Steve: Tonight, what the latest job report says about the state of the economy plus why ChatGPT is not the guide you want on your road to financial independence. You're listening to Simply Money presented by Allworth Financial. I'm Steve Hruby along with Brian James who's in for Steve Sprovach tonight. We have a great show planned for you. It's chock full of good financial lessons. Let's start with the state of the economy. Allworth Chief Investment Officer Andy Stout joins us as he does every Monday. Andy, last week the Fed did not hike interest rates. Do you believe they're done?

Andy: It seems more likely than not that they are finished and we can look at where the market expects the what's called the Fed Funds Rate. That's interest rate the Fed controls where to be over the next few months, few quarters and the market's pricing in no more rate hikes and actually has about four cuts, four quarter-point rate cuts priced in between now and January of 2025 so basically the next year and two months. Now, when you look at the Fed's meeting from last week, it's certainly suggested that they want to be finished hiking and that's why the market is pricing things in the way it is in terms of no more hikes.

Brian: Andy, does it mean something that the market is kind of doing the Fed's job for it, right? So the Federal Reserve has decided, seems to have decided at least for now, not to hike anymore, but we've still seen the market forces kind of keeping rates high. So does that normally happen this time of the cycle? Does that mean something beyond what we're thinking it does?

Andy: Yeah, the Fed noted that when they were talking about the tighter financial conditions, which means higher interest rates like a 10-year Treasury bond, mortgage rates being higher. So all of these things help the Fed in terms of bringing down inflation from the overall economic standpoint. So the Fed appreciates this and it does suggest that, you know, that the higher market rates are slowing down the economy, slowing down inflation, slowing down consumer spending, which all makes sense, right? Because if you have higher interest rates, it costs more to borrow and you're not going to borrow as much because you only have so much you can pay out in total interest and, you know, principal payments. So it does make sense that it is doing, you know some of the work for the Fed and it should help the Fed, you know, stay on that track of pausing and that's what the Fed talked about at the press conference and that's what they talked about in their official statement. So we'll see how it all plays out. I mean, there's always risks on either side of the coin. I mean, you could see inflation flare back up. It seems unlikely. The trajectory does appear to be to continue to drop but we're still not quite yet at that target 2% inflation rate that the Fed desires.

Steve: So, Andy, last week on Friday, the jobs report showed that unemployment rate ticked up a notch. Is this one of those bad news is good news type things that we used to focus on?

Andy: That's exactly what it is. If you look at the unemployment rate going from 3.8% to 3.9%, you might say that's not a big difference. It only went up 0.1%. But it is higher than the trough that we had a few months ago at 3.4%. So if you look at the trajectory going from 3.4% to 3.9%, we are definitely seeing a trend here. It's not just two data points. We're seeing it month over month over month, we're seeing slow increases. And when you look at the increase last month specifically, it increased for all the wrong reasons, at least from an economic perspective. So specifically, the items that feed into the unemployment rate, you have the labor force, unfortunately, it decreased. Not a good thing. You have the number of people employed that also decreased. Not a good thing. And you have the number of unemployed people increasing. Again, not a good thing. So essentially we're 0 for 3 in terms of what moves the unemployment rate. Now, that's a whole good news is bad news, bad news is good news because markets did really well last Friday in spite of that pretty weak report when it comes to the unemployment rate and that's because, well, that means the Fed may not have to raise rates so it just reinforces that view of what the Federal Reserve might do, and more specifically, that they're on pause.

Steve: So that's interesting, Andy, because it seems like we have like a sort of a difference of opinion between the economy and the unemployment rate, right? The economy is capable currently of generating the creation of new jobs. Maybe not exactly how many we want, but we're still positive there. But we're still having trouble filling them. Is there, do you see that continuing?

Andy: Yes, I do. I mean, there's quite a few things going on in the job market. So besides the unemployment rate from last Friday, we also got what's called payrolls or how many jobs employers added and employers added 150,000 jobs. That's less than the 180,000 that economists were looking for but we also had a revision lower to the prior two months by 101,000. So we netted just 49,000 jobs last month. So that's not necessarily a strong number anyway you look at it.

Now, job openings, we got that update as well. That actually did increase a little bit to about 9.5 million. But the reason it increased was because lower-skilled jobs became more available. We saw a decrease in the higher skilled jobs like business services and health care. So not exactly, you know, what you wanted to see from that perspective. Now, in terms of another area of the job market, it's called jobless claims of people filing for unemployment benefits, first-time filers, it's still low. I mean, they're still really low. We've been around 200,000 for the past few weeks. Last week came in at 217,000. But what's diverging is continuing claims.

So initial jobless claims, that's first-time filers, very low. Continuing claims, it's creeping up higher and higher. Really over the past month and a half we've seen the market move higher to 1.8 million. That suggests that people are having a more challenging time finding work than what they had been in the past and that's also reinforced with the quit rate, which is at 2.3%. That's a pretty low number and that suggests workers aren't confident that they're going to find new jobs at a higher pay so they're not quitting as much as they have been. So when you look at this altogether, it shows that there are cracks in the economy on the labor side specifically. And that's a concern longer term because people need jobs to pay for things and consumer spending is 70% of the U.S. economy.

Steve: You're listening to Simply Money presented by Allworth Financial on 55KRC. And today we have Chief Investment Officer Andy Stout giving us an update on economic news. Andy, I want to pivot for a moment and talk about what's been going on with something called the 10-year yield. Can you explain to us what that is and what it means for investors?

Andy: So the 10-year yield is the interest rate you would receive for buying a Treasury bond, which is a bond issued by the United States government that matures in 10 years, and it's often closely tied with longer term economic growth but it also has to do with what's going on on the short-term interest rates and what the Fed might do as well because, in theory, I don't want to go in the weeds here, but a 10-year bond would be equal to, you know, a one-year bond bought nine times over after it matures, so a one-year bond to the next year, the next year. So it's a bunch of short-term bonds and those short-term bonds have what the Fed Funds Rate or what the Federal Reserve is actually doing.

And so when you look at what's been going on in the interest rate market, it's certainly been volatile. There's no question about that. I mean if you look at just what the 10-year has done over the course of this year, then also, you know, what it has done over the course of just last week, you know, you're seeing multiple narratives play out all at once. So just last week, prior to the Fed meeting, the 10-year got as high as 4.9%. And I say prior to, I'm talking about the meeting concluded at 2 p.m. Eastern time, talking about like, you know, 1:55 p.m. Eastern time we were about 4.9%. And then from that time on Wednesday to the close on Friday, it dropped to 4.57. That's for some context. That's a big, big drop, okay, in just a very short period of time.

Now, I will say though for this year, the trend has been higher and that hasn't been too pleasant for bond holders. So if you look at, you know, where we were to start the year at, the 10-year Treasury, it was around like 3.9%, somewhere around there. It got as low as about 3.3% in April-ish. So from April, 3.3, it got up to 5% a few weeks ago and even just last Wednesday, it was 4.9. So we went from 3.3% to 5% really over the course of about six months and that's a pretty rapid move. Now remember, bond prices and interest rates move in opposite directions so as interest rate rose, bond prices go down and that was not necessarily too pleasing for some bond investors out there, which is understandable. But when you look at longer term expected returns, bonds are, you know, more attractive now than they have been because the interest rate level is a strong predictor of where future bond returns lie and so we have a higher interest rates now. So if you're buying bonds now, you should have a higher expected rate of return.

Steve: Andy, so one of the things that I run across talking to my clients during the financial planning process, whenever we talk about the 10-year yield, it's usually because they're talking, that particular client is talking to a mortgage lender. Mortgage lenders frequently cite the 10-year yield as something to pay attention to in terms of where mortgages go. And a lot of my clients are thinking about themselves. Maybe they've got, maybe they need to move for work purposes or they're worried about their kids who are just getting started and getting these crazy mortgages at really high rates. When do you think the Fed might start cutting rates so that those transactions might get a little easier or at least a little less terrifying?

Andy: Well, it's really tricky to say when they'll cut rates. The market expects the Fed to cut rates early next year. There's a quarter-point rate hike priced in April is when the first one is expected by the market. Whether or not that plays out will certainly depend on how inflation evolves and how the broad economy evolves. I mean if we see a slow down in the economy more pronounced than what, you know, many people expect, you could see those rates come down a lot more quickly. Now, you know, if we do see a slow down in the economy, typically that means a recession. Typically that means some people lose their jobs. So even if you were thinking about getting a mortgage rate, you know, let's hope you still have your job because otherwise you probably won't be looking to buy a home.

Now, in terms of, you know, bigger picture, I mean we're talking a quarter point or half point. That's not really going to move the needle too much when you have a mortgage rate at 8%. Right? So it's already really high. It needs to get meaningfully lower, excuse me, before it really pushes the needle. Also, we're just, you know, operating on the margins. So when that might happen, I think, that's, you know, when you do get signs of a clearer slow down in the broad economy. And in that case, you would see more than just three or four quarter-point rate cuts. You would see rates come down maybe, you know, a full 2 percentage points. That wouldn't surprise me at all. I don't think the Fed will take it too much lower, depending on how severe a slow down is just because they are worried about inflation rearing back up. Because when everybody thinks about inflation periods of history, you usually think back to the early '80s, right? And inflation got really high and the Fed raised rates really quickly. What's often overlooked is that the Fed made pretty critical mistakes where they cut rates too much and then you saw inflation come right back up. So there's like two distinct bouts of inflation in the early '80s The Fed doesn't want to make that same mistake. I don't think they're going to get to anywhere they had before.

Steve: Well, I think it's clear that Powell has always made it clear to us that he has that in mind and doesn't want to make the same mistakes as his predecessors. Anyways, thanks, Andy. Great perspective as always. Next, financial advisors square off against ChatGPT. Who's got the best advice? We'll talk about it. You're listening to Simply Money presented by Alworth Financial on 55KRC, the talk station.

You're listening to Simply Money presented by Allworth Financial. I'm Steve Hruby along with Brian James. If you can't listen to the Simply Money show every night, subscribe to get our daily podcasts. You can listen the following morning on your commute or at the gym. And if you think your friends can use some financial advice, tell them to search Simply Money on the iHeart app or wherever you find your podcasts. Straight ahead at 6:43, specific moves you don't want to make on your road to retirement. All right. So we preach about on this show all the times, all the time, the danger of financial products. And that's because there's people out there that you think may have your best interest in mind are actually selling you things that you might not need for a commission.

Brian: No, Steve, there are dirty, filthy people out there.

Steve: Can you believe it?

Brian: You know, but if I read it on the internet, it's good, right? We're cool there?

Steve: Yeah, exactly. Not so much, right? Well, hey, look, the Biden administration, they're trying to change that. So under the Securities and Exchange Commission regulation, best interest, it's called, advice to purchase securities like mutual funds, they have to be in a saver's best interest. So advisors have that fiduciary responsibility. That's what we do at Allworth, but the change is trying to add this to insurance salesmen.

Brian: So there's a lot of financial products out there and it gets very, very, very confusing. We hear it at Allworth, we throw around the word fiduciary all the time, but you know, and it does all run together. So what fiduciary means is that if we're going to give advice to anybody, we need to make sure that it's in their best interest, not for ours. We've got to be able to prove that in a court of law. So every now and then, the government will look at what are the standards of advice that are being applied across the financial services industry and make sure that people aren't taken advantage of. And that gives you things over the years, you get things like the Consumer Financial Protection Board and then the pendulum swings back the other way and it goes away. And so now they're looking at making sure that some standard of recommendation is applied to financial products.

So there are a lot of products out there that aren't exactly governed the same way you might think they are. So fixed index annuities, these aren't bad things. And the people who work with them aren't bad people. But there's no standard by which you have to come back and say, "Is this still the right product for this person?" Think of it this way, if I buy a used car today and I drive it off the lot, is my car dealer going to call me the next week to make sure I don't regret my purchase and that I'm happy and see if I have any questions? Not very likely. They might send you a survey. But before that, they're going to say, "Hey, it'd be really cool if you give us five stars." But in terms of being a fiduciary, that's something that's ongoing. That's not a one-time transaction. So they're just trying to put some rules in place to kind of govern the idea that there needs to be an ongoing relationship there.

Steve: Yeah, and as with many things regulation-wise, it turns political. And obviously there's some in Congress that think the government shouldn't be meddling in personal financial matters. But as you said yourself, these are complex products and solutions. And I think back to a story about my grandma that was a victim of a door to door sales rep that got her to cancel an old insurance policy and buy one that she didn't need for a high fee. What a disgusting practice that is. And this is where these regulations could have an improvement on the safety of financial solutions for people that might not understand what they're getting into.

Brian: Definitely a step in the right direction. So the proposal is out there now and right now there's a 60-day public comment period. Department of Labor is looking at doing a public hearing about 45 days after these proposals are published. So this isn't happening tomorrow, but it is on the front burner.

Steve: All right. So there's a growing trend out there where investors are getting their guidance from AI, specifically ChatGPT. But is this really the way to go? So let's compare. Have you ever used ChatGPT?

Brian: I do. I like those kind of tools because to me right now, all those tools are, they're a better Google. It's a faster way to get Google answers.

Steve: I remember when Google was the better Google.

Brian: We came from old school search engines that didn't really get you. You could get what you needed, but you'd have 99 things that were completely not relevant and then you found the one that did. That was still progress because it's still information.

Steve: So how do you use it in your day to day?

Brian: So yeah, so it's a better way to me to ask a question, right? If I have a general question, let's say I'm trying to... It's the end of the year, Steve. So we're talking to our clients about year-end tax planning. And also at the same time, we're talking about, you know, what do we need to be doing next year? I'm not going to lie. I get confused about what are the rules right now in '23 and which ones are changing in '24. ChatGPT is enormously helpful to go get a black and white mechanical answer. What is this piece of information? It'll give me it in a way where I don't have to go read an article. That's the difference between ChatGPT and Google. It'll give me a citation. It'll say, "Here's where I found it. But here it is in English. Here's the answer." It's like talking to a very smart person who is kind of a store of knowledge.

Steve: How do you use it in your day to day? Okay, so you are a human being. You are a certified financial planner. You've been in the industry for a long time. You are using it as a tool to help you with research, perhaps.

Brian: Correct. Just go get one concrete piece of information.

Steve: Okay. So when we compare an advisor that's got experience and they're helping with financial planning versus maybe somebody out there that's just going and going straight to ChatGPT, I think that's where the issue falls because if you're just using that, there's always a study. So in one study people were shown a one-year chart of investment returns, another group of individuals were shown a long-term period of investment returns, and what happened is the ones that looked in the short term, they only invested 40% into stock, whereas those that looked at the long term invested 90% and these were people with a long-term time horizon.

Brian: Yeah, you know what I think is missing is context, Steve, in these studies. And ChatGPT is not going to pick up on those things.

Steve: Yeah, exactly. So, you know, a financial advisor, they're going to remove bias from the table, whereas a piece of software, AI, ChatGPT, they're not. So it may create a situation where if somebody has a 30-year time horizon, they may invest too conservatively.

Brian: Yeah, and I think what's really missing there, if you're talking to a financial, and this isn't about financial advisors versus technology, this has gone on as long as I can remember. It used to be no-load funds. You can invest for nothing. That means financial advisors are irrelevant. I used to worry about that. I don't anymore because this is a people to people relationship. We spend far more time convincing our clients that they need to be confident, they can be confident in the situation that they've built for themselves because that's what we help them to see. It's going to be a very long time. Some people aren't even comfortable logging into websites to look at their financial accounts, let alone trusting a robot to tell them whether they should do Roth versus traditional or how should they deal with their child who's having this financial problem and how can they support them and support themselves.

Steve: Yes, so robots don't have empathy is what you're saying, whereas we develop relationships with the folks that we work with and we can help them not make emotional knee-jerk reactions that can derail their financial plan. I think that's the key here and that's something to focus on. Hey, here's the Allworth advice. If you want someone or something to keep you from making decisions from which you cannot recover, the qualified financial pro is the answer. Next, an important lesson on Social Security before you start taking benefits. 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 Steve Hruby along with Brian James. Hey, did you know that there's more than 60 different filing strategies when it comes to Social Security for married couples? Will you know which strategy to take when it comes time to take the benefit? The amount of questions we get about Social Security is endless. So we're going to go through a lesson on the history of Social Security, maybe some facts you didn't know.

Brian: Buckle up kids, it's time to talk Social Security.

Steve: So this is the good stuff. So where did it come from? It was born during the Great Depression. President Franklin D. Roosevelt signed the Social Security Act into law on August 14th, 1935, as part of the New Deal, which at the time it was intended to help those in need who were facing economic hardships.

Brian: That's where the name comes from, Social Security. So we need to make sure, prior to this, there was really just no way to know you're going to be okay. If you made money, however you made money up until the '30s, you better have enough savings. Or this was back in the days when you had a lot of kids in the hopes that one of them would allow you to move in with them and stay there forever.

Steve: So society was changing a little bit. So we needed to start thinking a little bit differently there.

Brian: So the things to remember is it's not only a retiree thing. We tend to think of that as a retirement benefit now. But it used to be literally the how am I going to have food on my table, period, end of story benefit. So it was signed into law to make sure we were covering those risks. But it also covers not just people based on age, also covers people who have issues with disability, survivors. And it does cover us from other areas there as well.

Steve: Yeah, absolutely. And at its inception, remember, it wasn't invented to pay everyone. Initially, Social Security excluded certain professions like farm workers, domestic workers, government employees. Obviously, some of these exclusions have been amended, making it more inclusive. But it's not supposed to be your only means of supporting yourself in retirement. It is a security blanket to kind of establish that minimum baseline. Now, if you're looking up your benefits, one thing that I encourage people to do, you log in to ssa.gov. It's going to ask you to create a user ID and a password. It's going to ask you questions from public records. Some of those funky ones. It's like, you know, what street did you live on?

Brian: What color beater did you drive in high school?

Steve: Yeah, it asked me about a boat that I owned once and didn't give me the opportunity to say I didn't own a boat. It was because I bought a kayak and you got to register them in Ohio. So be careful with that one.

Brian: We're all learning tonight.

Steve: Yeah, yeah. So this one's important. And the folks I work with, I call this an opportunity to personally audit the government because what you do is you look up your earnings history within the ssa.gov login and you can take a look to make sure that your earnings history is accurate because that's going to determine what your benefit amount is.

Brian: Yeah, and I think that's important to do because if you have moved...and where I see this, we'll occasionally we'll have people bring in their Social Security statements, and it'll show blanks, right? So it's the part of that report is giving you a year by year, here's what we think your Social Security earnings were for Social Security purposes. And frequently, I'll see somebody where it'll have three, four years of blank numbers. And so I always want to call attention to that. "Does this make sense to you?" And they'll say, "Well, yeah, I took a few days off, few years off because we were raising kids or whatever." But sometimes they'll say, "Well, no, it doesn't make any sense. I've really worked pretty much every year."

Oftentimes, Steve, what I see in those cases is that somebody moved from maybe like state employment, where Social Security is not a part of the mix, to private or vice versa, or they move from state to state, Social Security lost track of them. So it's always good to get in there and just look at it and make sure that Social Security has the right record. You're exactly right, this is a place where we occasionally get to call the government out that it's missed something.

Steve: And there's a phone number you can call if you want to wait on hold to fix it. But it's a good idea to fix it if you see it. I've had, I have seen that with some of the folks I've worked with. You're listening to Simply Money on 55KRC and we are talking about some of the history of Social Security and maybe some facts you didn't know. You can still work and collect Social Security benefits.

Brian: Why would I do that?

Steve: You know, maybe if you think you're going to retire and then decide to go back to work. Honestly, it's not something that I'm going to recommend too often for folks I work with because you can get a reduced benefit if you collect before full retirement.

Brian: Yeah, you're talking about something called the earnings test. So let's be real clear about this because this is very confusing to people. Because people will say, "Well, I'm thinking about working, but I don't want to get my Social Security benefits reduced. That only happens from the age of 62, which is the earliest you can apply for your Social Security retiree benefit, all the way to full retirement age, which for everybody is going to be somewhere between 66 and 67. If you were born after 1960, then full retirement age is age 67. If you were born before that, it's going to be 66 and one month, two months or whatever. But that earnings test only applies up until that age. After that, you can work and earn millions of dollars and you'll still get your full Social Security check after age 67 at the latest.

Steve: Yeah, yeah. And you know, you can collect it starting at 62. We've talked about this before. What happens though is you take about a 30% reduced benefit between 62 and what your full retirement age is.

Brian: Yeah, and you can earn a little bit and it moves based on your situation, but you can earn anywhere from $15,000, $17,000 based on your current situation and still be okay. So if you're looking to just do a part-time job, you know, working at the ice cream store, just do something to entertain yourself, you're probably okay. But you'll want to research those rules before you make that decision.

Steve: Yeah, what about taxes on Social Security?

Brian: Oh my gosh, Steve, Social Security is taxed. Is it really? You're kidding. Oh yeah, Social Security is actually taxed. Based on your, you know, and this is one of those things where I go, okay, wait a minute. We're always worried about means testing, means testing, means testing. It seems, Steve, we already do that. The more income you have, the more taxes you'll pay.

Steve: Is it really? You're kidding! Yeah, I mean, that's a good point that is entirely accurate and up to 85% of your Social Security benefit can be taxed depending on your income.

Brian: That's correct. So now let's make sure we say that twice. Because a lot of people that when we do our workshops and things, people will go, "Oh my gosh, they told me that I'm going to get 85% of my, it's an 85% tax levy against my Social Security benefits." No, 85% of your benefits are taxable. So if your benefit is 10,000, then only 8,500 of it is taxable. And that kicks in around $50,000 worth of income for a married couple.

Steve: And that's based on your marginal tax rate, not 85% tax. That's a good idea to share that fact a few times because people are terrified and that's not the reality of the situation. It's just taxed on up to 85% of the benefit.

Brian: Yeah, you were mentioning the ssa.gov portal and I think it's very important for everybody to go do that to get there to get there just get it set up that way if you set it up then you know you're the one who did it. This is occasionally we hear about identity theft because someone has not claimed their own Social Security portal. Well, that means somebody else can go claim it for you. So make sure you do that as well as go pull your report.

Steve: Yeah, great point, great point. So what about collecting on an ex-spouse's Social Security? This is something that you are eligible for or your ex-spouse can claim on yours. Let's say somebody's claiming against your benefit. It doesn't have any effect whatsoever on what you get from Social Security.

Brian: You don't even have to talk to him. So we hear this frequently from somebody, marriage went south, as long as they were married for 10 years or more and your ex-spouse is unmarried and they have to be at least 62 years worth of age.

Steve: Not remarried.

Brian: Not remarried. That's correct. That's right. You still have to be single. If you are that person, then you are able to apply for benefits on your ex-spouse's record and you may get an increase over your own benefits. Your ex-spouse does not know and doesn't have to do anything. All you need to do is bring your marriage license and that other person's Social Security number to the Social Security Administration and they will help you figure out what your benefit is. But if you were married for more than 10 years, are more than 62 years old and you have not remarried, then go double-check your benefits. Make sure you're not deserving of a raise.

Steve: Here's the Allworth advice. Social Security is a complicated program and applying it precisely the best time for your unique situation could be worth tens of thousands of dollars in extra income over the duration of your retirement. Next, a couple of financial moves that could derail your retirement if you're not careful. You are 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 Steve Hruby along with Brian James. Do you have a financial question you'd like for us to answer? There is a red button you can click on while you're listening to the show on the iHeart app. Simply record your question and it will go straight to us. Straight ahead, why that free iPhone promotion may not actually be free. All right. With the right planning and financial moves, you can achieve the goal of financial independence. With the wrong moves, obviously the opposite could happen. So we're going to cover some topics today that maybe you're going to want to avoid.

Brian: Yeah, one of the most common things that we'll hear is, or sometimes somebody will come into our office at Allworth Financial the very first time, and they'll say, "Well, my friend or my coworker is doing this, so that's what I want to do." And, you know, we don't treat our doctors that way, right? So I don't go to my doctor and say, "Hey, my neighbor's on this prescription, and they're wonderful, so I want it too." Every situation is different. So one of the things that can blow up in your face is copying exactly what others are doing. If you have simply said, "Well, I like these people, I respect them, they seem to be doing better than me, so I want to do exactly what they're doing," you're going to wind up buying boats and doing these different things that are not going to help you. So you want to understand what your own situation is. And I think people are attracted to this kind of stuff because it's just easier. "They look successful, I'll just do what they're doing, then I can be done thinking about it." No, this takes work and effort.

Steve: There's no one-size-fits-all financial plan. Everybody has their own financial needs. Everybody has their own financial goals, risk tolerances, personal points of view. You are not your neighbor. So what they are doing may not work for you. Yeah, this is very important to remember, a financial plan is tailored to your individual situation so don't copy off what your neighbor's doing.

Brian: Another one, forgetting to think about tax diversification. We often think about investment diversification. I need to own, you know, I can't just own one type of investment. I got to own stocks, bonds, mutual funds, maybe a little bit of crypto, real estate, whatever. But we also have to think about where these investments are sitting. Is this sitting in a pre-tax format? Is it Roth? Is it maybe after tax, which believe it or not is a different flavor than Roth in our 401(k)s? This is a little more complicated, isn't it, Steve?

Steve: Oh, absolutely it is. And there's many reasons why you'd want to diversify the future tax liability. You know, RMDs, for example, Roth assets are not subject to required minimum distributions. If you have an inherited IRA, your own 401(k), your spouse's 401(k), all put into IRAs, then these are potential tax bombs that you're going to need to address at some point in the future. So planning accordingly and diversifying your tax liability in the future is something that you need to be focusing on. Not doing so can create many issues for you.

Brian: And I've had conversations with clients recently where they're kind of...you might even be considering things that aren't necessarily that don't seem to make sense, common sense. So in other words, for somebody who started their 401(k)s 20, 25 years ago, there was pre-tax and there was nothing. There was no other option. You did not have the choice. Nowadays, most people have Roth. However, those folks who have been working for 20 to 25 years look at it and they go, "Well, I don't want to do Roth because I'm in a high bracket." And that's true. That's a good point. However, the only way you're ever going to benefit from tax-free is by biting the bullet and paying some taxes. I also contrast that with my clients who are now required minimum distribution age and have an enormous amount of money piled up on the pre-tax side. And those required minimum distributions are getting taxed at very high levels and they have a decent amount of income, couple hundred thousand dollars sometimes worth of income before they get out of bed on January 1st. So the only way to avoid that if you've got the time is to consider maybe paying more taxes now so you can head off a big tax train later.

Steve: Yeah, great advice. You're listening to Simply Money on 55KRC and we're talking about some of the pitfalls that can derail your financial plan. So not planning for a tax diversification, copying what others are doing. How about neglecting your own savings in favor of other financial goals? A big one is college savings. That's something that a financial plan will help you navigate. Finding the way to make the next most tax-efficient decision with your dollars, finding the way to start saving for these competing financial priorities like a 529, for example. I'm in a situation where I'm the first in my family to go to college. Only person that got a degree. I paid for it all on my own. Obviously, my folks would have loved to be able to do that for me. They weren't. It's very important for me to make sure I can pay for my daughter's college. Luckily, I'm a financial planner so I have that know-how and experience on how to build my own plan to ensure that it happens. But the issue is, if you haven't planned accordingly and now you want to pay for your entire college expense for your children, that could be a problem.

Brian: And this is the work part, Steve. So we were just talking about before this requires effort. You know, some people will come with a question, "How much should I be saving for college?" And the answer to that is everybody's least favorite answer to anything from a financial advisor.

Steve: It depends.

Brian: Exactly. That's the worst thing you can say. But it does. It really does because, you know, tell me is college your, A, number one goal? If that's it, great, then I will give you the math and we will revolve all of your other goals, retirement, paying down the mortgage, worrying about your parents, whatever else. We will rotate all of those other goals around the college goal. If, on the other hand, you say, "You know what? It is most important for me to retire by this age and my spouse and whatever, and then we want that to be our number one goal," that's fine. Then we figure out where are the sacrifices. What does that mean we can expect to have put away for college? Therefore, what can the kid expect to have to take on in terms of loans or working or whatever? And then when do we think the mortgage might get paid off? Everything is about prioritization and understanding the pros and cons between all the different goals you're going to have.

Steve: Yeah. And, you know, there's a lot of free resources out there that you might be able to dip a toe into and explore a free online calculator. For example, a lot of these rely on rule of thumb assumptions. They might not take into consideration what your actual spending needs are. Oftentimes folks I work with, they have a very low number for what they think they actually need, especially if they don't take inflation into consideration. there's online free calculators you can look at, but maybe explore sitting down with a fiduciary financial planner. Here's the Allworth advice. Financial planning is very entailed. If you do it properly now, your future self will thank you. Next, when free isn't free at all, you're listening to Simply Money presented by Allworth Financial on 55KRC, the talk station. You're listening to Simply Money presented by All Worth Financial. I'm Steve Hruby along with Brian James. So these commercials are everywhere. Trade in your old iPhone and get a new one for free. But is it really free?

Brian: Tis the season to be thinking about this stuff, right? I want a shiny new iPhone, there's a new one out there. And it's got titanium, I've heard. That's what I'm getting shoved down my throat. That's the latest thing. So they've all got deals. Let's go through these deals. Are these really that great? We'll start with Verizon. You're gonna get a free iPhone 15 Pro on Verizon. You can trade in a 12 and that can get you $1,000 in bill credits. Bill credits mean you gotta stick around and you'll see a credit on your bill every month. And that goes over 36 months. But you have to couple that with a $90 a month plan called Unlimited Ultimate. So total cost over the three years would be a little over $3,200, right? So if you wanna take advantage and get the "free phone," then that's what you're looking at, 3,200 bucks. Now what if you simply traded in your 12, picked a cheaper plan, like maybe the $65 version of the Unlimited Welcome, then they would offer $415 for a three-year-old iPhone. Then if you total that up and you shell out some money out of your own pocket on that iPhone 15 Pro, now you're only shelling out 2,900 bucks. Same service, same brand new shiny phone, but a little bit cheaper. So you gotta read the fine print on these things.

Steve: Yeah, this is amazing. So with Verizon's iPhone promotion, you would actually spend $315 more dollars over the three-year plan with the fancy perks than if you traded in your old phone and got the cheaper Verizon plan. This reminds me of something that Fidelity did years ago. They offered these 0% expense ratio funds. Do you remember that? They had one domestic and one international. And what it was, Abby Johnson, the CEO of Fidelity at the time, admitted that this was a tactic to get investors in the door so Fidelity could sell them other financial products. This is exactly what's happening with Verizon and AT&T and some of the other.

Brian: We all fixate on the word free. I want the iPhone and I want it to be free. How do I get that done? Tell me where to sign.

Steve: Yeah, AT&T, they're offering up to $1,000 off the iPhone 15 Pro with an eligible trade-in. You got to trade in the most recent and expensive smartphones like the 14 Pro, for example, to get a $1,000 credit. Older phones get less. AT&T, what they've done is they provided a promotional credit of $700 for the three-year-old iPhone 12 in the form of a discount. They spread it out over three years of bill payments. So what you're doing is they're buying the cost of the iPhone 15 Pro at $8.30 a month, spread out over that time frame. The bottom line is you can actually trade that phone in and get one of their cheaper packages that might be actually what you need. You don't need to get the big, shiniest, newest thing. And the price is actually a little bit cheaper not to do the new free approach.

Brian: AT&T is a little closer on that. T-Mobile, if you if you do the deal versus just buy it on your own it's only about 150 bucks difference.

Steve: Yeah, each of these has cheaper options. Make sure you look at the fine print before you make the change. Hey, thanks for listening. Tune in tomorrow. We'll talk about perhaps the most overlooked aspect of retirement preparation, managing your risk. You've been listening to Simply Money presented by Allworth Financial on 55KRC, the talk station.