- How to Invest When the Economy Sends Mixed Signals 0:00
- What State Street’s New 401(k) Strategy Means for You 12:50
- Best Employee Benefits to Choose During Open Enrollment 19:50
- How to Handle Inheritance, Annuities, and Selling a Business 28:20
- Social Security Claiming Strategies to Reduce Taxes 36:04
When the Economy Goes Off Script: Lessons from 40 Years of Market Surprises
On this week’s Best of Simply Money podcast, Bob and Brian explore how your financial plan should stay steady even when the economy doesn’t follow the script. From the double-digit interest rates of the 1980s to the AI-fueled market surge of 2023–24, they unpack the mixed signals investors have faced over the last 40 years—and what you can learn from the surprises. They also dive into how innovations from State Street could reshape your 401(k), how to make smart open enrollment choices, and real-life listener questions about supporting aging parents and adult kids, selling a business, managing inconsistent income, and dealing with old annuities.
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Bob: Tonight, what financial planning looks like when the economy doesn't necessarily follow the proverbial script. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Stocks are rising, the labor market is weakening, inflation is kind of just hanging around, tariff policy is still up for discussion, and geopolitical tensions remain. The economy often sends mixed signals, but your financial plan should not. And tonight, we're going to take kind of a walk down memory lane here over the last, I don't know, 40 years or so, Brian, and look historically at a few things that have been going on that maybe people didn't see coming. And the point here is, you don't want to completely upset the apple cart and bail on your plan, but there are opportunities out there to make some nuanced adjustments to things like tax planning, asset allocation, how your portfolio is structured.
And it's very interesting that when you look in the rear view mirror, which is always easy, it's easy to be a Monday morning quarterback, oftentimes, some of the best opportunities out there, nobody saw them coming. And if you just sit there like a deer in the headlights and don't react, you're kicking yourself down the road after the fact. So, take us back to the '80s. We love talking about the '80s. We did that last week.
Brian: Oh, I love the history here.
Bob: Great rock and roll. Joe Strecker reminds me of parachute.
Brian: Did your hair look different back then, Bob? Can you describe your hair in the '80s?
Bob: I had some.
Brian: Okay. There was hair. Oh, that is different.
Bob: I still required haircuts in the 1980s, Brian. All right. But, hey, carry the ball here. Walk us back to the '80s, and what was going on in the economy.
Brian: I was more of a '90s kid, so I was all grunge. And I had the shaggy hair and the flannel and all that. And now, I only have the flannel. Anyway, so these types of mixed signals that can create behavioral issues. I'm gonna go off script for one second here, Bob. This is something I think about all the time. I think that the generations that have money now look at the '80s and the '90s where literally nothing bad happened, right? You can't even find 1987, October '87, you can't find it on a chart anymore because it's been so much crazier ever since then. I think those were the anomaly.
And I think people got... Once we hit the internet bubble bursting in '01, '02, and that recession and 9/11 and all that, then we hit 2008, I think people viewed those items as the anomalies. Like that's not supposed to happen. But if you look over a couple of hundred years' worth of history of this country, it was the '80s and the '90s that wasn't supposed to happen. You're not supposed to have a period of prosperity that freaking long. But we did. And that created what we all thought was the economy. This is how it's supposed to work, and everything else is wrong. So, we did...
Bob: It is how it's supposed to work. The Nasdaq is supposed to go up 27% a year, Brian.
Brian: Of course. Companies don't need to make money. They just need to have flashy internet websites and not really a business plan. So, anyway, so yeah, mixed signals, this drives behavioral issues. When we get crazy stuff we don't expect, we tend to want to do something about it. Sometimes action feels so much better than inaction. So, we're going to talk about some of these things that kind of were head fakes economically speaking and the market speaking.
So, 1980s, we had double digit interest rates, but also, really strong growth that kind of seems counterintuitive. So, that would go the other way, right? We had stagflation through the '70s, and we needed to beat that down. The answer to that was really, really high interest rates to tamp down the growth of everything. And that did work, and it hurt a lot for those people who are remembering this time of the economy. But by the mid '80s, all of a sudden, we had explosive GDP growth. And that resulted in what we just talked about. And again, became kind of the formative, this is how it's supposed to work thought for a lot of people. Broke inflation that put confidence back in place, and then the demographic trends stepped in to kind of fuel that growth.
Bob: Yeah, let's pivot to the early 2000s. I mean, 2008, 2009, coming out of the housing crisis, we had 0 interest rates, 0, for it seemed like forever, but no runaway inflation because we were very extended. Credit wise, if you could fog a mirror, you could qualify for a mortgage. Stated income loans. You could buy five or six condos pre-construction down in Florida by just filling out an application. What could possibly go wrong? You get a house, you get a house, you get three condos. Everything was off to the races, and then, wow, the housing crisis hit. Banks were in default. Regular consumers were in default. It was a really wild period there for a couple of years.
Brian: So, I just used a banking term. I was working for a bank at that time. And I remember the head of the local lending facility there, the mortgage area, was a super honest guy, and completely on the up-and-up. But he was confused by these stated income loans. Which literally, that sounds like a fancy term. All that means is you walk in, you state your income, you get a mortgage. "I make a bazillion dollars." "Cool. We can loan you two thirds of a bazillion dollars to borrow home." No proof was required. It was just a lot easier. That's the environment that our leadership wanted us in. I'm not talking about the bank, I'm talking about the entire country. That's the environment that we wanted to be in when we reduced regulation on the rules of all that kind of stuff. And that did lead to kind of overdoing it, which we tend to do here.
Bob: Well, and rates stayed low for so long because it took a while for consumers and banks to just deleverage. Everybody had borrowed so much money because it was free. It was cheap. And money was really not moving around for a while. And that's what makes the economy go. So, that's why rates stayed low. It was a very interesting time.
All right. 2009 to 2013, even when we had a bunch of stimulus coming in from the government, inflation did not really spike because, again, we were trying to bail this economy out of that tremendous housing crisis. And you would have thought that inflation would be off to the races when all this government stimulus money was flowing around, but it didn't, Brian. And wow, what a great time to be invested in stocks.
Brian: It was. And so, let's talk about, what was the right move to have made at that time in response to what we just talked about? Well, aggressive rebalancing and taking risks, right? Put risk into your portfolio. A lot of high net worth investors were overly, overly conservative post 2008, and they ate a lot of the downside and missed most of the upside. So, if you had a plan in place and you understood the history, you would have sidestepped that because there would be no need to protect your long-term assets because you would have already set up your short-term assets, which would not have been affected by it at all.
Bob: All right. And then let's move forward to the dreaded COVID discussion, 2020. You know, stocks actually surged during a global pandemic as the GDP shrank by over 30% in the second quarter of 2020. Unemployment hit 14.7%. Boy, that's a great reminder. I forget about that high unemployment rate, and yet the S&P 500 hit all-time highs by August of that year. Why? More government stimulus, more Fed action, a bunch of money flying around. And when free money is flying around, it finds its way into real estate, into stocks, into speculative growth assets. And we were off to the races after that. The fastest and most serious bear market in U.S. history, that market dropped well over 30% in a heartbeat. It really froze people for a few months. And if you bailed on the market then and went to cash, boy, were you sorry just a few months later.
Brian: But I'll add, Bob, most of my clients don't really remember the market collapsing that much. Not like in 2008, because 2008 was real. Not that the COVID downturn wasn't, but it was over with relatively quickly, and it happened due to a stimulus that came out of left field. Those kinds of things tend to become a catalyst, right? Underneath all of that, when you remove the COVID issue, the economy was relatively strong before that.
So, all that happened was, we had a brief panic, and then everybody exhaled and said, "Okay, you know what? I think maybe this isn't that big of a deal. This is not the virus from Hollywood that's coming to kill us all. And then it became a catalyst because the entire world had to shift to working from home, which means Dell made a bunch of money. I can confirm that here on my own desktop. Zoom came out of nowhere, was created. Technology had to shift to allow the whole world to have a second workspace. And that was a catalyst for the stock market that trickled through in a huge way.
Bob: What were a couple of the huge financial planning techniques during that whole time period during COVID? Tax lost harvesting and Roth conversions. When the markets tanked in March of 2020 before rebounding, people that had an advisor and were paying attention, man, this is when tax-smart investing really came into vogue. Because you could just swap one S&P 500 ETF for another, harvest those losses, stay fully invested, and bank those losses to use later on to offset future gains. Wonderful time for tax-loss harvesting and Roth conversions. Man, converting IRAs to Roth during a 30% downturn, wonderful opportunity. And then you catch the rebound completely tax free. We had a lot of people doing both of those things, and it really moved the needle financially for them.
Brian: Yeah, and that can be a tough trigger to pull, because remember, you're doing that in the face of headlines that are screaming, "The end is near." And you're doing this Roth conversion going, "No, it's not. Matter of fact, I'm going to move this over to the tax free so when the pendulum ultimately swings back the other way, it'll be tax free now. And I paid a lot less in taxes to get it done." That's winning the game.
Bob: All right, we get through COVID, and now, we're in 2022. The Fed has to pump the brakes on all this free money flying around. So, what do they do? They raise interest rates seven times. The labor market came back. Everybody went back to work. And man, we had a horrible year in both the bond and the stock market.
Brian: From day one.
Bob: Which usually doesn't happen, because usually, you buy bonds to protect yourself from stocks. Man, in 2022, nothing worked. And that was an interesting time. But that's when, for the first time in many, many years, we talked to people about treasury bills, treasury bonds, some of these high-yield savings accounts, parking some money, getting very nice interest rates, fighting back against the current environment. And it was a good opportunity. Great time to have an emergency fund, Brian.
Brian: It really was. That was when we were all reminded that you are indeed allowed to get paid real dollars on your depository type accounts, your safe money. It had been decades since we had that opportunity. One of the things I like to point out to my clients is exactly how bad that year was. We don't really think of '22. '22 didn't have a story. It didn't come along with anything crazy, but it was one of the five worst market years we've had on record. And that includes 2008, it includes 1937, it includes 1973, '01, '02. It's up there with those worst years we've ever had, but it doesn't get thought of that way. Because it didn't come along with one great story like the depression or the great recession or anything like that. But anyway, so at that time, yeah, that was a time to kind of take stock of what your situation really is. It was a great time to have an emergency fund, not only to take advantage of those interest rates, but also, to not have to sell out your long-term assets that were getting hammered at the time.
Bob: And then last, but not least, 2023 to 2024, despite higher-than-normal interest rates in inflation, I don't think anybody saw this coming, Brian, to this extent. We had great stock market years, both of those years. Why? The influx of AI enthusiasm, new technology coming in, better-than-expected corporate earnings, and economic resilience, which usually always overcomes these short-term fears. Just proving once again, that the American people, American companies are very resilient. They find a way. And boy, if you were out of the market in '23 and '24 just because you were afraid of what was going to happen in the world, you missed out on some great returns.
Brian: Yeah, that's right. And the move then would have been, we're big fans of direct indexing here, if you can do it, which basically means own a pile of individual securities instead of mutual funds, if you can in a taxable account, replicate that index and take advantage of the tax loss harvesting opportunity.
Bob: Here's the Allworth advice, when the economy doesn't necessarily follow the proverbial rules or script, smart investors don't panic, they reach for the right tool in the toolbox. A giant in the retirement plan world is starting to shake things up. We'll show you what that means, potentially for your 401(k), your asset allocation, and your long-term income plan. 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" live every night, subscribe and get our daily podcasts. And of course, if you have family or friends that need some financial advice, let them know about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcasts. Straight ahead at 6:43, how to juggle the financial demands of aging parents and adult kids, what to do with old annuities that are laying around collecting dust, and why a big payday from selling your business isn't always as simple as it might seem.
Let's dig into a story that could have implications for your retirement planning toolbox, Brian. The asset management firm, State Street, one of the biggest providers in the ETF target date space, is making moves in the defined contribution or what we like to call the retirement plan world that could change how 401(k) plans look and behave in the pretty near future.
Brian: Yeah, so the gist of this is that we normally when we think of 401(k)s, we think of traditional mutual funds, which have been around for, I don't know, 100-some years. I believe 1924, as a matter of fact, was the first one. Anyway, those have been around forever. And that has evolved into target date funds, which are still mutual funds. Those are the ones that have a year in the name of them when you're looking at 401(k), and that year is roughly when you might retire. And that indicates a portfolio that might be appropriate, although you got to look under the hood, because not all target date funds with the year 2065 are the same, for example. And plain old index funds, as most people are familiar with.
But State Street is coming around saying, "We're going to innovate this space." And they have launched some target date strategies that include private markets exposure as well as public markets. State Street is a big firm, $1.7 trillion in exchange traded funds. If you've ever heard of SPDRs, which are the S&P 500 ETF, that's their flavor of them. But that's State Street behind that. So, this could be significant for higher earnings.
You're already thinking about more than just allocation. You're looking for... I'm sorry, more than just accumulation. You're looking for diversification. You're going to need income generation in the future. You want some things out there to kind of offset the swings of the market, meaning alternative assets, certainly need tax planning, those kinds of things. So, when a retirement plan provider starts offering these hybrid solutions, what that means is, your 401(k) is no longer just a commodity play. It's not the same as all the other ones. It can become part of a more sophisticated asset allocation strategy involving a whole bunch of other topics.
Bob: Well, let's look under the hood here for a minute. Let's say you've got a 401(k), and you've got $750,000, a million, couple million dollars in there. And maybe it isn't a target date fund or some other index funds. With these new structures coming from State Street, and I'm sure other providers are going to be following suit here, you might be able to get access inside the plan to private equity, private credit, infrastructure funds. That's the kind of model that State Street and others are starting to build.
I see pros and cons with all of this, mainly pros. I think for some of these larger plan sponsors, I think some of the traditional, potential objectives to adding these asset areas to these plans, i.e. fees and transparency and lockup periods, I have to think that if you're going to put them in some of these multimillion dollar 401(k) plans, that a lot of those traditional hurdles are going to start to go away. And I think that's a good thing.
Brian: Yeah. And make no mistake, what the motivation is behind this, of course, State Street is a for profit entity, as are many of them and us and individuals in this country. So, rest assured, they're looking to make a profit by providing people something that doesn't exist right now, because there is literally $12 trillion in the retirement plan space mostly locked up in traditional mutual funds. And they're viewing this as an area that is ripe for some different options out there.
Bob: Yeah, let's face it, if everybody just piles into index funds, it's a pretty low-margin business, because the internal operating expenses of those funds are very low. So, again, I see pros and cons to all this. If these alternative asset classes do their job, which is to potentially increase your return with lower risk adjusted volatility, it can be a good thing as long as you don't get sucked dry on fees. So, again, we're just calling it out to let you know this stuff is coming. But I think it's good to look under the hood and see what the deal terms are, so to speak, to make sure you're really getting good bang for your buck if you venture into some of these things.
Brian: Yeah. So, let's talk about, what are the pros and cons? We talked about the pros, right? So, these could be decent opportunities to get into things beyond traditional mutual funds. But private markets often do lock up capital, right? These aren't things that are priced every day. They're not liquid every day like a traditional investment. So, if you're used to that, and you've been using your 401(k) as part of your near retirement plan, then this could be something that locks up a chunk of your assets in something that you cannot get to. So, you need to plan around that. Also, they'll provide access to assets that historically only your ultra-high net worth folks have been able to get into. This could improve your return potential, but it's also going to change your risk profile around. You should expect the unexpected if you're going to invest in these different types of assets.
Bob: Let's take a practical scenario. Let's say you're 58 years old. Your 401(k) has a little over a million dollars in it. And you're projecting retirement at 62. So, you're already planning to take income from your portfolio here, i.e. your 401(k) that might get rolled over to an IRA within, say, four years. If your plan sponsor eventually offers these vehicles that has this private market exposure, you just want to make sure that you're going to be able to get access to your money if and when you need it. Again, the proof is in the pudding. You've got to read the fine print and see what's coming down the pike here before you get too involved in these kind of alternative assets.
Brian: Yeah. So, just like anything, be mindful of what you're getting into. Understand what it is. There are lockup periods, there are extra fees. Just understand what the investment is that's underlying it, because it may not match what the market is doing if that's what you primarily pay attention to. That's what you're asking for, "We want something different." That's why they call them alternative assets. But just understand that you're venturing into a world that you have not ventured into before. There are nuances.
Bob: Here's the Allworth advice, don't just treat your 401(k) like a pile of money sitting over there that you completely forget about. Treat it like a key piece of your portfolio. Know what's inside it. Demand choice and align everything with your timeline and your liquidity needs. All right, open enrollment is here, but which of the optional choices should you actually sign up and pay for? We'll explore that question next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, open enrollment is upon us, and for some, the choices are pretty simple in terms of health insurance. In fact, many plans just roll over your choices from last year. But there are some options that you can pay extra for, and are worth taking a look at. These are items that you can choose from through your company during open enrollment. Brian, let's dig into some of this. Tell us what we should consider and what we should just let walk on by here as we enter open enrollment period for folks that are actively working at an employer and have a bunch of options in front of them.
Brian: That's right, Bob. It is the season to watch the leaves fall and sip my pumpkin spice latte and go through my health insurance options, because that's what we do in Q4 here in the fall. So, let's start with life insurance. That's one of the choices you're going to make. Most employers will foot the bill for some level of life insurance up to, say, two times your annual earnings. But do you need more? And if so, what do you do then? Well, if you need more, you've got the option usually to choose three, four, five times, maybe even more your salary, but you're going to pay for it.
So, if you do decide you need that, a term policy is probably what's going to do the job best for you. It's affordable. It's going to cover you for a set period. And that premium is going to be locked in. If you decide you need more insurance, I wouldn't look at your benefits plan. It's not going to be the most cost-effective way to do it. Figure out what you need insurance-wise because that is probably not going to change as often as open enrollment comes around.
So, figure out what the mortgage is, what your family would need if something happened to you, and perhaps whatever college expenses. Those are calculable timeframes that you can figure out, and then do the math. That won't change year-to-year. However, the premium you would have to pay to go through your group benefits would. So, now, that's term insurance.
Permanent life insurance is exactly what it sounds like. That's going to be around your entire life, which isn't necessarily a bad thing, but obviously, that's more expensive because you're virtually guaranteeing that the insurance company is going to have to pay out a sizable amount. Term insurance is just that. Tie it to your mortgage, which might be 20 years left, 30 years left, or whatever. Tie it to the kids needing to go to school. That's a calculable timeframe. Use term insurance for those. Permanent is when there will always be a need for death benefit out there.
Bob: All right. A couple thoughts on this whole life insurance through your company benefit plan. The good thing is you get guaranteed underwriting because you're getting underwritten as part of a big group, your fellow co-workers. The bad thing is if you really are in a lower class underwriting, non-smoker, not overweight, very, very healthy, you can qualify, usually, for much better rates in terms of premiums by getting underwritten on the outside. So, this is where it makes sense to just, like we talk about all the time, do a financial plan. As Brian said, figure out how much life insurance you actually need and for how long, and then don't be afraid to go out and price this thing through your company and through a fiduciary advisor. And you might be surprised at what the difference in premiums actually are. All right. Moving to disability insurance. Most employers cover this. A lot of people don't even know what it is. And, Brian, I think this is a vastly overlooked part of the whole benefit menu that more people should be taking advantage of.
Brian: That's right. And a survey showed that just 56% of workers can say for sure whether their employer even offers a disability insurance benefit. That's a study of 2024 from LOMA and Life Happens. That's a nonprofit that looks at insurance education. So, like Bob says, this is a misunderstood area. Most people don't run into these types of things, right? Becoming disabled on the job is not necessarily something, or off the job that prevents you from working. That's not a common occurrence, but it does happen to people. These are reasonably priced options.
I would definitely go through. Start with your group for this because that's available. and this is more of a year-to-year thing, but it's the cheapest way to get a disability coverage. Remember to understand the difference between, how will they trigger your benefit. Is it because you can't do your job, or is it because you can't do any job? That is a huge difference in terms of how that coverage works. If you can flip burgers, you might not get it. But that's definitely something to pay attention to when you're going to look at this. That said, when you get closer and closer to retirement, you'll eventually hit a point where, "You know what? Maybe I don't need disability insurance because if something really happened, I would just plain retire and not do any job anymore."
Bob: Well, most of the time, short-term disability is paid for by the company. It's very inexpensive and it covers a short period of time, a very finite period of time. What I want to encourage everybody to do, almost everybody out there, is take that long-term disability option. It's typically going to ensure about 60% of your income. And like Brian said, even irrespective of the qualification of disability, in terms of what it actually costs, it's pretty darn inexpensive relative to the benefit that you get if a real catastrophe comes down the pike, a severe illness, an automobile accident, something like that. Let's face it, at the end of the day, your ability to earn an income is your largest asset, and you really do need to look at ensuring that. Brian, give us your take on voluntary accident insurance.
Brian: So, yeah, accidental insurance will give you payments in addition to the medical benefits when you or your enrolled family members have an accident. It's been a long time since I've seen one, but these are the ones where it'll say, "If you lose one hand, it's this dollar amount. If it's two hands, you get this much." I haven't seen that in about 20 years, but that always kind of made me giggle the way there's a menu that you can choose from.
Anyway, it's to cover out-of-pocket expenses on your medical plan, such as the deductible and co-insurance that result from some kind of an accident. Usually, a fairly small payout, looking for broken bones, burns, or missing limbs, that kind of stuff. If you're a high earner, this is really not essential. And honestly, the relatively low likelihood that this is going to happen to anybody. I'm not a huge fan of voluntary accident insurance. I've been ignoring it for years. I'm willing to kind of gamble. But that said, maybe if you're a mountain climber, you do a lot of physically-active stuff that does put you at risk, it can be not the worst idea to invest in.
Bob: All right, that accident insurance is followed closely by voluntary critical illness insurance. So, let's say you have a heart attack, a stroke, kidney failure, cancer, this insurance protects you with covering out-of-pocket expenses that your health insurance doesn't cover. We all remember the Aflac commercials that talk about this. That was an accident...
Brian: Can you do that again? I didn't quite hear that.
Bob: Aflac.
Brian: Thank you. One more time. One more time for the record.
Bob: I'm not a big fan of this stuff. I mean, at some point, you can just throw insurance premiums out the window that would... If you factor in the probability of any of this stuff actually happening, you're better off just raising your contributions to your 401(k) plan. Put your money away that way. But what say you about this kind of stuff?
Brian: I mean, if this is an obvious, family hereditary topic, everybody winds up with cancer, or everybody winds up with cardiac issues or whatever, then, yeah, you might think about it. But if you don't already know that about your family, then I would say it's not that big of an issue. Yeah, no, I'm not a big fan of an individual insurance policy for each and every bad thing that might happen to you.
Bob: All right. And no good benefits segment is complete without talking about voluntary pet insurance. Brian, give us your thoughts on pet insurance.
Brian: My thoughts on pet insurance is that, for the cost of the premium, I can probably buy five more of that little thing that occasionally I enjoy and sometimes annoys me. All right. How was that? Did I do good?
Bob: Yeah, I was thinking it. You actually said it, which is great.
Brian: I'm going to pay for that when I get home tonight.
Bob: I succeeded in making you be inappropriate on the radio. All right.
Brian: Well done. Well done.
Bob: Here's the Allworth advice, during open enrollment, don't just default to last year's choices, review your benefits with fresh eyes, because your situation in all seriousness may have changed. Next, real questions from people like you. Questions about selling a business, supporting parents and kids, managing an uneven income stream, and what to do with those old annuities you've had for years. We'll do our best to break all of that down coming up next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. You have a financial question you'd like for us to answer, there is a red button you can click while you're listening to the show. If you're listening to the show on the iHeart app, simply record your question and it will come straight to us. All right, Brian, get ready for Mark in Mainville who says, "Our advisor keeps pushing alternative investments. I wonder why. How do you tell the difference between genuine diversification and just a high-fee sales pitch?"
Brian: So, what alternative, what that really means is that it's an alternative to your traditional stocks and bonds. So, this includes private equity type investments, hedge funds, private credit, structured notes, real estate partnerships, commodities, those kinds of things. And these aren't necessarily bad, but the reason it's getting loud about this is because technology and efficiencies have allowed these types of things to be more presentable to the masses.
But you want to make sure that you're actually getting real diversification. Is this just some kind of hedge fund that ultimately matches the S&P 500, in which case it's just an expensive index fund? Or is it maybe just different for the sake of being different? So, real diversification should smooth out volatility and reduce your overall portfolio risk. So, make sure that's in there. Also, follow the fees. There's a lot of layers of fees. Oftentimes, there's 1% to 2% management fees, just like in a traditional portfolio, plus performance fees. If we make you 50%, we're going to keep 10% of it. That's a 20% performance fee. Those don't exist in your more traditional type investments.
Bob: And Brian, no high-fee sales pitch would be complete without presenting non-traded real estate investment trusts. We all love those.
Brian: Non-publicly traded REITs that you'll be stuck with until all of eternity.
Bob: High fees. Lock your money up for 10-plus years. They are wonderful. Absolutely wonderful things.
Brian: And the "advisor" behind those got paid a commission and will never bother talking to you about it again because his or her job is to go find the next person to put them in, and you'll be stuck with it forever. Anyway, not that we're biased. Are we biased here, Bob?
Bob: Not at all.
Brian: No, not at all.
Bob: Not always.
Brian: All right, so we're going to move on now to Greg in Lebanon. And Greg is looking at selling a business. Congratulations, Greg. It must have been pretty successful over the years. He's a little spooked by that liquidity event. It feels kind of overwhelming. And he's asking, "What is the smartest way to deploy that cash without rushing into the next big thing?" Bob?
Bob: Well, Greg, you hit on the best point here, not rushing to do anything. First of all, congratulations on being in a position to sell a business, which I'm assuming you worked very hard to build and get in a position to move on from. And that's a big event. You should be very proud of that. And along with that, just take a deep breath. Let the dust settle. Don't let that big chunk of cash burn a hole in your pocket. Take some time to just breathe and relax and get a good team around you, a good fiduciary advisor, financial advisor, CPA, attorney. And build a financial plan based on all this newfound liquidity that you have, dovetailing that with all of your future goals. And then slowly deploy things to make that financial plan come to life. That's my advice, is slow down, get some good advice, and don't let that cash burn a hole in your pocket.
All right. Emily in Fort Wright says, "We're helping support both aging parents right now and our adult kids. How do you plan for that kind of financial squeeze without burning through some serious retirement savings?"
Brian: Well, Emily, welcome to the sandwich generation. Roughly one in four adults in their 40s and 50s is now providing financial support to both an older parent and a grown child. In the Midwest, this is having an even bigger impact. Rising healthcare costs for parents and housing, and just the kind of overall family feel. We stick with family, you do it for family. That's what we do here, and that's what gets expensive.
So, the very first rule is put your own oxygen mask on first. You can't do them any good if you yourself are a mess because you'll all wind up a mess well down the road if you have spent your own assets down. So, make sure you are in good shape. You have to set clear boundaries with both sides. If it's your parents, have an open conversation about long-term care, what their income sources are, and what yours are, frankly, and whether it's time to simplify their investments or do something different for their living arrangements.
Adult kids, give them guidance, not guarantees. That's the best thing you can do, is share your experience with them. They're going to have to carry most of their own weight. Help with budgeting, job planning, and make sure that that support is conditional and time limited. You'll be there to talk, but you're not going to be an open wallet. All right, Ron in Amberley Village. Ron says they're both self-employed, and that means they see pretty violent swings in income. And he's asking how you build a savings and investment plan when that cash flow is not really predictable.
Bob: Ron, my advice here is just have a larger emergency fund. Most conventional wisdom says have 6 to 12 months' worth of expenses covered in a non-risk savings account at the bank. We all know that. I think when you own a business, you're self-employed, you've got things moving around a lot, you just need to give yourself a little more space. So, oftentimes, I tell people, "Take that 6 to 12 months and make it 24 to 36 months." Most of the time, if you know you've got your nut covered, so to speak, your basic, family, operating expenses covered for two to three years, that will take a lot of stress off the table and allow your longer-term capital to stay fully invested. And most importantly, for you and your wife not to stress out about short-term cash flow and just focus on running your business.
I mean, let's face it, owning a business comes with a lot of upside potentially, but as you said, a lot of volatility. So, just give yourself some wiggle room here in the form of a higher emergency fund balance. And don't worry about doing that. I know that money is not going to be making 20% a year, but you'll be glad you have it if the furnace breaks, the car breaks down. And you just don't need the extra stress in your life by worrying about where your next penny is going to come from. And you certainly don't want to get into a situation where you're running up a big credit card balance paying 29%. You talk about a stressor, that'll cause it in a hurry.
All right. Last, we've got Greg in Bellevue tonight. Brian, he says, "We've got a few old annuities sitting in our portfolio. And honestly, we're not sure what role they play anymore. How do you evaluate whether to keep them or just unwind them?"
Brian: So, annuities often get pitched as evil, but that's not the case. They're just simply complicated. They can be beneficial. There are some terrible ones out there that are just expense and they just exist for the insurance company to be happy. But it depends on what these are. If these are simple fixed annuities, and maybe you're beyond the surrender period where you could pull the money if you wanted to, look at the interest rate. And if you need an emergency type fund and it's paying a decent rate as they often do, then maybe it just sits, leave it alone. You don't have a surrender period to worry about, so you got past the painful part.
Contrast that with if it's an annuity that has, say, income riders on it that are a little more complicated, then generally, you're going to want to turn those on as soon as possible if you're going to use them because that's the way you'll maybe benefit from the insurance company's guarantee. But understand how the math works, and understand whether you should leave it in there at all, because you can get out of those once you're out of that surrender period. You can get out of them without paying any fees. Taxes, you got to be careful of. Certainly understand what that impact is.
Bob: All right, coming up next, I've got my two cents on a couple of nuances here to Social Security claiming strategies. 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. Brian, I want to talk about a meeting I actually had yesterday with a single lady who just turned 65. She's going to be 66 next year, and talking about how to take and when to take her Social Security. And it's just when we pulled out the tax software and we started looking at the implications of different decisions, things have gotten a little more complex here with the new tax legislation that came out earlier this year. And I just want to highlight that here to close things out tonight.
Because now, you've got to factor in two things. What threshold does your income cause most, if not all of your Social Security to be treated as taxable income? And then we also have that enhanced senior deduction for folks 65 and older. That's a deduction of $6,000 for single taxpayers, $12,000 for married filing joint. This is what the president and others, when they talk about Social Security being tax free, kind of.
Brian: Not so much.
Bob: But there's a phase out here. So, you got to take a look at when you take Social Security, how that dovetails with your other income. Because in this case, waiting a couple of months we're going to keep her in a 12% marginal tax bracket next year instead of jumping into a 23% tax bracket because of some of the phase outs and taxability of Social Security.
Brian: Yeah. So, I want to make sure you mentioned the phase out. Let's talk about what that is because a lot of people just heard, "Cool, $6,000 deduction, the $12,000." Single filers, you're going to lose the ability to do that if your modified adjusted gross is below $75,000. You're going to lose out if you're married, if it's... I'm sorry, above $75,000. And if you're married, you lose it if you're above $150,000.
Bob: So, just get with your CPA, get with your advisor, and make sure you're not surprised here by the taxability of your entire situation when it comes to Social Security. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Stocks are rising, the labor market is weakening, inflation is kind of just hanging around, tariff policy is still up for discussion, and geopolitical tensions remain. The economy often sends mixed signals, but your financial plan should not. And tonight, we're going to take kind of a walk down memory lane here over the last, I don't know, 40 years or so, Brian, and look historically at a few things that have been going on that maybe people didn't see coming. And the point here is, you don't want to completely upset the apple cart and bail on your plan, but there are opportunities out there to make some nuanced adjustments to things like tax planning, asset allocation, how your portfolio is structured.
And it's very interesting that when you look in the rear view mirror, which is always easy, it's easy to be a Monday morning quarterback, oftentimes, some of the best opportunities out there, nobody saw them coming. And if you just sit there like a deer in the headlights and don't react, you're kicking yourself down the road after the fact. So, take us back to the '80s. We love talking about the '80s. We did that last week.
Brian: Oh, I love the history here.
Bob: Great rock and roll. Joe Strecker reminds me of parachute.
Brian: Did your hair look different back then, Bob? Can you describe your hair in the '80s?
Bob: I had some.
Brian: Okay. There was hair. Oh, that is different.
Bob: I still required haircuts in the 1980s, Brian. All right. But, hey, carry the ball here. Walk us back to the '80s, and what was going on in the economy.
Brian: I was more of a '90s kid, so I was all grunge. And I had the shaggy hair and the flannel and all that. And now, I only have the flannel. Anyway, so these types of mixed signals that can create behavioral issues. I'm gonna go off script for one second here, Bob. This is something I think about all the time. I think that the generations that have money now look at the '80s and the '90s where literally nothing bad happened, right? You can't even find 1987, October '87, you can't find it on a chart anymore because it's been so much crazier ever since then. I think those were the anomaly.
And I think people got... Once we hit the internet bubble bursting in '01, '02, and that recession and 9/11 and all that, then we hit 2008, I think people viewed those items as the anomalies. Like that's not supposed to happen. But if you look over a couple of hundred years' worth of history of this country, it was the '80s and the '90s that wasn't supposed to happen. You're not supposed to have a period of prosperity that freaking long. But we did. And that created what we all thought was the economy. This is how it's supposed to work, and everything else is wrong. So, we did...
Bob: It is how it's supposed to work. The Nasdaq is supposed to go up 27% a year, Brian.
Brian: Of course. Companies don't need to make money. They just need to have flashy internet websites and not really a business plan. So, anyway, so yeah, mixed signals, this drives behavioral issues. When we get crazy stuff we don't expect, we tend to want to do something about it. Sometimes action feels so much better than inaction. So, we're going to talk about some of these things that kind of were head fakes economically speaking and the market speaking.
So, 1980s, we had double digit interest rates, but also, really strong growth that kind of seems counterintuitive. So, that would go the other way, right? We had stagflation through the '70s, and we needed to beat that down. The answer to that was really, really high interest rates to tamp down the growth of everything. And that did work, and it hurt a lot for those people who are remembering this time of the economy. But by the mid '80s, all of a sudden, we had explosive GDP growth. And that resulted in what we just talked about. And again, became kind of the formative, this is how it's supposed to work thought for a lot of people. Broke inflation that put confidence back in place, and then the demographic trends stepped in to kind of fuel that growth.
Bob: Yeah, let's pivot to the early 2000s. I mean, 2008, 2009, coming out of the housing crisis, we had 0 interest rates, 0, for it seemed like forever, but no runaway inflation because we were very extended. Credit wise, if you could fog a mirror, you could qualify for a mortgage. Stated income loans. You could buy five or six condos pre-construction down in Florida by just filling out an application. What could possibly go wrong? You get a house, you get a house, you get three condos. Everything was off to the races, and then, wow, the housing crisis hit. Banks were in default. Regular consumers were in default. It was a really wild period there for a couple of years.
Brian: So, I just used a banking term. I was working for a bank at that time. And I remember the head of the local lending facility there, the mortgage area, was a super honest guy, and completely on the up-and-up. But he was confused by these stated income loans. Which literally, that sounds like a fancy term. All that means is you walk in, you state your income, you get a mortgage. "I make a bazillion dollars." "Cool. We can loan you two thirds of a bazillion dollars to borrow home." No proof was required. It was just a lot easier. That's the environment that our leadership wanted us in. I'm not talking about the bank, I'm talking about the entire country. That's the environment that we wanted to be in when we reduced regulation on the rules of all that kind of stuff. And that did lead to kind of overdoing it, which we tend to do here.
Bob: Well, and rates stayed low for so long because it took a while for consumers and banks to just deleverage. Everybody had borrowed so much money because it was free. It was cheap. And money was really not moving around for a while. And that's what makes the economy go. So, that's why rates stayed low. It was a very interesting time.
All right. 2009 to 2013, even when we had a bunch of stimulus coming in from the government, inflation did not really spike because, again, we were trying to bail this economy out of that tremendous housing crisis. And you would have thought that inflation would be off to the races when all this government stimulus money was flowing around, but it didn't, Brian. And wow, what a great time to be invested in stocks.
Brian: It was. And so, let's talk about, what was the right move to have made at that time in response to what we just talked about? Well, aggressive rebalancing and taking risks, right? Put risk into your portfolio. A lot of high net worth investors were overly, overly conservative post 2008, and they ate a lot of the downside and missed most of the upside. So, if you had a plan in place and you understood the history, you would have sidestepped that because there would be no need to protect your long-term assets because you would have already set up your short-term assets, which would not have been affected by it at all.
Bob: All right. And then let's move forward to the dreaded COVID discussion, 2020. You know, stocks actually surged during a global pandemic as the GDP shrank by over 30% in the second quarter of 2020. Unemployment hit 14.7%. Boy, that's a great reminder. I forget about that high unemployment rate, and yet the S&P 500 hit all-time highs by August of that year. Why? More government stimulus, more Fed action, a bunch of money flying around. And when free money is flying around, it finds its way into real estate, into stocks, into speculative growth assets. And we were off to the races after that. The fastest and most serious bear market in U.S. history, that market dropped well over 30% in a heartbeat. It really froze people for a few months. And if you bailed on the market then and went to cash, boy, were you sorry just a few months later.
Brian: But I'll add, Bob, most of my clients don't really remember the market collapsing that much. Not like in 2008, because 2008 was real. Not that the COVID downturn wasn't, but it was over with relatively quickly, and it happened due to a stimulus that came out of left field. Those kinds of things tend to become a catalyst, right? Underneath all of that, when you remove the COVID issue, the economy was relatively strong before that.
So, all that happened was, we had a brief panic, and then everybody exhaled and said, "Okay, you know what? I think maybe this isn't that big of a deal. This is not the virus from Hollywood that's coming to kill us all. And then it became a catalyst because the entire world had to shift to working from home, which means Dell made a bunch of money. I can confirm that here on my own desktop. Zoom came out of nowhere, was created. Technology had to shift to allow the whole world to have a second workspace. And that was a catalyst for the stock market that trickled through in a huge way.
Bob: What were a couple of the huge financial planning techniques during that whole time period during COVID? Tax lost harvesting and Roth conversions. When the markets tanked in March of 2020 before rebounding, people that had an advisor and were paying attention, man, this is when tax-smart investing really came into vogue. Because you could just swap one S&P 500 ETF for another, harvest those losses, stay fully invested, and bank those losses to use later on to offset future gains. Wonderful time for tax-loss harvesting and Roth conversions. Man, converting IRAs to Roth during a 30% downturn, wonderful opportunity. And then you catch the rebound completely tax free. We had a lot of people doing both of those things, and it really moved the needle financially for them.
Brian: Yeah, and that can be a tough trigger to pull, because remember, you're doing that in the face of headlines that are screaming, "The end is near." And you're doing this Roth conversion going, "No, it's not. Matter of fact, I'm going to move this over to the tax free so when the pendulum ultimately swings back the other way, it'll be tax free now. And I paid a lot less in taxes to get it done." That's winning the game.
Bob: All right, we get through COVID, and now, we're in 2022. The Fed has to pump the brakes on all this free money flying around. So, what do they do? They raise interest rates seven times. The labor market came back. Everybody went back to work. And man, we had a horrible year in both the bond and the stock market.
Brian: From day one.
Bob: Which usually doesn't happen, because usually, you buy bonds to protect yourself from stocks. Man, in 2022, nothing worked. And that was an interesting time. But that's when, for the first time in many, many years, we talked to people about treasury bills, treasury bonds, some of these high-yield savings accounts, parking some money, getting very nice interest rates, fighting back against the current environment. And it was a good opportunity. Great time to have an emergency fund, Brian.
Brian: It really was. That was when we were all reminded that you are indeed allowed to get paid real dollars on your depository type accounts, your safe money. It had been decades since we had that opportunity. One of the things I like to point out to my clients is exactly how bad that year was. We don't really think of '22. '22 didn't have a story. It didn't come along with anything crazy, but it was one of the five worst market years we've had on record. And that includes 2008, it includes 1937, it includes 1973, '01, '02. It's up there with those worst years we've ever had, but it doesn't get thought of that way. Because it didn't come along with one great story like the depression or the great recession or anything like that. But anyway, so at that time, yeah, that was a time to kind of take stock of what your situation really is. It was a great time to have an emergency fund, not only to take advantage of those interest rates, but also, to not have to sell out your long-term assets that were getting hammered at the time.
Bob: And then last, but not least, 2023 to 2024, despite higher-than-normal interest rates in inflation, I don't think anybody saw this coming, Brian, to this extent. We had great stock market years, both of those years. Why? The influx of AI enthusiasm, new technology coming in, better-than-expected corporate earnings, and economic resilience, which usually always overcomes these short-term fears. Just proving once again, that the American people, American companies are very resilient. They find a way. And boy, if you were out of the market in '23 and '24 just because you were afraid of what was going to happen in the world, you missed out on some great returns.
Brian: Yeah, that's right. And the move then would have been, we're big fans of direct indexing here, if you can do it, which basically means own a pile of individual securities instead of mutual funds, if you can in a taxable account, replicate that index and take advantage of the tax loss harvesting opportunity.
Bob: Here's the Allworth advice, when the economy doesn't necessarily follow the proverbial rules or script, smart investors don't panic, they reach for the right tool in the toolbox. A giant in the retirement plan world is starting to shake things up. We'll show you what that means, potentially for your 401(k), your asset allocation, and your long-term income plan. 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" live every night, subscribe and get our daily podcasts. And of course, if you have family or friends that need some financial advice, let them know about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcasts. Straight ahead at 6:43, how to juggle the financial demands of aging parents and adult kids, what to do with old annuities that are laying around collecting dust, and why a big payday from selling your business isn't always as simple as it might seem.
Let's dig into a story that could have implications for your retirement planning toolbox, Brian. The asset management firm, State Street, one of the biggest providers in the ETF target date space, is making moves in the defined contribution or what we like to call the retirement plan world that could change how 401(k) plans look and behave in the pretty near future.
Brian: Yeah, so the gist of this is that we normally when we think of 401(k)s, we think of traditional mutual funds, which have been around for, I don't know, 100-some years. I believe 1924, as a matter of fact, was the first one. Anyway, those have been around forever. And that has evolved into target date funds, which are still mutual funds. Those are the ones that have a year in the name of them when you're looking at 401(k), and that year is roughly when you might retire. And that indicates a portfolio that might be appropriate, although you got to look under the hood, because not all target date funds with the year 2065 are the same, for example. And plain old index funds, as most people are familiar with.
But State Street is coming around saying, "We're going to innovate this space." And they have launched some target date strategies that include private markets exposure as well as public markets. State Street is a big firm, $1.7 trillion in exchange traded funds. If you've ever heard of SPDRs, which are the S&P 500 ETF, that's their flavor of them. But that's State Street behind that. So, this could be significant for higher earnings.
You're already thinking about more than just allocation. You're looking for... I'm sorry, more than just accumulation. You're looking for diversification. You're going to need income generation in the future. You want some things out there to kind of offset the swings of the market, meaning alternative assets, certainly need tax planning, those kinds of things. So, when a retirement plan provider starts offering these hybrid solutions, what that means is, your 401(k) is no longer just a commodity play. It's not the same as all the other ones. It can become part of a more sophisticated asset allocation strategy involving a whole bunch of other topics.
Bob: Well, let's look under the hood here for a minute. Let's say you've got a 401(k), and you've got $750,000, a million, couple million dollars in there. And maybe it isn't a target date fund or some other index funds. With these new structures coming from State Street, and I'm sure other providers are going to be following suit here, you might be able to get access inside the plan to private equity, private credit, infrastructure funds. That's the kind of model that State Street and others are starting to build.
I see pros and cons with all of this, mainly pros. I think for some of these larger plan sponsors, I think some of the traditional, potential objectives to adding these asset areas to these plans, i.e. fees and transparency and lockup periods, I have to think that if you're going to put them in some of these multimillion dollar 401(k) plans, that a lot of those traditional hurdles are going to start to go away. And I think that's a good thing.
Brian: Yeah. And make no mistake, what the motivation is behind this, of course, State Street is a for profit entity, as are many of them and us and individuals in this country. So, rest assured, they're looking to make a profit by providing people something that doesn't exist right now, because there is literally $12 trillion in the retirement plan space mostly locked up in traditional mutual funds. And they're viewing this as an area that is ripe for some different options out there.
Bob: Yeah, let's face it, if everybody just piles into index funds, it's a pretty low-margin business, because the internal operating expenses of those funds are very low. So, again, I see pros and cons to all this. If these alternative asset classes do their job, which is to potentially increase your return with lower risk adjusted volatility, it can be a good thing as long as you don't get sucked dry on fees. So, again, we're just calling it out to let you know this stuff is coming. But I think it's good to look under the hood and see what the deal terms are, so to speak, to make sure you're really getting good bang for your buck if you venture into some of these things.
Brian: Yeah. So, let's talk about, what are the pros and cons? We talked about the pros, right? So, these could be decent opportunities to get into things beyond traditional mutual funds. But private markets often do lock up capital, right? These aren't things that are priced every day. They're not liquid every day like a traditional investment. So, if you're used to that, and you've been using your 401(k) as part of your near retirement plan, then this could be something that locks up a chunk of your assets in something that you cannot get to. So, you need to plan around that. Also, they'll provide access to assets that historically only your ultra-high net worth folks have been able to get into. This could improve your return potential, but it's also going to change your risk profile around. You should expect the unexpected if you're going to invest in these different types of assets.
Bob: Let's take a practical scenario. Let's say you're 58 years old. Your 401(k) has a little over a million dollars in it. And you're projecting retirement at 62. So, you're already planning to take income from your portfolio here, i.e. your 401(k) that might get rolled over to an IRA within, say, four years. If your plan sponsor eventually offers these vehicles that has this private market exposure, you just want to make sure that you're going to be able to get access to your money if and when you need it. Again, the proof is in the pudding. You've got to read the fine print and see what's coming down the pike here before you get too involved in these kind of alternative assets.
Brian: Yeah. So, just like anything, be mindful of what you're getting into. Understand what it is. There are lockup periods, there are extra fees. Just understand what the investment is that's underlying it, because it may not match what the market is doing if that's what you primarily pay attention to. That's what you're asking for, "We want something different." That's why they call them alternative assets. But just understand that you're venturing into a world that you have not ventured into before. There are nuances.
Bob: Here's the Allworth advice, don't just treat your 401(k) like a pile of money sitting over there that you completely forget about. Treat it like a key piece of your portfolio. Know what's inside it. Demand choice and align everything with your timeline and your liquidity needs. All right, open enrollment is here, but which of the optional choices should you actually sign up and pay for? We'll explore that question next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, open enrollment is upon us, and for some, the choices are pretty simple in terms of health insurance. In fact, many plans just roll over your choices from last year. But there are some options that you can pay extra for, and are worth taking a look at. These are items that you can choose from through your company during open enrollment. Brian, let's dig into some of this. Tell us what we should consider and what we should just let walk on by here as we enter open enrollment period for folks that are actively working at an employer and have a bunch of options in front of them.
Brian: That's right, Bob. It is the season to watch the leaves fall and sip my pumpkin spice latte and go through my health insurance options, because that's what we do in Q4 here in the fall. So, let's start with life insurance. That's one of the choices you're going to make. Most employers will foot the bill for some level of life insurance up to, say, two times your annual earnings. But do you need more? And if so, what do you do then? Well, if you need more, you've got the option usually to choose three, four, five times, maybe even more your salary, but you're going to pay for it.
So, if you do decide you need that, a term policy is probably what's going to do the job best for you. It's affordable. It's going to cover you for a set period. And that premium is going to be locked in. If you decide you need more insurance, I wouldn't look at your benefits plan. It's not going to be the most cost-effective way to do it. Figure out what you need insurance-wise because that is probably not going to change as often as open enrollment comes around.
So, figure out what the mortgage is, what your family would need if something happened to you, and perhaps whatever college expenses. Those are calculable timeframes that you can figure out, and then do the math. That won't change year-to-year. However, the premium you would have to pay to go through your group benefits would. So, now, that's term insurance.
Permanent life insurance is exactly what it sounds like. That's going to be around your entire life, which isn't necessarily a bad thing, but obviously, that's more expensive because you're virtually guaranteeing that the insurance company is going to have to pay out a sizable amount. Term insurance is just that. Tie it to your mortgage, which might be 20 years left, 30 years left, or whatever. Tie it to the kids needing to go to school. That's a calculable timeframe. Use term insurance for those. Permanent is when there will always be a need for death benefit out there.
Bob: All right. A couple thoughts on this whole life insurance through your company benefit plan. The good thing is you get guaranteed underwriting because you're getting underwritten as part of a big group, your fellow co-workers. The bad thing is if you really are in a lower class underwriting, non-smoker, not overweight, very, very healthy, you can qualify, usually, for much better rates in terms of premiums by getting underwritten on the outside. So, this is where it makes sense to just, like we talk about all the time, do a financial plan. As Brian said, figure out how much life insurance you actually need and for how long, and then don't be afraid to go out and price this thing through your company and through a fiduciary advisor. And you might be surprised at what the difference in premiums actually are. All right. Moving to disability insurance. Most employers cover this. A lot of people don't even know what it is. And, Brian, I think this is a vastly overlooked part of the whole benefit menu that more people should be taking advantage of.
Brian: That's right. And a survey showed that just 56% of workers can say for sure whether their employer even offers a disability insurance benefit. That's a study of 2024 from LOMA and Life Happens. That's a nonprofit that looks at insurance education. So, like Bob says, this is a misunderstood area. Most people don't run into these types of things, right? Becoming disabled on the job is not necessarily something, or off the job that prevents you from working. That's not a common occurrence, but it does happen to people. These are reasonably priced options.
I would definitely go through. Start with your group for this because that's available. and this is more of a year-to-year thing, but it's the cheapest way to get a disability coverage. Remember to understand the difference between, how will they trigger your benefit. Is it because you can't do your job, or is it because you can't do any job? That is a huge difference in terms of how that coverage works. If you can flip burgers, you might not get it. But that's definitely something to pay attention to when you're going to look at this. That said, when you get closer and closer to retirement, you'll eventually hit a point where, "You know what? Maybe I don't need disability insurance because if something really happened, I would just plain retire and not do any job anymore."
Bob: Well, most of the time, short-term disability is paid for by the company. It's very inexpensive and it covers a short period of time, a very finite period of time. What I want to encourage everybody to do, almost everybody out there, is take that long-term disability option. It's typically going to ensure about 60% of your income. And like Brian said, even irrespective of the qualification of disability, in terms of what it actually costs, it's pretty darn inexpensive relative to the benefit that you get if a real catastrophe comes down the pike, a severe illness, an automobile accident, something like that. Let's face it, at the end of the day, your ability to earn an income is your largest asset, and you really do need to look at ensuring that. Brian, give us your take on voluntary accident insurance.
Brian: So, yeah, accidental insurance will give you payments in addition to the medical benefits when you or your enrolled family members have an accident. It's been a long time since I've seen one, but these are the ones where it'll say, "If you lose one hand, it's this dollar amount. If it's two hands, you get this much." I haven't seen that in about 20 years, but that always kind of made me giggle the way there's a menu that you can choose from.
Anyway, it's to cover out-of-pocket expenses on your medical plan, such as the deductible and co-insurance that result from some kind of an accident. Usually, a fairly small payout, looking for broken bones, burns, or missing limbs, that kind of stuff. If you're a high earner, this is really not essential. And honestly, the relatively low likelihood that this is going to happen to anybody. I'm not a huge fan of voluntary accident insurance. I've been ignoring it for years. I'm willing to kind of gamble. But that said, maybe if you're a mountain climber, you do a lot of physically-active stuff that does put you at risk, it can be not the worst idea to invest in.
Bob: All right, that accident insurance is followed closely by voluntary critical illness insurance. So, let's say you have a heart attack, a stroke, kidney failure, cancer, this insurance protects you with covering out-of-pocket expenses that your health insurance doesn't cover. We all remember the Aflac commercials that talk about this. That was an accident...
Brian: Can you do that again? I didn't quite hear that.
Bob: Aflac.
Brian: Thank you. One more time. One more time for the record.
Bob: I'm not a big fan of this stuff. I mean, at some point, you can just throw insurance premiums out the window that would... If you factor in the probability of any of this stuff actually happening, you're better off just raising your contributions to your 401(k) plan. Put your money away that way. But what say you about this kind of stuff?
Brian: I mean, if this is an obvious, family hereditary topic, everybody winds up with cancer, or everybody winds up with cardiac issues or whatever, then, yeah, you might think about it. But if you don't already know that about your family, then I would say it's not that big of an issue. Yeah, no, I'm not a big fan of an individual insurance policy for each and every bad thing that might happen to you.
Bob: All right. And no good benefits segment is complete without talking about voluntary pet insurance. Brian, give us your thoughts on pet insurance.
Brian: My thoughts on pet insurance is that, for the cost of the premium, I can probably buy five more of that little thing that occasionally I enjoy and sometimes annoys me. All right. How was that? Did I do good?
Bob: Yeah, I was thinking it. You actually said it, which is great.
Brian: I'm going to pay for that when I get home tonight.
Bob: I succeeded in making you be inappropriate on the radio. All right.
Brian: Well done. Well done.
Bob: Here's the Allworth advice, during open enrollment, don't just default to last year's choices, review your benefits with fresh eyes, because your situation in all seriousness may have changed. Next, real questions from people like you. Questions about selling a business, supporting parents and kids, managing an uneven income stream, and what to do with those old annuities you've had for years. We'll do our best to break all of that down coming up next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. You have a financial question you'd like for us to answer, there is a red button you can click while you're listening to the show. If you're listening to the show on the iHeart app, simply record your question and it will come straight to us. All right, Brian, get ready for Mark in Mainville who says, "Our advisor keeps pushing alternative investments. I wonder why. How do you tell the difference between genuine diversification and just a high-fee sales pitch?"
Brian: So, what alternative, what that really means is that it's an alternative to your traditional stocks and bonds. So, this includes private equity type investments, hedge funds, private credit, structured notes, real estate partnerships, commodities, those kinds of things. And these aren't necessarily bad, but the reason it's getting loud about this is because technology and efficiencies have allowed these types of things to be more presentable to the masses.
But you want to make sure that you're actually getting real diversification. Is this just some kind of hedge fund that ultimately matches the S&P 500, in which case it's just an expensive index fund? Or is it maybe just different for the sake of being different? So, real diversification should smooth out volatility and reduce your overall portfolio risk. So, make sure that's in there. Also, follow the fees. There's a lot of layers of fees. Oftentimes, there's 1% to 2% management fees, just like in a traditional portfolio, plus performance fees. If we make you 50%, we're going to keep 10% of it. That's a 20% performance fee. Those don't exist in your more traditional type investments.
Bob: And Brian, no high-fee sales pitch would be complete without presenting non-traded real estate investment trusts. We all love those.
Brian: Non-publicly traded REITs that you'll be stuck with until all of eternity.
Bob: High fees. Lock your money up for 10-plus years. They are wonderful. Absolutely wonderful things.
Brian: And the "advisor" behind those got paid a commission and will never bother talking to you about it again because his or her job is to go find the next person to put them in, and you'll be stuck with it forever. Anyway, not that we're biased. Are we biased here, Bob?
Bob: Not at all.
Brian: No, not at all.
Bob: Not always.
Brian: All right, so we're going to move on now to Greg in Lebanon. And Greg is looking at selling a business. Congratulations, Greg. It must have been pretty successful over the years. He's a little spooked by that liquidity event. It feels kind of overwhelming. And he's asking, "What is the smartest way to deploy that cash without rushing into the next big thing?" Bob?
Bob: Well, Greg, you hit on the best point here, not rushing to do anything. First of all, congratulations on being in a position to sell a business, which I'm assuming you worked very hard to build and get in a position to move on from. And that's a big event. You should be very proud of that. And along with that, just take a deep breath. Let the dust settle. Don't let that big chunk of cash burn a hole in your pocket. Take some time to just breathe and relax and get a good team around you, a good fiduciary advisor, financial advisor, CPA, attorney. And build a financial plan based on all this newfound liquidity that you have, dovetailing that with all of your future goals. And then slowly deploy things to make that financial plan come to life. That's my advice, is slow down, get some good advice, and don't let that cash burn a hole in your pocket.
All right. Emily in Fort Wright says, "We're helping support both aging parents right now and our adult kids. How do you plan for that kind of financial squeeze without burning through some serious retirement savings?"
Brian: Well, Emily, welcome to the sandwich generation. Roughly one in four adults in their 40s and 50s is now providing financial support to both an older parent and a grown child. In the Midwest, this is having an even bigger impact. Rising healthcare costs for parents and housing, and just the kind of overall family feel. We stick with family, you do it for family. That's what we do here, and that's what gets expensive.
So, the very first rule is put your own oxygen mask on first. You can't do them any good if you yourself are a mess because you'll all wind up a mess well down the road if you have spent your own assets down. So, make sure you are in good shape. You have to set clear boundaries with both sides. If it's your parents, have an open conversation about long-term care, what their income sources are, and what yours are, frankly, and whether it's time to simplify their investments or do something different for their living arrangements.
Adult kids, give them guidance, not guarantees. That's the best thing you can do, is share your experience with them. They're going to have to carry most of their own weight. Help with budgeting, job planning, and make sure that that support is conditional and time limited. You'll be there to talk, but you're not going to be an open wallet. All right, Ron in Amberley Village. Ron says they're both self-employed, and that means they see pretty violent swings in income. And he's asking how you build a savings and investment plan when that cash flow is not really predictable.
Bob: Ron, my advice here is just have a larger emergency fund. Most conventional wisdom says have 6 to 12 months' worth of expenses covered in a non-risk savings account at the bank. We all know that. I think when you own a business, you're self-employed, you've got things moving around a lot, you just need to give yourself a little more space. So, oftentimes, I tell people, "Take that 6 to 12 months and make it 24 to 36 months." Most of the time, if you know you've got your nut covered, so to speak, your basic, family, operating expenses covered for two to three years, that will take a lot of stress off the table and allow your longer-term capital to stay fully invested. And most importantly, for you and your wife not to stress out about short-term cash flow and just focus on running your business.
I mean, let's face it, owning a business comes with a lot of upside potentially, but as you said, a lot of volatility. So, just give yourself some wiggle room here in the form of a higher emergency fund balance. And don't worry about doing that. I know that money is not going to be making 20% a year, but you'll be glad you have it if the furnace breaks, the car breaks down. And you just don't need the extra stress in your life by worrying about where your next penny is going to come from. And you certainly don't want to get into a situation where you're running up a big credit card balance paying 29%. You talk about a stressor, that'll cause it in a hurry.
All right. Last, we've got Greg in Bellevue tonight. Brian, he says, "We've got a few old annuities sitting in our portfolio. And honestly, we're not sure what role they play anymore. How do you evaluate whether to keep them or just unwind them?"
Brian: So, annuities often get pitched as evil, but that's not the case. They're just simply complicated. They can be beneficial. There are some terrible ones out there that are just expense and they just exist for the insurance company to be happy. But it depends on what these are. If these are simple fixed annuities, and maybe you're beyond the surrender period where you could pull the money if you wanted to, look at the interest rate. And if you need an emergency type fund and it's paying a decent rate as they often do, then maybe it just sits, leave it alone. You don't have a surrender period to worry about, so you got past the painful part.
Contrast that with if it's an annuity that has, say, income riders on it that are a little more complicated, then generally, you're going to want to turn those on as soon as possible if you're going to use them because that's the way you'll maybe benefit from the insurance company's guarantee. But understand how the math works, and understand whether you should leave it in there at all, because you can get out of those once you're out of that surrender period. You can get out of them without paying any fees. Taxes, you got to be careful of. Certainly understand what that impact is.
Bob: All right, coming up next, I've got my two cents on a couple of nuances here to Social Security claiming strategies. 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. Brian, I want to talk about a meeting I actually had yesterday with a single lady who just turned 65. She's going to be 66 next year, and talking about how to take and when to take her Social Security. And it's just when we pulled out the tax software and we started looking at the implications of different decisions, things have gotten a little more complex here with the new tax legislation that came out earlier this year. And I just want to highlight that here to close things out tonight.
Because now, you've got to factor in two things. What threshold does your income cause most, if not all of your Social Security to be treated as taxable income? And then we also have that enhanced senior deduction for folks 65 and older. That's a deduction of $6,000 for single taxpayers, $12,000 for married filing joint. This is what the president and others, when they talk about Social Security being tax free, kind of.
Brian: Not so much.
Bob: But there's a phase out here. So, you got to take a look at when you take Social Security, how that dovetails with your other income. Because in this case, waiting a couple of months we're going to keep her in a 12% marginal tax bracket next year instead of jumping into a 23% tax bracket because of some of the phase outs and taxability of Social Security.
Brian: Yeah. So, I want to make sure you mentioned the phase out. Let's talk about what that is because a lot of people just heard, "Cool, $6,000 deduction, the $12,000." Single filers, you're going to lose the ability to do that if your modified adjusted gross is below $75,000. You're going to lose out if you're married, if it's... I'm sorry, above $75,000. And if you're married, you lose it if you're above $150,000.
Bob: So, just get with your CPA, get with your advisor, and make sure you're not surprised here by the taxability of your entire situation when it comes to Social Security. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.