November 22, 2024 Best of Simply Money Podcast
- Investments vs. fads 00:00
- The power of diversification 14:02
- The true cost of homeownership 20:03
- Charitable giving techniques 28:47
- What top retiree cities share 35:01
Investments vs. fads, charitable giving techniques, and the power of diversification.
On this week’s Best of Simply Money podcast, Amy and Steve dive into the intriguing world of investments versus fads. In this episode, they explore historical financial trends, discussing past fads like cryptocurrency, the dot-com bubble, Beanie Babies, the housing bubble, meme stocks, and NFTs. They highlight how these trends captivated public attention but often lacked solid investment fundamentals.
Plus, they discuss the true cost of homeownership, and charitable giving techniques.
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Transcript
Amy: Tonight, you're going to hear our take on the difference between an actual investment and a fad. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. I think this is actually a hard thing to wrap your brain around, I think back to when cryptocurrency became all the rage, and I think because people were talking about it so much, not necessarily understanding it as an investment, right? There were not regulations around it. We didn't have a lot figured out. But because everyone was talking about it, many people who weren't invested felt like they were missing out. So many people, "Come on our radio show and talk about this," and people would stop me in the grocery store, "I think I should be in crypto." "Why?" "Well, because everyone's talking about it."
Steve: Yeah, because it's a fad.
Amy: Yes, right, right. Yeah. People were talking about it because it's a fad, not because it's a solid investment.
Steve: Yeah. I mean, crypto, in and of itself, there are many different coins out there. It's not just Bitcoin. It's not just Ethereum. There are thousands of different coins that you can buy into. Most of them are fads. And that was the case over the years for a lot of people got caught up in Bitcoin when they shouldn't have been, again, fad at the time. I think it's got a little bit more staying power at this point, but it's still a very speculative investment. So, let's look back over time to talk about some of the trends that we've seen as far as what is a fad and what might not be all the way back to 30 years ago almost at this point, the dot-com bubble, first and foremost.
Amy: It's like when you think, "Wait, this is a new great thing," sometimes you have to look backwards to realize, "Oh, actually, the concept of brand new fad investments really isn't new at all." Look at the dot-com bubble, right? So, the late '90s, you had total FOMO if you knew anyone who was heavily concentrated in that tech sector because their story was a really good one. It was a really strong one as an investor, right? The returns year after year, skyrocketing, skyrocketing. And then all of a sudden, '99 hit, 2000, and that bubble burst. I have talked to people who had plans for an early retirement based on their tech stock investments. They worked another 12 years longer than they were planning because when that bubble burst and they were so heavily concentrated in that one particular sector, what seemed like a surefire, safe bet investment ended up being anything but that.
Steve: Yeah. I mean, if it had the word internet in its name...
Amy: Right. "Sign me up."
Steve: ...then it could not lose. These were startups with no profits, no viable business models. It was literally a name, kind of like you could make... There could have been an Amy and Steve coin. There still could be. We could make that today for crypto. So, the dot-com bubble, there was obviously a couple of companies that made it through that that are very successful today, but the majority of them, I mean, the NASDAQ was down 80% when the bubble burst. How about Beanie Babies? You strike me as somebody that had a collection of hundreds of Beanie Babies.
Amy: I never had a collection...
Steve: Why are you denying it?
Amy: ...of hundreds of Beanie Babies, but I'm actually glad that you brought this up. I think we can laugh about the concept of Beanie Babies as an investment, but I know many people who back in the day would camp out overnight for the next big Beanie Baby or whatever it was because they were sure that that, I don't even know, $10 investment that they were making was going to be worth hundreds and hundreds of dollars down the road. I still know people who are holding on to Beanie Babies, just so sure that at some point they're going to make a comeback. There's actually a term for this. It's called the Greater Fool Theory. And essentially, what it is is there has to be a greater fool than you who is going to pay that greater price that you think that killer whale Beanie Baby is worth. There has to be someone out there who thinks there is value in something that is really a stuffed animal.
Steve: Yeah. I mean, the prices in the secondary market for Beanie Babies, some of them reached thousands of dollars for the rare items, but then what happened is the company that made them increased production. And the rarity of a lot of these things actually went down to the point where you have people still sitting on orcas, I guess, that they're hoping are going to skyrocket in value one of these days.
Amy: There probably never was a whale Beanie Baby. I don't know. That's what I came up with off the top of my head.
Steve: That's the one that you have 20 orcas?
Amy: Yeah, sure. Sure. Exactly.
Steve: Housing bubble. So, 2000s, this one, obviously, people have a need to be in a home. They need shelter. This is a little bit different because it wasn't necessarily speculative to the same level as Beanie Babies, but there were loose lending practices, there were the creation of securities that you could speculate on the housing bubble. Financial derivatives drove that, and that led to a skyrocket of home prices. And there we were, a lot of homeowners defaulted on their loans that, quite frankly, many of them shouldn't have gotten in the first place.
Amy: Essentially, the housing market became a house of cards, right? If you could fog a mirror, you could get a mortgage for a half-million-dollar house. There was no research being done on, "Can people actually afford these prices?" And, yeah, to your point, there were then investments. You can invest in these mortgages. And as a result of that, the house of cards absolutely came falling down. At the time, it seemed like you could do no wrong buying a home. But when you look back in each of these scenarios, there were fundamentals that were missing. There were things that you could point to and say, "This doesn't look quite right," yet there was a buzz around it that caused so many people to overlook the fact that the situation was not fundamentally sound.
You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. Is it an actual investment, or is it just a fad? There are so many... It's interesting because you think about investments, you think about 401(k)s and IRAs, and this is what gets you from where you are now to hopefully retirement someday. It seems like this shouldn't be as trendy or as fad-oriented as my 15-year-old in basketball shoes. Yet, I think the same thing applies. Things come in and out, and there are certain people that are going to jump on them every time. I would just caution you, as we have looked backwards at different fads and the issues that they've created for so many of the investors is have your own plan, your own long-term financial plan. And any new investment that's coming down the pike, hold it up, look at it through that lens. "Is this going to help me get to retirement? Is this going to help me pay for my daughter's wedding or my son's college tuition someday?" If the answer is probably not, or maybe, but we're not quite sure, then you're probably betting on something that you saw on social media or some crazy headline about someone hitting it big with a meme stock. There's also YOLO bets, which is go all in, take everything out of your 401(k), put it on this meme stock, which, by the way, these companies are never, ever fundamentally sounds...
Steve: That's the whole point of it, with a meme stock.
Amy: Exactly. Yeah. Let's talk about meme stocks.
Steve: Yeah. Meme stocks, this is a craze that started in 2021. There was writing on the wall after COVID shut down places like movie theaters, for example, so that's AMC, and then GameStop, brick-and-mortar locations selling video games because you could just buy them online, I guess, right there, and you don't even have to go to a store. People couldn't go to movie theaters. So, a lot of hedge funds saw the writing on the wall, and they shorted, meaning they sold stock that they didn't own on margin, waiting for the prices to drop so that they could then fill that order and realize a profit. And these people on WallStreetBets, which is a subreddit on Reddit, got together, and they said, "All right, let's make a short squeeze happen." They got together, and they bought a whole bunch of these shares of AMC and GameStop, waiting for the price to go up, up, up, up, up, and the hedge funds had to eventually buy that short position at a huge loss, which was when the stock went up. That caused the prices to skyrocket. So, there were a handful of individuals that made a ton of money off this. There's a lot of people out there, too, that said, "All right, this stock looks like it's great because it's going up, up, up. So, I'm going to buy it." They bought it at the top and lost their shorts.
Amy: One thing that you can almost bet on with speculative or gambling investments like this, or by the time that you've heard of it, you've probably already lost the opportunity. Behind the time it reaches the normal average person and you start hearing people talk about it, it's gone. The opportunity is gone.
Steve: I saw some of this happening in real-time. I did, just for fun. I had looked at that subreddit in the past. I was like, "These guys might be onto something."
Amy: Did you jump in?
Steve: No.
Amy: You were watching it happen.
Steve: I don't regret it either. But technically, had I done that, which is... It would have been the wrong decision. I have no regrets of not doing it.
Amy: You sure? You sound like [crosstalk 00:09:29].
Steve: I don't. I really don't because it was such a dumb idea that I was like, "All right, there's like a 1% chance this works." And I watched it work. I was like, "Okay, well, they got it. Good for them." I feel really terrible for the people that didn't.
Amy: And jumped in afterwards, right? And non-fungible tokens, NFTs, people were just so dang bored during the pandemic, had nothing to do. Day trading surged, meme stocks surged in these non-fungible tokens, which are essentially digital images that people were paying for. Like, it was a Picasso, you know, "We're going through the roof." No one's really even talking about these anymore.
Steve: Because they're a fad.
Amy: I mean, talk about a fad. Yeah. I mean, those were such a flash in the pan. People were talking about them for, like, four months.
Steve: "You just don't get it, Amy. This is a great opportunity."
Amy: I just don't get it.
Steve: "Hop on right now and buy your NFTs." What do we need to look for? What's different between a fad? I mean, obviously, you've talked about that, but focus on something that you know will have staying power, first and foremost. I mean, renewable energy. It's been something that's been steadily growing due to global demand, environmental priorities. People do have those. This is an investment that is not necessarily a fad anymore, but at one point, it might have felt like one. But it does have staying power, for example.
Amy: Yeah. Same with AI, right? AI is like, "Oh my gosh," right? You've got Nvidia right now, like all-the-rage kind of driving the market. For people who are like, "Well, wait a second, this is the fad, this is brand new," no, if you are really paying attention, AI has been in the conversation for years now. Now, we're using it. We're talking about it on a daily basis. Many companies are figuring out how to use it to make processes easier for their employees, right? There's even concern it could take over jobs for certain sectors and certain kind of positions. And so, AI, if you look at the fundamentals of these businesses, they've been around for years, right? They've been developing things, they have strong leadership, all the kinds of things that you would look at if you looked under the hood at an investment and said, "Does this make sense?"
Steve: Yeah. Does a company have revenue, good profit margins, low debt levels? These are the fundamentals that are underlying. If you look at all of those details for AMC and GameStop, you look under the hood, you're not going to see anything that's a great investment.
Amy: Yeah. Meme stocks absolutely did not make sense. People were buying them because people were talking about them. If you are at a holiday party this holiday season, a basketball game, whatever, and people are talking about some kind of investment, they're usually not talking about it because it is slow and steady and grows over time. They're talking about it because it's sexy and new and the latest, greatest thing. And it likely is more of a gamble than an investment.
Steve: If there's witty Super Bowl commercials led by celebrities...
Amy: Run the other direction fast. Here's the Allworth advice. By focusing on staying power, fundamentals, track records, aligning with your personal goals, you should feel more confident in telling a worthwhile trend, a real investment from a passing fad. Coming up next, a major bank makes a declaration to investors that has us saying, "Duh, we've been saying that for a long time." You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. If you can't listen to our show every night, you don't have to miss a thing. We have a daily podcast for you. Just search "Simply Money" on theon the iHeart app or wherever you get your podcast. Coming up at 6:43, we're going to delve into charitable giving techniques that will also, win-win, lower your tax burden. It's been a while actually since we've had any news of an airline filing for bankruptcy. Yet here we are, Spirit Airlines filing for bankruptcy right now.
Steve: Yeah, overcome by stronger competition for budget fares and the carrier's own hefty debt obligations. Oops. Obviously, stuff like that can lead to bankruptcies. They did say that all passengers can use all tickets, credits, or loyalty points as normal. The important thing to know is that you can also continue to book and fly now and in the future. They made it clear that they're still operating as a company. They're just doing a restructuring of the debt behind the scenes.
Amy: I think it'll be interesting to see how this one plays out. And also, some more perspective here, Spirit's actually the first major passenger airline to file for bankruptcy since American Airlines back in 2011. When I said it's been a while, it's been a while. Okay. So, we found this interesting and also funny. So, we're going to make fun of it right now. Goldman Sachs just issued some what they call guidance for investors with stocks at record highs. Here's what they're saying. "You, as an investor, should probably start making plans to diversify." But I'm bombed.
Steve: Yeah. Great advice. Thank you, Goldman Sachs, with all that power and all that.
Amy: That's a revelation right there.
Steve: Yeah, all the thinking heads behind the scenes, their advice is diversified. Good job. You get a pat on the back.
Amy: Yeah. How much are their paychecks exactly?
Steve: Incredible, improbable.
Amy: Exactly. And here's what, in a note, their analysts, led by Peter Oppenheimer, said, "The sharp increases in stock valuation seen over the previous years have left little space for further gains."
Steve: Sounds a little alarmist.
Amy: Yeah. I mean, do they have a crystal ball there in their offices? No, of course, they don't. Markets are going to go up and markets are going to go down. Yes, you're always going to be right when you tell people markets are going to go down because the answer to that is eventually they will. But you should be diversified for a thousand different reasons. And what we've seen over the past year or two is greed could have led you in the direction of, "Wait a second, starting to pay attention to the financial headlines. And there's six, seven companies that seem to be in the headlines all the time, by the way." Those have been dubbed the Magnificent Seven, Nvidia, Tesla, Alphabet, Google, among them.
Steve: Facebook.
Amy: Yeah, exactly, exactly. And because everyone's talking about them, we were just talking about fad investments a few minutes ago because everyone's talking about them. I think greed kind of creeps into the equation here. "And maybe if I want these huge returns that everyone's talking about, I should be more focused on these kinds of investments." And then when the Magnificent Seven isn't so magnificent anymore, you're not reaping rewards. You're paying a major price tag for that.
Steve: Yeah, I mean, they come out and they give this guidance about the importance of diversification. They do use some facts to back up that feedback. The S&P 500 in the past year, if we're looking at it year over year, has gone up 30% in the year over year. That's one of the best years that we've seen in quite some time. Obviously, the market's been on a tear. So, if you're in just the S&P 500, which is primarily driven by the Magnificent Seven because it's market cap weighted, then they're talking about maybe pivoting to something that's equal-weighted, which means the 500 companies in the S&P 500 would have an equal opportunity to have a pull on the underlying price of that index fund. There's a little bit of merit to that, but this is also assuming that people weren't already diversified.
Amy: Here's another revelation. High levels of concentration have now left investors vulnerable to disappointments. Duh, of course, they have. That's why being concentrated in any one stock or sector can always lead to disappointments. You're going to have some really high highs, but you're also going to expose yourself to the possibility of some really low lows. I don't know how many times I can say this. It's like slow and steady will win this race. I was with some friends of mine over the summer. He's probably 5, 10 years away for retirement. He had this perspective of, "I have had so many friends through the years who have jumped on these kinds of fads, into certain sectors, into certain companies, gone all in." He said, "I listened to them at dinner parties talking about life-changing, whatever it was, and then they lost their shorts." He said, "I never got to tell the good stories, but I'm going to have a great retirement."
Steve: That sounds a lot better. I prefer the great retirement over the good stories.
Amy: Sign me up for that. Absolutely.
Steve: When we think about what Goldman here is saying, it's almost an argument to rebalance. I mean, that's really what it is because if you... You should already have a diversified mix, meaning some of your investments are going to do really well, some of them aren't in any given time. Periodically, you have a responsibility, and this is what professional money managers do, too, that they have ice in their veins. Why I say that is because the emotional decision that many folks make if they're making decisions on their own with their investments is they look at the ones that are down, and they sell them, and they buy the ones that are up, which is the exact opposite of what you should be doing. You sell the ones that are up to buy the ones that are down because the ones that are up aren't always going to be up, and the ones that are down aren't always going to be down. You're buying low and you're selling high. That's precisely what you have an opportunity to do right now when the markets are high because chances are if you haven't made any changes in your investments, you've had what's called portfolio drift, and your asset allocation isn't what you thought it was. If we want to try to give Goldman some credit here, it's almost like they're saying, "Hey, rebalance."
Amy: But they're not saying, "Hey, rebalance," they're saying, "Hey, you might be too focused in one particular sector, and maybe what you should be is invested in a lot of different companies." Well, duh. If you've listened to our show for more than three minutes, we have been saying this for years now. The secret isn't figuring out that Nvidia is the next big tech stock because of AI and all the revolutionary things it's going to do to how we work and everything we do. No, no. It's just being diversified. In some points, those kinds of companies, for whatever reason, and we've seen it, right? Some DOJ investigations into certain companies like this or whatever, those stock prices go down, and the slow and steady ones that weren't necessarily sexy, value stocks, things like that, those end up being the winners. So, what's the answer for you? Have a little bit of money in all of them, right?
Here's the Allworth advice. It took until now for a huge bank to tell you to have a diversified portfolio. Ah, we've been giving you this advice for years now. Coming up next, we're breaking down what is the true cost of home ownership. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. If you are one of those people who has been waiting to buy or sell or both a new home over the past several maybe months or a couple of years as interest rates have been higher, you've probably been waiting for mortgage rates to go down. Joining us tonight is our credit expert, Britt Scearce. Britt, it's been interesting because we've been just waiting for the Fed to lower interest rates, thinking that mortgage rates might also go down at the same time, and we're still waiting.
Britt: Yes, it can be very frustrating when everyone tells you, "Hey, rates are going to go back down into the 5s, you know, in a year or two years. And then, of course, all this stuff that happens all around the world that affects the bond markets, that affects our mortgage rates can sometimes put a little kink in your plans. You know, I do feel like, you know, things have gotten better a little bit from the... From the period of time where rates were all the way up into the 8s, they've kind of come back down, and now they're hovering closer to 7%. And we'll see what world events affect the markets and see if we can get our rates, you know, if they do start to continue to go back down. And that going down, if they can go down a little bit, that really has a huge impact on affordability for homeowners and potential homeowners.
Steve: And, you know, we've been talking about it for a while that mortgage interest rates, we were spoiled for a long time. You know, we're not going to see them go back down to 2.5%. You know, it's going to go lower than 7. It's just taken a little bit longer than I think everyone was anticipating. So, you know, some other hidden costs of homeownership. I think a lot of first-time home buyers, they're focusing solely on the mortgage payment anyways, but there's some other costs included that sometimes folks just don't think about.
Britt: Exactly. You actually do your calculations based on, "Okay, I'm going to borrow, you know, $200,000 or $300,000 to purchase this home," and you figure out what the mortgage payment is going to be. Well, the mortgage payment itself, just the principal and interest payment may be very affordable, but there are other things that are going to be included in the cost of ownership. You have property taxes, you have homeowners insurance. If you're not putting 20% or more down on a conventional loan, you might have private mortgage insurance. And there also could be homeowners association fees or condo fees that are also associated with that homeownership. So, when you break all that down, you know, that easy, you know, $1,000 or $1,500 payment might really be $1,800 to $2,300. And that's where people...
Amy: And there are a lot of people who have been waiting for mortgage rates to go down. And as they're waiting, I like that you're bringing up this point, which is, "Let's look at the total cost of ownership and go into this with eyes wide open." So, if you're going to sit on the sidelines, I don't think enough people look at it this way. But when you're talking to first-time home buyers, what's the conversation that you're having with them about understanding what their all-in cost is going to be?
Britt: Yeah. First off is going through what we just discussed, you know, all of the costs that are going to go into that homeownership. And, you know, you have taxes and insurance and, you know, private mortgage insurance, and then you also have different types of loan products. Right now, some folks have been utilizing adjustable rate mortgages in order to kind of get into the home, marry the house, but date the rate, and hope that rates come down to where you could refinance and say, "If you have a 5/1 ARM, you have five years to kind of watch the market and have an opportunity to refinance." So, some people are doing that.
But the other stuff to look at is not just looking at the total monthly mortgage payment, but also making sure that people are ready for the upfront cost of purchasing a home. You know, there's due diligence to be done. You're going to need money upfront, not just for your down payment at closing, but you're going to need money for an appraisal, which can run $500 or $600. You're going to need the first year's homeowners insurance premium upfront. You're going to probably want to do an inspection on the home to make sure that there aren't hidden defects that could cost you a lot of money down the road. So, you know, having some money upfront even before closing is important knowledge for people to be prepared for because some folks...you know, I had someone that went into contract the other day, and they didn't realize that they were going to have to put up earnest money on the contract.
Steve: Surprised.
Britt: They're just like, "Well..."
Steve: "Who's earnest, and why do I have to pay him?"
Britt: Exactly. So, understanding the overall just expense of becoming a homeowner, the monies that you need upfront for the earnest money, for the upfront homeowner's insurance, the inspections, the appraisal, all of that, and then, yes, there are going to be closing costs on the mortgage as well that you need in addition to your down payment. So, you know, all of that is what I go through with a borrower to make sure that they're going in it with their eyes wide open.
Steve: And I think if you've been renting, it may be a rude awakening as far as utilities and different services are concerned that you need to pay for, you know, higher electric bills, gas, water, trash collection. Internet is something we're all used to here, cable maybe. But some of these other expenses, especially if you're moving into, like, a big older home, for example, that might not be the most energy efficient, I think you might be surprised with some of the costs associated with that.
Britt: Exactly. You not only have, you know, the mortgage, and taxes, and insurance, and TMI, and homeowners association, but now, you know, if your utilities used to be included in your rent, well, they're not going to be as a homeowner. And you also may have some other, you know, repairs that now you're going to be responsible for rather than calling a landlord and saying, "Hey, you know, my sink needs fixed." Well, you're the landlord now as the homeowner. You get to go and fix that.
Amy: Rude awakening there. You know, it's been a brutal housing market for first-time home buyers., people who five, six years ago could have jumped in, rates were lower, there was more inventory. We just came out of this pandemic where homes were going in the matter of hours and there were bidding wars. What does the market look like now for first-time home buyers? Is it still tough for them to get in?
Britt: Well, I can tell you it's improved in that some of the really crazy multiple offers where a home would go on the market and literally they would get 10 offers and half of them would be above asking price and that sort of thing, some of that has calmed down now. In the first-time home buyer range, price range is you're still sometimes are getting into multiple offers. But the first-time home buyers that were getting pre-approved for, say, FHA loans or first-time home buyer programs like the HomeReady and Home Possible, those programs where people were going to be putting as little as 3% down or 3.5% down and they didn't necessarily have a lot of extra money available to put down above asking price and that sort of thing, a lot of them got locked out during that crazy time. And you're finding that sellers are much more willing right now to entertain those borrowers and those offers now because a lot of those really crazy above-asking-price offers have kind of gone away. So now, that part has improved tremendously for first-time home buyers that they're being looked at. Their offers are being, you know, entertained a bunch more now. But with rates being where they are and with so many folks with student loan payments and a lot of extra debt and large car payments, you know, with the higher rates, that makes it pretty expensive. And that part has been working against first-time home buyers.
Amy: Yeah. Tough period of time for first-time home buyers. We appreciate your insights as always, Britt Scearce, our credit expert. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. Do you have a financial question you just can't figure out for yourself? There's a red button you can click on while you're listening to the show. You'll find it right there on the iHeart app. Record your question. It's coming straight to us. We'll help you figure it out and straight ahead. The number one trait that all the best places to retire have in common, if you are thinking about moving anywhere else in retirement, you're going to want to stay tuned for that. Okay. When it comes to charitable giving, most of us do this because we love the way it makes us feel. We love to make a difference. There's certain charities I think that are near and dear to all of our hearts. But if you can give money and make a difference and also help yourself a little at the same time, I'm calling that a win-win.
Steve: Yeah. These are conversations that fiduciary financial planners have with the folks that they work with all the time. We're talking about charitable giving strategies that can effectively poke Uncle Sam in the eye with a stick. That's a saying that I like. I think a lot of us enjoy doing that because we're also helping charitable causes at the same time. So, first one that we talk about are called donor-advised funds, which is, like, a charitable investment account. You contribute assets. It could be cash, it could be stocks, it could be real estate. Typically, I see these funded oftentimes with highly appreciated shares of some kind of stock. And in this region anyways, we see a lot of that with Procter & Gamble, for example. Maybe you inherited some Procter & Gamble shares. Cost basis is real low. You can use that to fund your donor-advised fund. You receive an immediate tax deduction. And then over time, you actually recommend grants to different charities directly from your donor-advised fund. In the meantime, you're getting tax-free gains inside of that account, and the strategy is typical that you are going to, what I call, bunch your tax filing. If you typically take the standard deduction and you open...
Amy: Which most people do.
Steve: Yeah. And if you open and fund a donor-advised fund in a given year, the idea here is that you're kind of looking forward a few years, maybe several years into the future and lumping all of your contributions into that donor-advised fund, in which case you will itemize that year for a higher tax benefit on top of already donating your low cost basis shares.
Amy: These can also make a lot of sense if you've had a heck of a year, right? Whether it's an inheritance, a major bonus, and all of a sudden you're like, "Wait a second, I'm in a higher tax bracket," it could make sense to donate some money this year. You can donate, to your point, Steve, more in that year than you would maybe in years past or years moving forward. You don't have to make decisions about where that money actually goes. It's just kind of a waiting room for charitable giving. It goes into that donor-advised fund. It can grow there. You can wait. You know, if you've got kids that are younger and you want to wait until they get older and figure out what they're really interested in, where their hearts lie as far as charitable giving, you can wait as long as you want to figure out where that money is going to go. So, you can take the immediate tax benefit of that. At the same time, you can hold off on making that decision.
Steve: Yeah. So, this is a strategy for really any age. When we talk about what are called qualified charitable distributions, normally, this is for folks that are already taking the required minimum distributions off of an IRA, for example, of pre-tax dollars, a rollover IRA from your 401(k), or a pension rollover. Although you can actually start qualified charitable distributions the year you turn 70 and a half, what this means is...and this number goes up periodically. Currently, it's $100,000. You can take $100,000 directly from your IRA and give it to a charity of your choosing with paying no taxes on that distribution. This is a huge benefit because there's folks out there that don't necessarily spend enough.
Amy: Need that income.
Steve: Yeah, they don't spend enough, or they don't need the income. And it puts them in a situation where now they're 73 years old. In a few years, it'll be 75 when it's time for RMDs. And you're forced to take out those distributions. But if you're giving money on a weekly basis to your church or other organizations, you could just pivot how you're giving it and give it directly from your RMDs, right from your IRA rather than cash. And that saves taxes by not having to pay them on the distribution.
Amy: Well, and to your point, if you're already giving these donations, it's just a different way to give the donation so you're having the same impact or possibly greater impact at the same time. There's more tax benefits to this. Steven, we talk all the time about fiduciary financial advisors. I think for so many people, when you're in your working years, it's about accumulating, right? But when you flip that switch into retirement, it is, "How do I be as tax efficient as possible?" And I know it sounds...like, we've got ice in our veins when we're talking about charitable giving, but also the fact that you can do it and have a benefit to you. But it just makes sense, right? If you're going to make these donations or you're going to have to pay these taxes, what's a way that we can marry the two and make it as tax-efficient for you as possible?
Steve: Yeah. Charitable remainder trust is another one. This is where you support a cause while still generating income. This is done by transferring assets into the charitable remainder trust. You receive a partial tax deduction, and then the trust pays you, or it could be another designated beneficiary income each year. When the term of the trust ends, then all of the money in that trust goes to the charity of your choosing. So, it doesn't have the same level of flexibility as maybe a donor-advised fund or doing QCDs. But it does give you an opportunity to generate income off of those assets in life.
Amy: Yeah. I mean, a few thoughts on these. It's kind of like how an annuity would work, right? You get that guaranteed income. Not all charities have these set up. So, if you're interested in looking into these, make sure you do your research first to see if that charity actually gives you the option for charitable remainder trust. But, yeah, this can make sense. And I think the key here is to understand you have options. Here's the Allworth advice. Whether you want flexibility, tax efficiency, or a mix of income and giving, there are tools out there that can help you make a positive impact. Coming up next, what all of the best places to retire have in common. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. You know, we've been doing this for a long time, helping people retire. And I've heard all kinds of reasons why people are going to move somewhere else in retirement. Maybe it's affordability, although we've got that here, healthcare, desirability, weather somewhere else, taxes, job market, you name it. But apparently, according to research, there is one trait that trumps all of those things. Do you wanna talk...?
Steve: Happiness. Oh, yeah, I'll talk about it. I thought you were passing it right to me.
Amy: I was, like, setting you up for the grand moment.
Steve: You were, and then I blew it. Happiness. Happiness is that thing that is the most important. And this is according to U.S. News and World Report, ranked the best places to retire, Naples, Florida, Virginia Beach, Virginia, and New York City. So, this is interesting because, you know, this doesn't take into consideration necessarily the expenses of living in a place. You're like, "How does New York end up on the top of the list with all the taxes, the crowds?" It's an interesting study because it looks at things through the lens of happiness being the number one criteria.
Amy: Yeah. So, it looked at people 45 and older and said, "Okay, what matters most to you if you're thinking about a retirement destination?" Yeah. And in part of that equation, yes, is how to stretch your dollar. But more than that, the response was, "How much enjoyment do I get from that place?" I just came back from Florida, was there over the weekend. I got a lot of enjoyment from the weather. Come back here, it's bonkers weather. It's great...
Steve: How was your commute this morning?
Amy: Exactly. Not even talking about that. But, you know, I understand putting this lens on top of things. Now, I do think there's also some logistical considerations that need to go with these things. Like, for instance, if Florida is your dream...and in the past, that has been mine as well. So, I get that. Have you looked at the cost of home insurance, of insuring your home in this state of Florida these days? Some insurance companies will not even insure you if you live anywhere near the coast. So, again, practical considerations, but happiness is at the top of the list of what are you looking for in retirement.
Steve: Yeah, it's interesting because when we've talked about these in the past, it's usually focused on some mix that's tied in heavily with affordability. But when we look at it through the lens of happiness, that actually some of the top places to live, New York City, Washington, D.C., San Francisco, all very expensive places to live, but they still ranked high on the list. Cincinnati, 111. Not sure I agree with that. But one of the main reasons is because we had the highest score in housing affordability. But come on, happiness. There's a lot going on in this city.
Amy: I was talking to some clients of mine a few days ago who live in Washington, D.C., and I was like, "How are you guys liking it?" It was a litany of complaints, right? It's crazy, it's crowded, it's overpriced, it's this, it's that. And I'm like, "Okay."
Steve: But there's museums.
Amy: But the grandkids are here. There is your happiness card, right? And I think if moving somewhere that's more expensive and because the grandkids are there, again, it's really all about happiness. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station.
Steve: Yeah, because it's a fad.
Amy: Yes, right, right. Yeah. People were talking about it because it's a fad, not because it's a solid investment.
Steve: Yeah. I mean, crypto, in and of itself, there are many different coins out there. It's not just Bitcoin. It's not just Ethereum. There are thousands of different coins that you can buy into. Most of them are fads. And that was the case over the years for a lot of people got caught up in Bitcoin when they shouldn't have been, again, fad at the time. I think it's got a little bit more staying power at this point, but it's still a very speculative investment. So, let's look back over time to talk about some of the trends that we've seen as far as what is a fad and what might not be all the way back to 30 years ago almost at this point, the dot-com bubble, first and foremost.
Amy: It's like when you think, "Wait, this is a new great thing," sometimes you have to look backwards to realize, "Oh, actually, the concept of brand new fad investments really isn't new at all." Look at the dot-com bubble, right? So, the late '90s, you had total FOMO if you knew anyone who was heavily concentrated in that tech sector because their story was a really good one. It was a really strong one as an investor, right? The returns year after year, skyrocketing, skyrocketing. And then all of a sudden, '99 hit, 2000, and that bubble burst. I have talked to people who had plans for an early retirement based on their tech stock investments. They worked another 12 years longer than they were planning because when that bubble burst and they were so heavily concentrated in that one particular sector, what seemed like a surefire, safe bet investment ended up being anything but that.
Steve: Yeah. I mean, if it had the word internet in its name...
Amy: Right. "Sign me up."
Steve: ...then it could not lose. These were startups with no profits, no viable business models. It was literally a name, kind of like you could make... There could have been an Amy and Steve coin. There still could be. We could make that today for crypto. So, the dot-com bubble, there was obviously a couple of companies that made it through that that are very successful today, but the majority of them, I mean, the NASDAQ was down 80% when the bubble burst. How about Beanie Babies? You strike me as somebody that had a collection of hundreds of Beanie Babies.
Amy: I never had a collection...
Steve: Why are you denying it?
Amy: ...of hundreds of Beanie Babies, but I'm actually glad that you brought this up. I think we can laugh about the concept of Beanie Babies as an investment, but I know many people who back in the day would camp out overnight for the next big Beanie Baby or whatever it was because they were sure that that, I don't even know, $10 investment that they were making was going to be worth hundreds and hundreds of dollars down the road. I still know people who are holding on to Beanie Babies, just so sure that at some point they're going to make a comeback. There's actually a term for this. It's called the Greater Fool Theory. And essentially, what it is is there has to be a greater fool than you who is going to pay that greater price that you think that killer whale Beanie Baby is worth. There has to be someone out there who thinks there is value in something that is really a stuffed animal.
Steve: Yeah. I mean, the prices in the secondary market for Beanie Babies, some of them reached thousands of dollars for the rare items, but then what happened is the company that made them increased production. And the rarity of a lot of these things actually went down to the point where you have people still sitting on orcas, I guess, that they're hoping are going to skyrocket in value one of these days.
Amy: There probably never was a whale Beanie Baby. I don't know. That's what I came up with off the top of my head.
Steve: That's the one that you have 20 orcas?
Amy: Yeah, sure. Sure. Exactly.
Steve: Housing bubble. So, 2000s, this one, obviously, people have a need to be in a home. They need shelter. This is a little bit different because it wasn't necessarily speculative to the same level as Beanie Babies, but there were loose lending practices, there were the creation of securities that you could speculate on the housing bubble. Financial derivatives drove that, and that led to a skyrocket of home prices. And there we were, a lot of homeowners defaulted on their loans that, quite frankly, many of them shouldn't have gotten in the first place.
Amy: Essentially, the housing market became a house of cards, right? If you could fog a mirror, you could get a mortgage for a half-million-dollar house. There was no research being done on, "Can people actually afford these prices?" And, yeah, to your point, there were then investments. You can invest in these mortgages. And as a result of that, the house of cards absolutely came falling down. At the time, it seemed like you could do no wrong buying a home. But when you look back in each of these scenarios, there were fundamentals that were missing. There were things that you could point to and say, "This doesn't look quite right," yet there was a buzz around it that caused so many people to overlook the fact that the situation was not fundamentally sound.
You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. Is it an actual investment, or is it just a fad? There are so many... It's interesting because you think about investments, you think about 401(k)s and IRAs, and this is what gets you from where you are now to hopefully retirement someday. It seems like this shouldn't be as trendy or as fad-oriented as my 15-year-old in basketball shoes. Yet, I think the same thing applies. Things come in and out, and there are certain people that are going to jump on them every time. I would just caution you, as we have looked backwards at different fads and the issues that they've created for so many of the investors is have your own plan, your own long-term financial plan. And any new investment that's coming down the pike, hold it up, look at it through that lens. "Is this going to help me get to retirement? Is this going to help me pay for my daughter's wedding or my son's college tuition someday?" If the answer is probably not, or maybe, but we're not quite sure, then you're probably betting on something that you saw on social media or some crazy headline about someone hitting it big with a meme stock. There's also YOLO bets, which is go all in, take everything out of your 401(k), put it on this meme stock, which, by the way, these companies are never, ever fundamentally sounds...
Steve: That's the whole point of it, with a meme stock.
Amy: Exactly. Yeah. Let's talk about meme stocks.
Steve: Yeah. Meme stocks, this is a craze that started in 2021. There was writing on the wall after COVID shut down places like movie theaters, for example, so that's AMC, and then GameStop, brick-and-mortar locations selling video games because you could just buy them online, I guess, right there, and you don't even have to go to a store. People couldn't go to movie theaters. So, a lot of hedge funds saw the writing on the wall, and they shorted, meaning they sold stock that they didn't own on margin, waiting for the prices to drop so that they could then fill that order and realize a profit. And these people on WallStreetBets, which is a subreddit on Reddit, got together, and they said, "All right, let's make a short squeeze happen." They got together, and they bought a whole bunch of these shares of AMC and GameStop, waiting for the price to go up, up, up, up, up, and the hedge funds had to eventually buy that short position at a huge loss, which was when the stock went up. That caused the prices to skyrocket. So, there were a handful of individuals that made a ton of money off this. There's a lot of people out there, too, that said, "All right, this stock looks like it's great because it's going up, up, up. So, I'm going to buy it." They bought it at the top and lost their shorts.
Amy: One thing that you can almost bet on with speculative or gambling investments like this, or by the time that you've heard of it, you've probably already lost the opportunity. Behind the time it reaches the normal average person and you start hearing people talk about it, it's gone. The opportunity is gone.
Steve: I saw some of this happening in real-time. I did, just for fun. I had looked at that subreddit in the past. I was like, "These guys might be onto something."
Amy: Did you jump in?
Steve: No.
Amy: You were watching it happen.
Steve: I don't regret it either. But technically, had I done that, which is... It would have been the wrong decision. I have no regrets of not doing it.
Amy: You sure? You sound like [crosstalk 00:09:29].
Steve: I don't. I really don't because it was such a dumb idea that I was like, "All right, there's like a 1% chance this works." And I watched it work. I was like, "Okay, well, they got it. Good for them." I feel really terrible for the people that didn't.
Amy: And jumped in afterwards, right? And non-fungible tokens, NFTs, people were just so dang bored during the pandemic, had nothing to do. Day trading surged, meme stocks surged in these non-fungible tokens, which are essentially digital images that people were paying for. Like, it was a Picasso, you know, "We're going through the roof." No one's really even talking about these anymore.
Steve: Because they're a fad.
Amy: I mean, talk about a fad. Yeah. I mean, those were such a flash in the pan. People were talking about them for, like, four months.
Steve: "You just don't get it, Amy. This is a great opportunity."
Amy: I just don't get it.
Steve: "Hop on right now and buy your NFTs." What do we need to look for? What's different between a fad? I mean, obviously, you've talked about that, but focus on something that you know will have staying power, first and foremost. I mean, renewable energy. It's been something that's been steadily growing due to global demand, environmental priorities. People do have those. This is an investment that is not necessarily a fad anymore, but at one point, it might have felt like one. But it does have staying power, for example.
Amy: Yeah. Same with AI, right? AI is like, "Oh my gosh," right? You've got Nvidia right now, like all-the-rage kind of driving the market. For people who are like, "Well, wait a second, this is the fad, this is brand new," no, if you are really paying attention, AI has been in the conversation for years now. Now, we're using it. We're talking about it on a daily basis. Many companies are figuring out how to use it to make processes easier for their employees, right? There's even concern it could take over jobs for certain sectors and certain kind of positions. And so, AI, if you look at the fundamentals of these businesses, they've been around for years, right? They've been developing things, they have strong leadership, all the kinds of things that you would look at if you looked under the hood at an investment and said, "Does this make sense?"
Steve: Yeah. Does a company have revenue, good profit margins, low debt levels? These are the fundamentals that are underlying. If you look at all of those details for AMC and GameStop, you look under the hood, you're not going to see anything that's a great investment.
Amy: Yeah. Meme stocks absolutely did not make sense. People were buying them because people were talking about them. If you are at a holiday party this holiday season, a basketball game, whatever, and people are talking about some kind of investment, they're usually not talking about it because it is slow and steady and grows over time. They're talking about it because it's sexy and new and the latest, greatest thing. And it likely is more of a gamble than an investment.
Steve: If there's witty Super Bowl commercials led by celebrities...
Amy: Run the other direction fast. Here's the Allworth advice. By focusing on staying power, fundamentals, track records, aligning with your personal goals, you should feel more confident in telling a worthwhile trend, a real investment from a passing fad. Coming up next, a major bank makes a declaration to investors that has us saying, "Duh, we've been saying that for a long time." You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. If you can't listen to our show every night, you don't have to miss a thing. We have a daily podcast for you. Just search "Simply Money" on theon the iHeart app or wherever you get your podcast. Coming up at 6:43, we're going to delve into charitable giving techniques that will also, win-win, lower your tax burden. It's been a while actually since we've had any news of an airline filing for bankruptcy. Yet here we are, Spirit Airlines filing for bankruptcy right now.
Steve: Yeah, overcome by stronger competition for budget fares and the carrier's own hefty debt obligations. Oops. Obviously, stuff like that can lead to bankruptcies. They did say that all passengers can use all tickets, credits, or loyalty points as normal. The important thing to know is that you can also continue to book and fly now and in the future. They made it clear that they're still operating as a company. They're just doing a restructuring of the debt behind the scenes.
Amy: I think it'll be interesting to see how this one plays out. And also, some more perspective here, Spirit's actually the first major passenger airline to file for bankruptcy since American Airlines back in 2011. When I said it's been a while, it's been a while. Okay. So, we found this interesting and also funny. So, we're going to make fun of it right now. Goldman Sachs just issued some what they call guidance for investors with stocks at record highs. Here's what they're saying. "You, as an investor, should probably start making plans to diversify." But I'm bombed.
Steve: Yeah. Great advice. Thank you, Goldman Sachs, with all that power and all that.
Amy: That's a revelation right there.
Steve: Yeah, all the thinking heads behind the scenes, their advice is diversified. Good job. You get a pat on the back.
Amy: Yeah. How much are their paychecks exactly?
Steve: Incredible, improbable.
Amy: Exactly. And here's what, in a note, their analysts, led by Peter Oppenheimer, said, "The sharp increases in stock valuation seen over the previous years have left little space for further gains."
Steve: Sounds a little alarmist.
Amy: Yeah. I mean, do they have a crystal ball there in their offices? No, of course, they don't. Markets are going to go up and markets are going to go down. Yes, you're always going to be right when you tell people markets are going to go down because the answer to that is eventually they will. But you should be diversified for a thousand different reasons. And what we've seen over the past year or two is greed could have led you in the direction of, "Wait a second, starting to pay attention to the financial headlines. And there's six, seven companies that seem to be in the headlines all the time, by the way." Those have been dubbed the Magnificent Seven, Nvidia, Tesla, Alphabet, Google, among them.
Steve: Facebook.
Amy: Yeah, exactly, exactly. And because everyone's talking about them, we were just talking about fad investments a few minutes ago because everyone's talking about them. I think greed kind of creeps into the equation here. "And maybe if I want these huge returns that everyone's talking about, I should be more focused on these kinds of investments." And then when the Magnificent Seven isn't so magnificent anymore, you're not reaping rewards. You're paying a major price tag for that.
Steve: Yeah, I mean, they come out and they give this guidance about the importance of diversification. They do use some facts to back up that feedback. The S&P 500 in the past year, if we're looking at it year over year, has gone up 30% in the year over year. That's one of the best years that we've seen in quite some time. Obviously, the market's been on a tear. So, if you're in just the S&P 500, which is primarily driven by the Magnificent Seven because it's market cap weighted, then they're talking about maybe pivoting to something that's equal-weighted, which means the 500 companies in the S&P 500 would have an equal opportunity to have a pull on the underlying price of that index fund. There's a little bit of merit to that, but this is also assuming that people weren't already diversified.
Amy: Here's another revelation. High levels of concentration have now left investors vulnerable to disappointments. Duh, of course, they have. That's why being concentrated in any one stock or sector can always lead to disappointments. You're going to have some really high highs, but you're also going to expose yourself to the possibility of some really low lows. I don't know how many times I can say this. It's like slow and steady will win this race. I was with some friends of mine over the summer. He's probably 5, 10 years away for retirement. He had this perspective of, "I have had so many friends through the years who have jumped on these kinds of fads, into certain sectors, into certain companies, gone all in." He said, "I listened to them at dinner parties talking about life-changing, whatever it was, and then they lost their shorts." He said, "I never got to tell the good stories, but I'm going to have a great retirement."
Steve: That sounds a lot better. I prefer the great retirement over the good stories.
Amy: Sign me up for that. Absolutely.
Steve: When we think about what Goldman here is saying, it's almost an argument to rebalance. I mean, that's really what it is because if you... You should already have a diversified mix, meaning some of your investments are going to do really well, some of them aren't in any given time. Periodically, you have a responsibility, and this is what professional money managers do, too, that they have ice in their veins. Why I say that is because the emotional decision that many folks make if they're making decisions on their own with their investments is they look at the ones that are down, and they sell them, and they buy the ones that are up, which is the exact opposite of what you should be doing. You sell the ones that are up to buy the ones that are down because the ones that are up aren't always going to be up, and the ones that are down aren't always going to be down. You're buying low and you're selling high. That's precisely what you have an opportunity to do right now when the markets are high because chances are if you haven't made any changes in your investments, you've had what's called portfolio drift, and your asset allocation isn't what you thought it was. If we want to try to give Goldman some credit here, it's almost like they're saying, "Hey, rebalance."
Amy: But they're not saying, "Hey, rebalance," they're saying, "Hey, you might be too focused in one particular sector, and maybe what you should be is invested in a lot of different companies." Well, duh. If you've listened to our show for more than three minutes, we have been saying this for years now. The secret isn't figuring out that Nvidia is the next big tech stock because of AI and all the revolutionary things it's going to do to how we work and everything we do. No, no. It's just being diversified. In some points, those kinds of companies, for whatever reason, and we've seen it, right? Some DOJ investigations into certain companies like this or whatever, those stock prices go down, and the slow and steady ones that weren't necessarily sexy, value stocks, things like that, those end up being the winners. So, what's the answer for you? Have a little bit of money in all of them, right?
Here's the Allworth advice. It took until now for a huge bank to tell you to have a diversified portfolio. Ah, we've been giving you this advice for years now. Coming up next, we're breaking down what is the true cost of home ownership. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. If you are one of those people who has been waiting to buy or sell or both a new home over the past several maybe months or a couple of years as interest rates have been higher, you've probably been waiting for mortgage rates to go down. Joining us tonight is our credit expert, Britt Scearce. Britt, it's been interesting because we've been just waiting for the Fed to lower interest rates, thinking that mortgage rates might also go down at the same time, and we're still waiting.
Britt: Yes, it can be very frustrating when everyone tells you, "Hey, rates are going to go back down into the 5s, you know, in a year or two years. And then, of course, all this stuff that happens all around the world that affects the bond markets, that affects our mortgage rates can sometimes put a little kink in your plans. You know, I do feel like, you know, things have gotten better a little bit from the... From the period of time where rates were all the way up into the 8s, they've kind of come back down, and now they're hovering closer to 7%. And we'll see what world events affect the markets and see if we can get our rates, you know, if they do start to continue to go back down. And that going down, if they can go down a little bit, that really has a huge impact on affordability for homeowners and potential homeowners.
Steve: And, you know, we've been talking about it for a while that mortgage interest rates, we were spoiled for a long time. You know, we're not going to see them go back down to 2.5%. You know, it's going to go lower than 7. It's just taken a little bit longer than I think everyone was anticipating. So, you know, some other hidden costs of homeownership. I think a lot of first-time home buyers, they're focusing solely on the mortgage payment anyways, but there's some other costs included that sometimes folks just don't think about.
Britt: Exactly. You actually do your calculations based on, "Okay, I'm going to borrow, you know, $200,000 or $300,000 to purchase this home," and you figure out what the mortgage payment is going to be. Well, the mortgage payment itself, just the principal and interest payment may be very affordable, but there are other things that are going to be included in the cost of ownership. You have property taxes, you have homeowners insurance. If you're not putting 20% or more down on a conventional loan, you might have private mortgage insurance. And there also could be homeowners association fees or condo fees that are also associated with that homeownership. So, when you break all that down, you know, that easy, you know, $1,000 or $1,500 payment might really be $1,800 to $2,300. And that's where people...
Amy: And there are a lot of people who have been waiting for mortgage rates to go down. And as they're waiting, I like that you're bringing up this point, which is, "Let's look at the total cost of ownership and go into this with eyes wide open." So, if you're going to sit on the sidelines, I don't think enough people look at it this way. But when you're talking to first-time home buyers, what's the conversation that you're having with them about understanding what their all-in cost is going to be?
Britt: Yeah. First off is going through what we just discussed, you know, all of the costs that are going to go into that homeownership. And, you know, you have taxes and insurance and, you know, private mortgage insurance, and then you also have different types of loan products. Right now, some folks have been utilizing adjustable rate mortgages in order to kind of get into the home, marry the house, but date the rate, and hope that rates come down to where you could refinance and say, "If you have a 5/1 ARM, you have five years to kind of watch the market and have an opportunity to refinance." So, some people are doing that.
But the other stuff to look at is not just looking at the total monthly mortgage payment, but also making sure that people are ready for the upfront cost of purchasing a home. You know, there's due diligence to be done. You're going to need money upfront, not just for your down payment at closing, but you're going to need money for an appraisal, which can run $500 or $600. You're going to need the first year's homeowners insurance premium upfront. You're going to probably want to do an inspection on the home to make sure that there aren't hidden defects that could cost you a lot of money down the road. So, you know, having some money upfront even before closing is important knowledge for people to be prepared for because some folks...you know, I had someone that went into contract the other day, and they didn't realize that they were going to have to put up earnest money on the contract.
Steve: Surprised.
Britt: They're just like, "Well..."
Steve: "Who's earnest, and why do I have to pay him?"
Britt: Exactly. So, understanding the overall just expense of becoming a homeowner, the monies that you need upfront for the earnest money, for the upfront homeowner's insurance, the inspections, the appraisal, all of that, and then, yes, there are going to be closing costs on the mortgage as well that you need in addition to your down payment. So, you know, all of that is what I go through with a borrower to make sure that they're going in it with their eyes wide open.
Steve: And I think if you've been renting, it may be a rude awakening as far as utilities and different services are concerned that you need to pay for, you know, higher electric bills, gas, water, trash collection. Internet is something we're all used to here, cable maybe. But some of these other expenses, especially if you're moving into, like, a big older home, for example, that might not be the most energy efficient, I think you might be surprised with some of the costs associated with that.
Britt: Exactly. You not only have, you know, the mortgage, and taxes, and insurance, and TMI, and homeowners association, but now, you know, if your utilities used to be included in your rent, well, they're not going to be as a homeowner. And you also may have some other, you know, repairs that now you're going to be responsible for rather than calling a landlord and saying, "Hey, you know, my sink needs fixed." Well, you're the landlord now as the homeowner. You get to go and fix that.
Amy: Rude awakening there. You know, it's been a brutal housing market for first-time home buyers., people who five, six years ago could have jumped in, rates were lower, there was more inventory. We just came out of this pandemic where homes were going in the matter of hours and there were bidding wars. What does the market look like now for first-time home buyers? Is it still tough for them to get in?
Britt: Well, I can tell you it's improved in that some of the really crazy multiple offers where a home would go on the market and literally they would get 10 offers and half of them would be above asking price and that sort of thing, some of that has calmed down now. In the first-time home buyer range, price range is you're still sometimes are getting into multiple offers. But the first-time home buyers that were getting pre-approved for, say, FHA loans or first-time home buyer programs like the HomeReady and Home Possible, those programs where people were going to be putting as little as 3% down or 3.5% down and they didn't necessarily have a lot of extra money available to put down above asking price and that sort of thing, a lot of them got locked out during that crazy time. And you're finding that sellers are much more willing right now to entertain those borrowers and those offers now because a lot of those really crazy above-asking-price offers have kind of gone away. So now, that part has improved tremendously for first-time home buyers that they're being looked at. Their offers are being, you know, entertained a bunch more now. But with rates being where they are and with so many folks with student loan payments and a lot of extra debt and large car payments, you know, with the higher rates, that makes it pretty expensive. And that part has been working against first-time home buyers.
Amy: Yeah. Tough period of time for first-time home buyers. We appreciate your insights as always, Britt Scearce, our credit expert. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. Do you have a financial question you just can't figure out for yourself? There's a red button you can click on while you're listening to the show. You'll find it right there on the iHeart app. Record your question. It's coming straight to us. We'll help you figure it out and straight ahead. The number one trait that all the best places to retire have in common, if you are thinking about moving anywhere else in retirement, you're going to want to stay tuned for that. Okay. When it comes to charitable giving, most of us do this because we love the way it makes us feel. We love to make a difference. There's certain charities I think that are near and dear to all of our hearts. But if you can give money and make a difference and also help yourself a little at the same time, I'm calling that a win-win.
Steve: Yeah. These are conversations that fiduciary financial planners have with the folks that they work with all the time. We're talking about charitable giving strategies that can effectively poke Uncle Sam in the eye with a stick. That's a saying that I like. I think a lot of us enjoy doing that because we're also helping charitable causes at the same time. So, first one that we talk about are called donor-advised funds, which is, like, a charitable investment account. You contribute assets. It could be cash, it could be stocks, it could be real estate. Typically, I see these funded oftentimes with highly appreciated shares of some kind of stock. And in this region anyways, we see a lot of that with Procter & Gamble, for example. Maybe you inherited some Procter & Gamble shares. Cost basis is real low. You can use that to fund your donor-advised fund. You receive an immediate tax deduction. And then over time, you actually recommend grants to different charities directly from your donor-advised fund. In the meantime, you're getting tax-free gains inside of that account, and the strategy is typical that you are going to, what I call, bunch your tax filing. If you typically take the standard deduction and you open...
Amy: Which most people do.
Steve: Yeah. And if you open and fund a donor-advised fund in a given year, the idea here is that you're kind of looking forward a few years, maybe several years into the future and lumping all of your contributions into that donor-advised fund, in which case you will itemize that year for a higher tax benefit on top of already donating your low cost basis shares.
Amy: These can also make a lot of sense if you've had a heck of a year, right? Whether it's an inheritance, a major bonus, and all of a sudden you're like, "Wait a second, I'm in a higher tax bracket," it could make sense to donate some money this year. You can donate, to your point, Steve, more in that year than you would maybe in years past or years moving forward. You don't have to make decisions about where that money actually goes. It's just kind of a waiting room for charitable giving. It goes into that donor-advised fund. It can grow there. You can wait. You know, if you've got kids that are younger and you want to wait until they get older and figure out what they're really interested in, where their hearts lie as far as charitable giving, you can wait as long as you want to figure out where that money is going to go. So, you can take the immediate tax benefit of that. At the same time, you can hold off on making that decision.
Steve: Yeah. So, this is a strategy for really any age. When we talk about what are called qualified charitable distributions, normally, this is for folks that are already taking the required minimum distributions off of an IRA, for example, of pre-tax dollars, a rollover IRA from your 401(k), or a pension rollover. Although you can actually start qualified charitable distributions the year you turn 70 and a half, what this means is...and this number goes up periodically. Currently, it's $100,000. You can take $100,000 directly from your IRA and give it to a charity of your choosing with paying no taxes on that distribution. This is a huge benefit because there's folks out there that don't necessarily spend enough.
Amy: Need that income.
Steve: Yeah, they don't spend enough, or they don't need the income. And it puts them in a situation where now they're 73 years old. In a few years, it'll be 75 when it's time for RMDs. And you're forced to take out those distributions. But if you're giving money on a weekly basis to your church or other organizations, you could just pivot how you're giving it and give it directly from your RMDs, right from your IRA rather than cash. And that saves taxes by not having to pay them on the distribution.
Amy: Well, and to your point, if you're already giving these donations, it's just a different way to give the donation so you're having the same impact or possibly greater impact at the same time. There's more tax benefits to this. Steven, we talk all the time about fiduciary financial advisors. I think for so many people, when you're in your working years, it's about accumulating, right? But when you flip that switch into retirement, it is, "How do I be as tax efficient as possible?" And I know it sounds...like, we've got ice in our veins when we're talking about charitable giving, but also the fact that you can do it and have a benefit to you. But it just makes sense, right? If you're going to make these donations or you're going to have to pay these taxes, what's a way that we can marry the two and make it as tax-efficient for you as possible?
Steve: Yeah. Charitable remainder trust is another one. This is where you support a cause while still generating income. This is done by transferring assets into the charitable remainder trust. You receive a partial tax deduction, and then the trust pays you, or it could be another designated beneficiary income each year. When the term of the trust ends, then all of the money in that trust goes to the charity of your choosing. So, it doesn't have the same level of flexibility as maybe a donor-advised fund or doing QCDs. But it does give you an opportunity to generate income off of those assets in life.
Amy: Yeah. I mean, a few thoughts on these. It's kind of like how an annuity would work, right? You get that guaranteed income. Not all charities have these set up. So, if you're interested in looking into these, make sure you do your research first to see if that charity actually gives you the option for charitable remainder trust. But, yeah, this can make sense. And I think the key here is to understand you have options. Here's the Allworth advice. Whether you want flexibility, tax efficiency, or a mix of income and giving, there are tools out there that can help you make a positive impact. Coming up next, what all of the best places to retire have in common. You're listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Hruby. You know, we've been doing this for a long time, helping people retire. And I've heard all kinds of reasons why people are going to move somewhere else in retirement. Maybe it's affordability, although we've got that here, healthcare, desirability, weather somewhere else, taxes, job market, you name it. But apparently, according to research, there is one trait that trumps all of those things. Do you wanna talk...?
Steve: Happiness. Oh, yeah, I'll talk about it. I thought you were passing it right to me.
Amy: I was, like, setting you up for the grand moment.
Steve: You were, and then I blew it. Happiness. Happiness is that thing that is the most important. And this is according to U.S. News and World Report, ranked the best places to retire, Naples, Florida, Virginia Beach, Virginia, and New York City. So, this is interesting because, you know, this doesn't take into consideration necessarily the expenses of living in a place. You're like, "How does New York end up on the top of the list with all the taxes, the crowds?" It's an interesting study because it looks at things through the lens of happiness being the number one criteria.
Amy: Yeah. So, it looked at people 45 and older and said, "Okay, what matters most to you if you're thinking about a retirement destination?" Yeah. And in part of that equation, yes, is how to stretch your dollar. But more than that, the response was, "How much enjoyment do I get from that place?" I just came back from Florida, was there over the weekend. I got a lot of enjoyment from the weather. Come back here, it's bonkers weather. It's great...
Steve: How was your commute this morning?
Amy: Exactly. Not even talking about that. But, you know, I understand putting this lens on top of things. Now, I do think there's also some logistical considerations that need to go with these things. Like, for instance, if Florida is your dream...and in the past, that has been mine as well. So, I get that. Have you looked at the cost of home insurance, of insuring your home in this state of Florida these days? Some insurance companies will not even insure you if you live anywhere near the coast. So, again, practical considerations, but happiness is at the top of the list of what are you looking for in retirement.
Steve: Yeah, it's interesting because when we've talked about these in the past, it's usually focused on some mix that's tied in heavily with affordability. But when we look at it through the lens of happiness, that actually some of the top places to live, New York City, Washington, D.C., San Francisco, all very expensive places to live, but they still ranked high on the list. Cincinnati, 111. Not sure I agree with that. But one of the main reasons is because we had the highest score in housing affordability. But come on, happiness. There's a lot going on in this city.
Amy: I was talking to some clients of mine a few days ago who live in Washington, D.C., and I was like, "How are you guys liking it?" It was a litany of complaints, right? It's crazy, it's crowded, it's overpriced, it's this, it's that. And I'm like, "Okay."
Steve: But there's museums.
Amy: But the grandkids are here. There is your happiness card, right? And I think if moving somewhere that's more expensive and because the grandkids are there, again, it's really all about happiness. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial here on 55KRC THE Talk Station.
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