed annuities, or things like that, which are embedded with, you know, extremely high fees, surrender charges, lock up periods. This is a lot more flexible approach to manage some downside risk in your portfolio.
Brian: Yeah, and we're definitely not saying that everybody should run out and get these. These are things to understand and consider, maybe adding to your portfolio if you happen to check the right boxes. But, you know, in those index-based annuities, we don't think annuities are evil by any stretch of the imagination, they're tools right. A tool is just used for a specific purpose. If you've got the purpose, use the tool. If I got a hammer in my hand, I can build a birdhouse with it, or I can hit somebody in the head. So, these different investment products serve different purposes.
The scary thing about annuities in this case is that they do lock up. You don't have the ability to pull out whenever you might want as opposed to a buffered ETF, which again, they trade all day, every day. So, you could change your position pretty quickly. Now, we're certainly not advocating that you do that because Bob already kind of hinted at it. If you happen to have a gain in one of these, and you go ahead and sell it out, then that's most likely going to be a short-term gain because we're trying to use these to ride out a shorter-term market period, and you build a gain, and that's a short-term gain, which is taxable as income.
Bob: Well, and, Brian, that's why I like these things, again, for certain situations, because of the flexibility that's embedded in this strategy. If we have a change in the economic environment, you know, a big change in interest rates, or tax law, or a market correction, you can adjust on the fly and protect that downside risk, and then, change and adapt the portfolio as economic conditions change, or your personal financial goals, liquidity goals, spending goals might change. So, it's a great strategy because it can it can evolve and adapt to the changing things going on in the economy or with the client's personal situation. Brian, I know you've talked to clients about, you know, buffered ETFs yourself in your practice. Can you give us an example maybe where this has been a good fit for somebody, and where did you use it, you know, with an actual client?
Brian: So, I've been doing this almost three decades now, and in the past, bonds or fixed income were kind of the agreed-upon rudder for the portfolio to keep things on the straight and narrow. But over the past several decades, we've seen bonds move more in the direction of the overall stock market. So, that doesn't mean bonds are bad investment either. But at the same time, this is another alternative where you can put a little bit in there to kind of straighten out the overall ups and downs of the portfolio.
And like I mentioned, the specific scenarios I'm thinking of where we have used this is where, for example, perhaps, let's say, we have two spouses. One spouse makes all the financial decisions. The other spouse is kind of arm's length away, only wants to be involved when he or she has to be. Well, if the financial-deciding spouse passes away, all of a sudden, surviving spouse, you know, unexpectedly, has to get up to speed really, really quick on things, you know. And they may be super nervous about the ups and downs of the market. They need a cycle or two to maybe get used to it. So, that's a case where buffered ETFs can temporarily lessen the stress that that person might be feeling because they don't know the ups and downs of the market.
So, we've used those in those cases because it is a shorter-term scenario, and then, they can get used to kind of dip a toe in the water, get used to the ups and downs, and then, we can talk about whether it continues to be necessary. These are not, and really nothing, nothing is set it and forget about it forever. That's not the case here. These aren't magical things that guarantee upside and no downside. That's not the point. It offsets the stuff that drives the upside because that anything invested in the stock market, of course, is going to have its bumps, and buffered ETFs can smooth it out without forcing you to make a long-term commitment to them.
Bob: You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponsler along with Brian James. Brian, in the example that you cited, which I think is a good one, I think the key here is you were talking to folks that had, you know, maybe limited experience with the ups and downs of the financial markets and the stock market. And I run across people that just...they know they need to earn a positive return on their money that outpaces inflation, but they just do not want to be 60%, 70%, 80% in stocks, which we know is the asset class that outperforms everything else over the long-term. But sometimes people don't care about that. They say, "Look, that's fine, I get it, but I don't want to sit there and watch my portfolio decline by 20 % or 15 % even in the short-term. I want some protection embedded in my portfolio, and that could be a great place for these.
And you brought up bonds. I mean look 2022 was a great example. Historically, you know, the old traditional approach to asset allocation just put a bunch of money in bonds and that'll cushion the blows, so to speak. That did not work so well in 2022 when the Federal Reserve raised interest rates, you know, seven times in one year. Bonds took a hit. Stocks took a hit. A lot of things took a hit. And that's where something like a buffered ETF strategy could have helped people weather that albeit, short-term storm, and had them not in a situation where they're upset or panicking about their portfolio.
Brian: Yeah, so I want to throw out one quick thought because you went started to go down this path of settling for, you know, something that beats inflation versus just trying to grow as much as I can. If I've got a financial plan, then that means I know what I need, and I may not need as much growth as I wanted in my 20s and 30s. If I have a certain rate of growth that makes my plan work, then it's okay to put these things in there to buffer around that. But that means I will not keep up with the overall market and I don't have to.
Bob: Here's the Allworth advice, you don't need to risk everything to grow. There are smarter ways to play defense. Next, we'll show you how to make smart spending moves that secure your financial future in the first 10 years of retirement. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. If you're newly retired, or planning to retire soon, this next segment is for you. Because how you spend in the first 10 years of that retirement period can determine how long your money lasts. And we're talking about something I think a lot of us have heard about or read about. There's been TV commercials about it. The retirement red zone, Brian, what is that?
Brian: Well, Bob, the retirement red zone is that time, that couple of years where you start going, "Ah, pretty soon, I'm going to have to turn on this money machine and make it work for me, so that I can quit getting out of bed when I don't want to anymore." So, this is the most vulnerable stretch of your life. And you're making a transition from saving to spending. And that is a huge mental shift.
Bob, I think that you've seen this too, but a lot of clients really, really struggle with the idea that, "I have to rely on my own savings. I've never done that before." It's a huge psychological hurdle to get over because we all have ground into our heads over decades, "I have got to save, save, save. I cannot touch these dollars. That's not allowed. It's a failure if I tap into my retirement savings." That is a massive hurdle. We all tend to hide behind that in terms of, "I just got to keep working, got to keep working." And some people work well beyond, when they could have retired, because they're too scared to tap into those retirement assets. Again, that's where a written financial plan comes in.
Bob: Well, and there's another risk to all this. We don't see this a ton, but some people, Brian, they retire, and they're not working, maybe they're a little bored, they're looking for something to do, so they're like, "All right, we're going to splurge on some things. Three or four big trips, remodel the kitchen, giving money to kids." And you know what? Before long, they've depleted a lot of money in a very short amount of time. Again, we don't see that a lot, you know, often, but it does happen. And sometimes, we got to talk people off the ledge from doing too much too soon.
Brian: Right. And that's an understandable desire. "I've been working my rear end off. If I'm married, my spouse and I have been, you know, just hitting it so hard. And we're just tired. And we want to celebrate and do some things. And we feel like we've been successful." And that's great. You should do that. And the last person who should be discouraging you from doing that is your financial advisor. However, all of you need to agree on, "This is what we can get away with, but here's what we can't."
And so, that's where a full projection will come into play. In other words, taking a look at what your resources are, which is your streams of income that might be social security, could be pension, maybe there's an inheritance, or some real estate out there, something like that that's spitting out income for you. And then, looking at your piles of assets, these are your IRAs and your investments, you've got piles of money and streams of income. And then, a long discussion about, "What do we actually need this to do?" That's living expenses, the stuff we have to deal with the rest of our lives. That's, perhaps, there's still a mortgage in the mix or you're supporting kids or maybe your own parents or whatever. Let's figure out what these costs are.
Now that we have a combination of the resources and the needs, we can run some projections. And across those projections, we will mix up the rates of return on the market. Because there's something called sequence of returns risk, which simply means that if the market takes a hit early in my retirement, that's going to have a bigger impact than if it happens later. And this is something that happened to a lot of people in 2021 when we went over the cliffs for a little while in 2022.
Bob: Yeah, this sequence of return risk is real and it's counterintuitive. I mean, I was shocked to see the impact of this when I first started to look at this, you know, many years ago. And even very experienced, very intelligent clients have a hard time grasping this at first blush. Because when you're accumulating money, you know, saving money, you really don't care what the year-by-year return is. You care about what the average return is because you're not spending any money from your 401(k).
Once you start to convert this, you know, mass of accumulated wealth into a paycheck, you know, to replace your paycheck, volatility matters. And even if your long-term return is identical to what it was when you were saving and investing, if that return gets volatile in the short-term while you're pulling money out every month or every quarter every year, that money, once it's pulled out, cannot be replaced at all. And that's why you've got to manage this sequence of return risk a lot, what you were starting to talk about in your example of cash flow planning.
Brian: Yeah, a good financial professional, and anybody worth their salt in this industry is going to help you come up with a spending strategy, where everyone agrees upon, "Here's what we need, and here's where we're going to get it from. We're going to hit the Roth IRA first, or maybe we're going to hit the traditional IRA first, or perhaps it's something else entirely, but we have a plan. And if something happens, as life tends to do because God has a sense of humor, so if something zigs when we wanted to zag, well, then we know how we're going to handle that." That lessens the stress a lot and it prevents us from making bad decisions.
Taxes play a massive role in this, Bob, because, you know, obviously, different things get taxed differently. And depending on your own situation, as well as the overall situation we've got in the country, we may want to choose from one account versus another so that we can maximize the efficiency of those taxable distributions.
Bob: Well, and having that first one to two years of spending, one to two years of planned spending completely out of harm's way, you know, in a high-yield savings account or short-term bonds or something like that can help cushion the blow as well, and it's critical that you develop a strategy to get that in place. Here's the Allworth advice, your early retirement year set the pace. Spend smart, and your money will last.
Next, why automated investing can fail you when you need it most. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. You have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right there on the good, old iHeart app. Simply record your question, and it will come straight to us.
Straight ahead, a five minute task that could save you from financial fraud. And the good news, it's totally free. All right, if you're over 60 and still relying on a set it and forget it approach with your investments, we need to talk. Look, target-date funds, auto-rebalancing, and low-maintenance portfolios, Brian, they're all great when you're saving, but once you retire, it can quickly become an entirely different ballgame.
Brian: That's right, Bob. And then, the reason that happens is because now, your money has a different job description. Your pile of money's job description for probably 30, maybe even 40 years, was just to grow, just be a bigger pile. And that's all I need for the first chunk of my life. But now that we've successfully created that pile and transitioned into retirement or are transitioning, now, it's about cash flow. Isn't it, Bob? We need more than just a bigger pile. So, it becomes about, "Which accounts are we going to hit first?" And that triggers certain taxes. Later down the road, you'll be dealing with required minimum distributions, you have to work that in. And certain methods that you follow to simply pay your bills can cause things like Medicare premiums to spike. That's something called IRMAA, which is I-R-M-A-A, is one of these fancy acronyms that everybody learns about once they retire, which simply means that if two years ago I had a bunch of income, then I might see a spike in my Medicare premiums. And that's never a fun thing. Sometimes it's unavoidable, but it's better to see these things coming on the horizon. So, what about Social Security, Bob? You had anybody with any issues they're getting that settled in?
Bob: Well, we always have to run the number. I mean, again, people always ask...you know, and it's human nature, is for as soon as somebody is willing to write you a check every month, you know, the default position is, "Yep, sign me up."
Brian: Give me, give me, give me.
Bob: "I want to take it. Send me that money." But the point you brought up, it's important to run some projections on how that's going to impact your income taxes, your future Medicare premiums, all that kind of stuff. And that's why it's important to do some advanced planning.
And, Brian, I want to get your take on target-date funds. Because we run into a lot of folks that come to us, you know, to hire us to do this kind of planning for them. And, you know, they always come to us, or usually come to us with that default, you know, position in their 401(k) plan, a retirement fund. You and I haven't talked a whole lot and kick this back and forth. I'm interested in your thoughts on the pros and cons of target-date funds, especially, as someone enters these retirement years.
Brian: Now, in contrary to the way we kicked off this segment, I do think there are some times where a set it and forget it approach is okay. If you're a young person and you're just getting started with that 401(k) and it's literally got a few hundred few thousand dollars in it, a target-date fund can be a perfect solution. However, even in this case, if that's what you're looking at, look under the hood, just make sure you know what it owns. So, it may look like a super aggressive fund. It's targeted for 20, 65, 40 years from now. I saw one the other day, Bob, that had 20% bonds in it, and that's not something a 20-year-old needs. Twenty-year-old needs a definitely a set it forget it aggressive approach.
Now, on the other hand, when you're on the back end of this... I like to use a golf analogy here. That 20-year-old is standing on the tee of a 600-yard golf hole, and there is little debate about which club they need to pull out of the bag. The big, fat one that they're going to swing out of their shoes. It's okay. You're going to be in the rough, you know, you'll miss the fairway from time to time, but you can recover. Now, the closer I get to the green when I'm 50-yards, 60-yards out, now I got a choice, "What am I hitting today? Which way is the wind going? Which club do I hate? Which club do I think I have to have confidence in?" You've got to be more specific the closer you get to the goal. And so, that's what we're talking about here. Target-date funds don't deliver on that requires for specificity when I get super close to that goal of mine.
Bob: Yeah, I love that golf analogy because it's hitting pretty close to home. Now, you're talking about my golf game, Brian. I mean I stand out there on the tee with a 500 and some yard par five. I pull out the driver, well-intentioned, but I hit that little 70-yard worm burner and hack it to the left. I got no shot of getting to that green anywhere in regulation, and it puts me behind the eight ball even before I get started. And I think that's a good analogy to use for your, you know, 25-year-old client. So, let's talk about what we do suggest. You know, when we talk about a withdrawal strategy and the coordination and everything we're talking about to get people set up the right way for retirement income.
Brian: Yeah, so I think a lot of this has to do with, "What outcome do I want?" There are some people out there, Bob, who are in a situation where, "You know what? I don't really care about taxes. Maybe I don't have kids, and taxes are going to be what they are. I would rather live my life. I'm not really worried about tax efficiency." And that's an okay, as long as people understand, you know, what is the tax impact of your various decisions going to be. That is an okay outcome. What I would say is not okay is having no idea what's going to happen and just saying, "I really don't care," and throwing caution to the wind and kind of ignoring all of the impacts. But, yeah, some people say, "You know what? I'm not worried about taxation on my requirement of distributions down the road. It's just not important to me."
On the other hand, there are others who will say, "You know what? I just don't trust this government. I feel like taxes are going to go up, and I want to do everything I can to control." So, in that case, you might be a person who chooses to pull your taxation forward. In other words, you know, a lot of times, people will retire in their 60s, and maybe have some savings or some cash set aside they can live off of. And they are sitting on, you know, some years where they are not in a bracket at all. They're literally not paying taxes because there's literally no income, maybe a little bit spit out from a money market fund or something like that. To me, that is not something to be celebrated. That is a missed opportunity because we ought to be filling the 10%, the 22%, maybe even the 24 % bracket with Roth conversions. And that's what I mean when I say pulling taxation forward, not waiting until I'm 73 or 75, when my requirement of distributions come in and I got no choice, but rather, converting, proactively paying taxes now, spending some of that money I've got on the sidelines to buy the tax freedom of my pre-tax dollars before I have to pay the piper.
Bob: Good stuff, Brian. And here's the thing, this doesn't have to be overly complex, it just has to be intentional. You don't need 20 different accounts, but you do need one cohesive plan, and that plan does need to be built to evolve. Because life after 60 isn't static, things change, your money should be flexible enough to change with it.
Here's the Allworth advice, retirement isn't the finish line, it's just the next phase, and your investments need to graduate along with you. Next, one of the simplest and smartest things you can do today to protect yourself and your family. You're listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money" presented by "Allworth Financial". I'm Bob Sponseller along with Brian James. Let's talk about something that could literally take you five minutes, but save you thousands of dollars, potentially, and that's freezing your credit. Brian, this is so simple, it's free to do. This is the closest thing to a no brainer. We're probably going to talk about here as far as I know.
Brian: Yeah, freezing your credit simply means, ain't nobody going to open a credit line in your name, including you. So, what this means is you're contacting the various credit bureaus, and you are jumping through their hoops to have your credit frozen, meaning, nobody can apply for anything. Obviously, you don't want to do this right around when you're...if you're going to be, you know, actually needing your credit, you're going to have a mortgage or something like that. But the good thing is, this is not a permanent decision. You're simply freezing it for the time being. You also, of course, have the have the right to unfreeze it when you do need it. But like you said, it is a very, very easy way to protect yourself from somebody stealing your identity.
Bob: Yeah, let's make sure we separate freezing your credit from identity-theft protection, you know, some service that you pay for and subscribe to. And we're not saying, don't do that too. What we're saying is just freezing your credit. If you're in a situation where you just know you're not going to need or want to borrow any money anymore, or for the foreseeable future, this, again, is a no brainer. Because most identity theft starts with a new credit application. Somebody is trying to impersonate you and borrow money in your name. And the credit freeze stops that at the source. No lender can approve your line of credit without your explicit permission to unlock your report. Brian, I've done this personally, you know, for myself, and it's beautiful. It's like putting a padlock on your front door. It doesn't stop people from trying, but it sure does stop them from, you know, getting in.
Brian: Yeah, and I would throw out there, too, don't think just about yourself. Let's not be selfish here. You've got family and other people you worry about. So, if you've got kids out there, then here's a way to kill two birds with one stone. First thing, put them on as authorized users on your credit card. That's going to allow them to start building credit because they're going to inherit your score when they become independent. As soon as you've done that, freeze their credit. Don't just freeze yours, freeze theirs too. Because they have Social Security numbers, they're living beings who can have credit as well, their identities get stolen, too. And because they're not as connected, of course, as the adults in the situation, a lot of times, that can't surface until it's way too late. Kids will find out years later when they're applying for, you know, sometimes student loans or a mortgage down the road, that there's been some debt that's been unpaid forever, and that nobody has any idea what it is. So, that's why it's important to freeze these things.
And, Bob, I would throw out there too, another way that people are stealing identities is by looking at places where you already have some kind of a presence, right? If you're a client of a bank, then you have the ability to do online banking. If you haven't set it up, that means anyone can do it who has the right amount of information for you. I have a lot of clients that'll say, "You know what? I don't trust the Internet. I just don't wanna do these kinds of things." And that's all fine. You don't have to use it, but I would still suggest, set up the online profile because that way, if somebody changes the password, you're gonna get notified on your phone, in the mail, and a lot of different ways versus if you never set it up at all, and you'll never hear that somebody has done that. You can also do that with the federal government. They have a system called ID.me. That is another way that is gonna be right, you know, for people stealing identity. So, own those things. You don't have to use them, but I would definitely own them and get them set up yourself so that you know that you did it.
Bob: Well, and from a practical standpoint... Again, this is easy to do, but you do have to go online to do this. So, there are three credit bureaus out there, Equifax, Experian, and TransUnion. And you do need to take the steps, and it's very quick and it's very free. You got to freeze your credit at each bureau. And, Brian, you know, we talk about the sandwich generation all the time. This is a good 5 to 10 minute exercise that we should sit down with our kids to do, and then, maybe at the same time, or in a follow-up meeting, sit down with our parents and do this.
People sometimes in their 70s or 80s, and for good reason, they don't know what's real and fake out there. We counsel them about identity theft all the time. The last thing somebody in their mid-80s wants to do is sit down, you know, under their own devices by themselves and navigate through these credit bureau websites. This is a good thing to do for our parents and for our kids to just lock everything up at the same time. It's quick and easy to do.
Brian: Yeah, simple steps. There are a lot of things out there that we can do that don't require a whole lot of energy. And this is really an easy one. Pour a cup of coffee and jump on these three websites and go lock your credit and that of those you love.
Bob: Here's the Allworth advice. A credit freeze is one of the easiest, smartest ways to guard your identity. Do it and do it today. Thanks for listening. You've been listening to "Simply Money" presented by "Allworth Financial" on 55KRC THE Talk Station.