The Worst ‘Smart’ Money Advice That Could Cost You Millions
On this week’s Best of Simply Money podcast, Bob and Brian unpack the “smart-sounding” money advice that can quietly sabotage your future—from skipping Roth conversions and “going broke safely” in cash, to estate-planning myths that lead to probate messes, and being sold permanent life insurance instead of building a tax-smart strategy. Plus, they tackle oversized RMDs, executor pitfalls with business interests, smarter stock-option exercises, and whether to migrate from mutual funds to ETFs or direct indexing.
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Bob: Tonight, the worst financial advice you could ever receive that seems to make sense on the surface. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Well, bad advice is everywhere. Things like, all you need to do is put all your money in tech stocks focused on AI, or you're really not that rich, therefore you don't need an estate plan, things like that. But tonight, we're not talking about laughable bad advice. We're talking about the advice that sounds smart and even feels safe, but can slowly sabotage your financial future. Let's get into a couple of examples tonight, Brian.
Brian: Yeah, Bob, a lot of times, this comes from a standpoint of doing nothing is better than doing something. That's not usually the case. So, let's take a quick example here. A couple retires with about $4 million, maybe half of it in traditional IRAs, meaning pre-tax dollars they've never paid income taxes on. They worked hard, saved wealth, feel pretty confident about their situation. And, well, they should. They built a good nest egg there. But here's the bad advice they got. We hear this from time to time. The accountant told them, "Hey, don't worry about Roth conversions. Nobody wants to pay taxes any sooner than they have to. Just wait until you got to take your RMDs. There's no need to mess with that."
And, yeah, on the surface, that sounds like good, conservative advice. Don't take any unnecessary risks and so forth. But what happens is, by following that advice and continuing to do nothing, they missed out on years of low-tax opportunities in early retirement. So, when those RMDs finally require minimum distributions, by the way, is what we're talking about, that's when you are either 73 or 75, and you have to start taking money out to keep the IRS happy. So, when those finally kick in on their $2 million portfolio, their taxable income all of a sudden spikes that, and that robs them of flexibility. It results in higher Medicare premiums and they can't do any efficient legacy planning. So, they missed an opportunity. They celebrated the fact that they were in the lowest brackets of their lives right after they retired before Social Security kicked in, before requirement of distributions kicked in, and they ended up paying for it in the long run.
Bob: Yeah, Brian, I want to make sure we're not throwing accountants under the bus here with our hypothetical example. I mean, what I find...
Brian: No, no, but this is a specific situation.
Bob: Okay, all right. Well, what I find happens a lot of times, Brian, and feel free to disagree is, you know, the clients go to the accountant when it's time to file the tax return. And by then it's too late. You know, now it's time to file the return, spit out the answer, tell me how much I'm getting back or how much I owe. And, you know, if that's the time when people are asking about these planning questions, it is too late. And I can understand why an accountant might react in that way. What I have found in practice is when folks have a good fiduciary advisor working in tandem with the CPA, we can do some actual proactive planning, get out in front of this thing. And I find that virtually, every accountant I've dealt with is very open and very, frankly, excited about looking at some of these possibilities. But you've got to come to them in advance so everybody has time to run some numbers and do some planning. That's all I wanted to make sure to point out here.
Brian: No, and I think that's a great point, Bob. And people should not assume that they're going to get this kind of advice prior to the run up or during the run up to tax time in April or October if you're on extension. During that window, your accountant is doing everything they can to get the taxes filed on time for everybody. They don't have time to do the planning. So, planning is going to be, if you're going to work with your account, it's going to be a separate engagement. Look for them in the summer or maybe early November, something like that. That's when their window will open up a little bit. But, yeah, you're right, I think more brains are better than none. Have a fiduciary financial advisor in position who can work hand-in-hand with your advisor. So, Bob, this is another...
Bob: Yeah, well, again, these accountants, from between February and April, they're working 18-hour days just trying to spit out tax returns. So, yeah, it's a very, very busy time. Yeah, let's get into example number 2. We got a retired executive with $5 million in assets. He's conservative by nature, but not financially naive. Also, he retired in his 50s. And his longtime golfing buddy or friend says, "Hey, you got enough money. Don't take any chances. Don't take any risk. Just put it somewhere safe." And that's what he does. He parks it all in CDs, money markets, short term bonds. He doesn't lose money. He doesn't experience any market volatility. I'm sure he sleeps well at night. But the money doesn't grow. And over time, inflation just quietly chips away at the purchasing power of that $5 million. And that's where problems can crop up in maybe the 70s and 80s where purchasing power has declined. And then lo and behold, a long term care situation might come up. And this person that thought he was safe in his 50s is suddenly realizing, "Wow, inflation really is a thing, and it is eaten away at what I thought was my safe nest egg."
Brian: Yeah, going broke safely, as our old friend Ed Fink used to say on these very airwaves for a long time. There's more to it than just making sure your pile of money doesn't move. If your pile of money doesn't move, then so does your spending ability. And you've got to be able to make sure you can keep up with the lifestyle you've built for yourself. That's going to cost more money over time. Not to mention if we've got situations like long term care, as this individual specifically ran into. So, something's got to be grown. You got to find a way to carve out something to let it ride the rollercoaster a little bit. And this has everything to do with, let's start with figuring out what pile of my money does not have to grow like that. That's my emergency fund. If I've got that in place, then that frees up the other assets for more growth.
So, okay, well, let's move into it. Now, we've got a third example here. Another business owner, late 50s, recently sold his company for about $5 million. He's got a golf buddy who basically tells him, "Hey, you don't need to pay anybody to manage your money. Just sit on index funds and let it ride. That's all you got to do. Just buy S&P 500 and chill and ignore it." So, that's what he does. No advisor, no estate attorney, just a spreadsheet that he eventually stops updating because there's just not much point in updating something he gets on statements every month.
Anyway, fast forward five years. Now, he's paying more in taxes than he has to, triggering capital gains, and he's still got zero estate structure in place. Yeah, his pile of money grew, right? So, the low cost index fund is the only holding, isn't the worst idea in the world, but it's not protected in any way. And it's also not aligned with his goals because he never sat down to figure out what his goals were. He simply operated off of the structure that, "I just need a bigger pile of money and all my other problems will be solved." The interesting thing about that is, yeah, it solves a lot of problems, but at the same time, it brings along a lot more. Now, you've got an asset that you're always going to be hesitant to sell because it's got such a low cost basis.
I'm working with a situation right now with some people who maybe 20, 25 years ago just began piling up money into a single index fund and it's got a really low cost basis. Every bit of it that they sell is going to trigger capital gains. We're slowly working them into an equity indexed portfolio, meaning that, direct indexes when I'm referring to their meaning, that now, from here on out as it grows, we'll be able to do some tax laws harvesting along the way. That's never an opportunity they've had, and it would have been super useful for them over the prior 20 years.
Bob: You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, let's get into an example number 4. A couple in their early 70s with about $3.5 million, modest, comfortable, and family-focused couple. After a family dinner, the husband's brother, who has read one financial book declares, "You don't need an estate plan. That stuff simply for the ultra-wealthy." So, they never create a trust. They don't update beneficiaries. They just assume that everything's going to be hunky dory with their $3.5 million and just leave where it passes to chance. And then lo and behold, the husband passes away unexpectedly and everything is tied up for probate for nearly a year. Obviously, it creates stress, legal bills, resentment among the kids, all because someone casually told them that they weren't "rich enough" to do an estate plan. Brian?
Brian: Yeah, so the interesting point here is that, at least, these folks, at least at some moment in time, consciously thought about a trust and decided not to create one, which might not have been the right idea. The trust is not always necessary, but they also didn't take any steps to update beneficiaries, which that's the root purpose of a trust, at least, name beneficiaries and stuff. However, we do run across situations somewhat frequently, where somebody does create a trust because the brother in law, the sister in law is an attorney, and was happy to do it for him. But nobody circles back to make sure the trust owns anything. So, thousands of dollars get spent on a document that ultimately does nothing because nobody ever retitled assets into the trust or named the beneficiaries on all the other assets to the trust.
So, there are extra steps that need to happen here. Even if you're not going to get into an elaborate estate plan, and then there's no law that says you have to, you do need to name beneficiaries. If you don't name beneficiaries on every asset that can clearly have a beneficiary named against it, then you are setting up your heirs for a lengthy probate stay. And that's going to be a lot of stress and bills and all that other stuff. So, there are very simple steps you need to take before you should consider an estate plan. Once you've done that, then you should look, "Is this enough for me? Do I have it? Is there anything complicated about my estate? Do I have kids that I'm not sure can handle the money all at once? Or maybe there's a spouse out there of one of my kids that I don't quite trust," perhaps there's a disability, something like that. All those things would indicate the need for a much more elaborate structure than simply naming beneficiaries.
All right. Example number 5. Last ones. We got a 60-year-old couple, Bob. Both of them are still working. About $6 million in net worth. Investment accounts, business, and some real estate, the whole shebang. And what is their insurance agent telling, Bob?
Bob: "Take a big chunk of money and buy a permanent life insurance policy because it's tax free, it grows, and you'll never have to worry about it again. What could possibly go wrong?" So, they follow the advice. They park about three quarters of a million dollars into some complex life insurance product they never understood in the first place. It has high fees. It has poor liquidity. It has surrender charges. And it isn't necessarily aligned with their actual estate needs because nobody really cared to ask what their comprehensive financial plan in a state needs even were. And when we come along and review it later, they definitely had alternatives to that complex life insurance product, like Roth conversions or tax loss harvesting, things that certainly would have kept their situation much more liquid and flexible. But, again, they were sold a product, not given a plan. And, Brian, we see this happen all too often. Somebody comes along and just sells a product rather than build a comprehensive plan for someone.
Brian: Yeah, in this case, nobody dug deep enough to understand really, truly, what are my goals here? Is it better to take that $750,000 and stick it in a place where I as the owner of the grantor, if you will, can't touch it ever again because there's no point in dipping into a life insurance policy if the goal was to buy death benefit in the first place. And what else could have been done with that money? This is somebody who had their $6 million net worth. There's an awful lot of pre-tax dollars buried in there that really probably would have been better off taking some of that, at least, some chunk of that seven hundred fifty thousand dollars, lower the life insurance, and pay some taxes on Roth conversions, make the whole thing more efficient. But like you said, this was, they walked into a hardware store and said, "Give me a hammer," and were sold a hammer. Meanwhile, they're trying to cut a board in half. So, nobody asked the question of, what are you trying to accomplish from a big standpoint? And then we will figure out which tools are necessary in this case.
Bob: Here's the Allworth advice, the worst financial advice often comes from people who don't see the whole picture or even care to. When you've built real wealth, you need more than quick tips. You need a comprehensive, tax-smart financial plan, preferably built by a fiduciary advisor and team of advisors. Coming up next, regulators are about to make day trading easier, while big corporations are buying back stock at record levels. How should you react? We'll discuss it 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. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. And if you think your friends or family could use some financial advice, tell them about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead at 6:43, RMD surprises, stock options, tax traps, and what to do with an inherited home. All of that coming up next in our Ask the Advisor segment coming up ahead. All right. Regulators are working to loosen something called the pattern day trader rule that's kept a lot of smaller accounts, people with very small accounts, from actively day trading. Brian, we're just going to hand the candy bowl to the children and hope they don't eat too much. I guess, that's where we're headed here.
Brian: Right. I'm not sure exactly what problem we're solving as a society and as a regulatory body here. But here's how this works. Under the current rule, if you make four or more day trades in five business days, right? So, day trade, of course, is in and out in the same day. And those day trades make up more than 6% of your trading activity, you're going to get tagged by your custodian, which is your fidelities or your swabs or whoever, whoever is holding your actual money. You're going to get tagged as a pattern day trader. They are responsible regulatorily to make sure that they know who their day traders are. And once you have that tag, you're required to maintain, at least, $25,000 in a margin account or face restrictions. So, this says that people who are into this, this has them scrambling to find any liquid dollar they can throw into that account. Even if they don't intend on trading it, it's got to sit there so that they can do the day trading of their little nickels and dimes.
So, Finro, of course, has voted to update that. Finro, by the way, is the regulatory body behind the stock trading industry. So, that plan is to replace that fixed minimum equity requirement with a more flexible intra-day margin rule. So, what that means is that your buying power during the day would need to be tied to margin calculations rather than a flat $25,000 threshold. In other words, basically, you can borrow some of that $25,000 to qualify for that rule. Again, I don't know who was being truly harmed that this rule was in place. It's kind of there to not be enough rope so that somebody can hang themselves. So, my Spidey sense is tingling here. I'm not exactly sure what the opportunity is here and how this is going to help people. What do you think, Bob?
Bob: Well, it seems like a solution in search of a problem. I mean, yeah, $25,000 threshold might not apply to everybody. I get that. And I guess, they're trying to let people with smaller accounts participate more and more in day trading. And, you know, I think choice is a good thing, freedom is a good thing, but when you've that margin requirement moves around every single second based on the amount of cash you have in your account and the value of any securities that you've bought. So, it's just one more watch out here. You know, kind of danger. Will Robinson, the FINRA rules give you an opportunity, but it's more of an opportunity to hang yourself and hang yourself quickly if you don't know what you're doing. And most people that venture into this world of day trading quickly exit and exit with fewer dollars in their pocket. Brian?
Brian: Yeah, my concern is that the people who do get truly into this stuff are trying to make a bunch of money overnight to really get themselves started. It tends to be younger people. And I would really jump up and down and encourage, build a core portfolio first before you get into this other stuff on the side.
Bob: Yeah, and maybe get a job.
Brina: Well, I'm assuming there is a job. Let's not throw everybody under the bus here.
Bob: All right. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right. We're also following some new data that shows that S&P 500 firms have authorized and are executing buybacks, stock buybacks at historic levels. Brian, this is some interesting data.
Brian: Yeah. So, let's talk about, first real quick, what is a buyback? Well, basically, what that means is that a company can go out on the markets and buy its own shares just like you and I can. It's a publicly traded market, so anybody can buy. What that does, if they take those shares out of circulation, then think about it, that's less dividend they have to pay. Every dollar that they earn is spread less thinly across a bunch of shareholders. So, share buybacks are a corporate strategy that has been in place for a long time. So, what's going on now is these buyback announcements from corporate America this year have reached a trillion dollars as of August 20th. That's the fastest pace ever going all the back to 1982. That information comes from Birinyi and Associates who pays attention to this stuff.
But, again, so that that will mechanically boost their metrics. Earnings per share goes up because there's fewer shares out there, return on equity, and so on. So, that can be an instant way to lift the share performance, to lift the share price without really necessarily improving business fundamentals. Doesn't mean they invented a new product or found a new market. Simply means that they rejiggered the numbers so that the share price would go up, which isn't any nefarious by any means. It's just how the math works. But it's a little different than growing organically to make the valuations a little better. So, what kind of things should we be watching for? Is this all bad news, Bob?
Bob: It's not all bad news. I mean, you know, their company might have different reasons for doing this. They might love the value of their stock. They might not like the alternatives that they have, you know, in front of them of what to do with that cash. They might have already done a lot of capital investment in their company, and they want to just let the business work for a while. It's not all bad, but I think some people are just fixated on price earnings ratios. Anybody that reads introductory books on investing and buying stocks, they tend to dial in on that PE ratio. And I think this is a reminder to also look at sales growth. Companies that are truly growing, truly building their business, it doesn't take a genius to figure out that they have growing revenues. Their sales are going up. So, if the sales are slowing down, but yet those earnings are going up, that can be a caution signal that, "Hey, there's just maybe some window dressing going on here through these buybacks." And that game can't last forever. Sooner or later, if you're not generating more revenue in your business, you know, it's a signal that the stock price might be headed down. Because you can only buy back stock for so much for so long, sooner or later, you got to actually grow the business organically, as you mentioned.
Here's the Allworth advice, when companies are buying their stock, dig a little bit deeper. Value isn't the same as appearance. Here's a question you might have asked yourself, should I quit, retire, or go part time? Coming up next, decision making tools for when you're financially ready, but professionally unsure. 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, joined tonight by our career expert, Julie Balky. Julie on the job. Julie, first of all, thanks for making time for us tonight. And we've got an interesting topic to cover with you. You know, some open-ended question here for you just to start. And I know you deal with a lot of people that are going through this question, should I retire altogether? Meaning just quit and hang it up and retire or go part time and what goes into making those kinds of decisions. So, we're interested in your thoughts on that, Julie, as you navigate these complex questions with your clients all the time in your practice.
Julie: The first thing, the analogy I always like to use when it comes to this is, you know how we all use Google Maps or Waze? So, when you think about when you want to get where you're trying to go with those apps, you put a destination in. You know exactly where you're trying to go. The problem with... So, I like to use that analogy to say, to really be successful getting someplace, you got to have some general idea of where you're trying to go. So, the first question I would ask someone is, if you're financially ready, if that's not an issue, how do you feel about the work you do right now? If you say, "I absolutely hate it and I can't wait to get out," then I think you throw the baby and the bath water out and start with a fresh sheet of paper and say, "Okay, I'm going to create something for the next stage of my life."
The next option would be, let's say, "I like parts of it. There's parts of it I'd love to keep doing." And in that case, I recommend you talk to your leaders about, is there a way that you could go part-time? Maybe just doing the things that you're uniquely qualified and skilled at doing. Just make sure you don't expect part-time pay for full-time work. So, what pieces of what I do now can I carve out in order to make that transition from 40-plus hours a week to zero hours a week much smoother? And then there are times when we can't. We say, "You know what? I want to keep doing what I'm doing now, but I only want to do it for another year or so." And so, in that case, what can you start doing to start filling up that other life bucket, let's call it? So, getting clear on what your situation is today and what your possibilities are.
You might work for a company that says, "Nah, we need you full-time or not at all." Okay, well, that's going to tell you what you need to do. And at that point, it's like, "Okay, now, I need to start planning for the day when the retirement party, they've taken the streamers and balloons down, and now it's time for me to go do something else." It is a wildly underestimated, under-talked about, stressful process to move into retirement.
Brian: Sure. So, okay, well, let's talk about that. So, yeah, it is very stressful. And you get to hear a lot of stories. So, Bob and I have our own war stories from the financial side, right? So, how do we make the numbers work from all this? What are some of the stories that you hear? But you're more on the day-to-day career side. So, let's say, you sense that somebody is there really kind of ready to go, but maybe there's not a little bit. What if somebody pulls the trigger a little bit too soon? What are the biggest regrets you tend to hear from people who maybe hung it up too early?
Julie: You know, the biggest regrets come from people who hung it up too early because they've not jumped at something that they're excited about. In other words, the dislike for what they were doing overrode their patience. So, they might say, "You know what? I'm going to go be a volunteer full-time," or, "I'm going to go play golf until I can't stand it anymore," or, "I'm going to go do more, spend more time on a hobby." I actually had a client several years ago who was on the road so much that when he got to the point that he could retire, he quit cold turkey. And he went, moved to Florida, golf, pickleball, tennis, racket golf. He did so much of it that he hurt his shoulder. And he's like, "Now," he said, "I jumped from 120% at one thing to 120% at another."
And he realized at that point that that life of 100% leisure while tantalizing in concept was not only not good for his body, but it also wasn't good for his mind. And so, he went back to work doing some consulting. And so, you know, you have to know, if your identity is tied up in your job, then you are going to have a harder time with it, or if you don't have anything that you're interested in. I've been talking about this with people recently, and with men, it's especially hard because they generally don't have the friend and support network that women do. And so, now, you're 60-some years old and you're trying to find people to do stuff with. And wives are saying, "We don't really want to be your 100% entertainment." And so, how should we then...
Brian: My wife would never say that. She loves every minute that we do that.
Julie: She just spit her coffee out right now if she's listening to this.
Brian: Oh, apparently you've met. Okay.
Julie: But, yeah, you have to get realistic about all the pieces of your life. If things are really, really, really bad, and you feel like you're being pushed out, and then it can be worth it to just stop, pull turkey, take a breath, and then rebuild something new. But if you generally like what you do or portions of what you do, the smarter play can be a slower exit, or you get a chance to try some things on the other end and to build on the other end before you go full-time. Because some of the things you think you're going to enjoy doing in retirement, you won't. And you're going to discover some new things once you allow yourself to be really open-minded around that, that you do choose to pursue.
It can be a really wonderful time, but it's not an easy time because you're also dealing with the mental piece, which is, "Oh, my gosh, this is that last portion of my life," which is really quite sobering. And so, you're dealing with a lot of that kind of stuff as well. Maybe some regret, maybe all that stuff that comes with a major transition. And so, be realistic. Be realistic about who you are, what your support systems are, what your hobbies and interests are. And you have to get out there and be bold and vulnerable a little bit, and know that you're really, in a lot of ways, building a brand new stage of life.
Bob: All right, Julie, in the minute we got left here, one of the best ideas I've heard on this topic, and I think the idea actually came from you in one of the prior segments we've done with you, and that's once you get to that point where you know you're going to probably retire in a year or a year and a half or what have you, that's the time to maybe take that one or two week vacation and actually trial run retirement. Now, that takes some planning, right, Julie?
Julie: Yeah, absolutely.
Bob: But pretend that you're retired on your vacation and actually plan out what you think you're going to want to do to make sure that that's really what you're going to enjoy. Am I on the right track there?
Julie: Yeah, absolutely. You've got to try things out. You've got to get out of your head. You've got to say, "Look, if my goal is to give back or contribute more in my community," maybe you take time to figure out, what is it? What is the way you want to contribute? Then start researching organizations that do that and figure out what your role might be. And so, you have to take this on like a project, and you're the project. And that's the stuff that's really, really uncomfortable for us because it causes a bunch of other stuff to surface that maybe we haven't dealt with.
Bob: Thanks for listening. You've been 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. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question, and it will come straight to us. All right, Brian, John and Madeira says, "Our required minimum distributions are going to be much larger than our actual spending needs. What strategies can help us avoid a huge tax bite?"
Brian: Yeah, very common question, John. Thanks for sending it in, and thanks for trusting us to provide you some feedback there. Well, we don't know John's age. He talks about RMD's requirement of distributions in the future tense. So, we're assuming he's not quite there, yet. If that's the case, then he's got a couple alternatives. John, you can be looking at Roth conversions. And the most ideal window for this is when you're in the lowest bracket you'll ever see. So, perhaps you're retired. Maybe you haven't turned on Social Security or pension benefits yet. So, there's no income generating tax taxation there. And obviously, you're not at requirement minimum distribution age. So, that's probably the lowest bracket that you've seen in decades. So, you might want to look at Roth conversions here.
Or even if maybe that's not on the table or maybe you got other things going on, another thing you can do is just start accelerating withdrawals. Don't rule out the IRA when you do need money for that vacation, the next car or whatever. Remember, you're in the lowest bracket of your life. If you take a chunk out, you can calculate what the bracket will be and get an idea for how you'll stay below whatever bracket you want to avoid. But don't always avoid the IRA because you know it's income taxable. Spread that out. More distributions over a longer period of time is going to stretch it out into more tax years, therefore less taxes percentage wise.
So, we will move on then to our next question here, which comes from Jerry in Lebanon. Jerry says he's the executor for his father's estate and he's got business interests. Well, congratulations, Jerry. That's going to be a couple of curveballs for you to go chase down. What steps does he need to take, Bob, to avoid some personal liability as he's selling this estate? It's a tough one.
Bob: Well, it is a tough one, Jerry. And I take these questions literally, and based on the lack of information contained in the question, that's not your fault. That's just the way you ask the question. Here's my advice, hit the pause button immediately. Don't do anything. And go network around a little bit and find a good, qualified attorney, someone that specializes in both business planning and estate planning. They're out there. Just network around a little bit and find one and don't take any action. Don't do anything until you have consulted with a good attorney. Perhaps it's your father's attorney, you know, who might be well skilled in these things. And if that person has retired or moved on or is no longer active, talk to your friends and colleagues and find a good attorney.
That's my best advice because if you're involved in making decisions on behalf of the business, or operating the business in any way after your father's passing, you want to be real careful, you know, to protect yourself. So, get some good legal counsel here. I know it'll cost a little bit of money to do that, but my experience has been, you know, a good attorney is worth his or her weight in gold and can help you avoid some possibly significant problems. That's the best advice I could give. All right, Kevin in Erlanger, Brian, he says, "I've accumulated stock options through work. What's the smartest way to exercise them without triggering a massive tax bill all at once?
Brian: Okay. So, this is another good one here. Some complicated features here to a very popular benefit plan that some employers share with their employees. So, your stock options are going to fall in one of two categories. They're either ISOs, incentive stock options, or they're NQSOs, non-qualified stock options. Big differences between them. If they happen to be of the incentive variety, then you can get a little bit of a tax benefit there. If you hold those shares, exercise and hold the shares one year from the exercise and two years from the grant, then you should qualify for long-term capital gains tax, which is the most favorable kind of tax. If we got to pay it, that's the one we want. But you want to watch out for alternative minimum tax. We can do a whole fascinating, boring show on the alternative minimum tax. We can't get into that here, but just be aware that if it's incentive stock options, that's something you're going to want to be paying attention to.
On the other hand, if it's non-qualified, those are going to be taxed as income at exercise. So, you're going to pay ordinary income tax on the spread, which is the difference between the market price, whatever everybody would pay for it on the open market, and whatever the strike price was, which you were given at the time of the grant. And then any further appreciation after you exercise this, that's taxed as capital gains when you sell. So, if you want to avoid this, you can spread it out over multiple years. Try to wait, or if you can wait until you have a lower income year, for example, let's say you're planning on retiring at the end of this year, awesome. Don't exercise anything now. Wait until January if you've got that ability through your employer.
And also, there may be options for cashless exercises, which basically means that you liquidate the whole thing. You don't have to lay out any cash. They'll pull the purchase value right out of the proceeds. And also, as always, you can consider some charitable giving to offset taxes. If you're already doing some of that anyway, then there may be a way to combine these things. So, get with a fiduciary financial advisor, and they'll help you put these puzzle pieces together. Next question. This one comes from Mark in Indian Hill. And Mark says, they've saved steadily, but they've mostly used mutual funds. And he's wondering if exchange traded funds, ETFs, or direct indexing might be a better option for them at this stage.
Bob: Well, Mark, I would say, all things being equal, of course, ETFs and direct indexing are more tax efficient than having everything in mutual funds. But first of all, congratulations for saving steadily and building a nice portfolio of mutual funds. Because I'm assuming you've done this over years and decades, and that was the only game in town. So, you did right. You saved. You accumulated. The industry has evolved over the years to have these ETFs and direct indexing and tax loss harvesting strategies. So, it's good that you're aware that those are out there. My advice would be, have a good fiduciary advisor, sit down, look at your portfolio, and there might be spots where you can gradually move into some of these more tax efficient strategies without causing you to just dump all your mutual funds, or most of them, and pay a huge capital gain tax bill in the process. So, it's important to look at the details. Have a good advisor sit down with you that could give you good, fiduciary advice, and help you transition responsibly into some more tax efficient strategies moving down the road. Coming up next, I've got my two cents on how maybe to evaluate what kind of financial advice you really need based on your situation. 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. All right, we started off tonight's show by giving four or five different examples of fairly well-to-do families that had gotten some bad advice, and kind of went to sleep on not doing some important things. I want to bring this back, Brian, to kind of real world, how should these people be evaluating their situation? And what I'm talking about here, and I run into this quite often, a lot of times people don't need or want a professional advisor to help them with everything. They might already have a good estate plan. They might be very comfortable, self-managing their portfolio. But there's some of these things like tax efficiency or more complex estate planning or distribution strategies that they haven't even thought of. And it can really move the needle in their overall financial plan from a tax standpoint and from a legacy standpoint to their families and chosen charities.
And so, my message tonight is be open to sitting down with somebody and be a little self-aware about what you haven't covered or you might not know or might not want to do. Because oftentimes, Brian, we don't do every single thing for clients, but there's one or two value-added things we can add to somebody's situation, really move the needle for them. And they walk away feeling glad that they worked with us or with another good, fiduciary advisor. That's my message tonight, is have an open mind as you evaluate comprehensive advice and comprehensive planning.
Brian: Yeah, and I would add to that, I would add this, one of my favorite times as an advisor is when I come across something where I can educate somebody using an actual real example. Because I think people are very comfortable knowing that they're not alone in whatever weirdness they're facing. Sometimes it can be good weirdness, right? "I'm fortunate, I've got a lot of money that provides a lot of opportunities. What do other people do in my situation?" And sometimes, it's terrifying stuff, you know, where maybe there's a health care problem or something in the mix. And I think the value that any advisor brings is the ability to say, "I've been through this before. Here's how other people who look just like you have responded to it. Here's the techniques they use. Here's the results that they got out of it. Here's the pros and cons of all the decision options that they had." And then everybody can move forward having made a confident decision. But it helps an awful lot to have somebody who is an independent bystander on arm's length away who can kind of guide you. Sort of the docent in the museum, if you will, of here's how things have worked for other people historically, and here's how it can work for you.
Bob: Yeah, it doesn't mean that you have to do what everyone else does. But to your point, Brian, just knowing what some of your options are, and maybe hearing some real life examples, three or four ways to possibly skin the cat, oftentimes, you know, the bells and whistles go off in people's brains and say, "Yeah, I never thought about it that way. I like that idea. Let's explore how that might impact my plan." So, yeah, keep an open mind. Keep an open mind to working with advisors, but pick advisors properly so that they're actually operating in a fiduciary role, operating in your best interest, not theirs. Thanks for listening. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Well, bad advice is everywhere. Things like, all you need to do is put all your money in tech stocks focused on AI, or you're really not that rich, therefore you don't need an estate plan, things like that. But tonight, we're not talking about laughable bad advice. We're talking about the advice that sounds smart and even feels safe, but can slowly sabotage your financial future. Let's get into a couple of examples tonight, Brian.
Brian: Yeah, Bob, a lot of times, this comes from a standpoint of doing nothing is better than doing something. That's not usually the case. So, let's take a quick example here. A couple retires with about $4 million, maybe half of it in traditional IRAs, meaning pre-tax dollars they've never paid income taxes on. They worked hard, saved wealth, feel pretty confident about their situation. And, well, they should. They built a good nest egg there. But here's the bad advice they got. We hear this from time to time. The accountant told them, "Hey, don't worry about Roth conversions. Nobody wants to pay taxes any sooner than they have to. Just wait until you got to take your RMDs. There's no need to mess with that."
And, yeah, on the surface, that sounds like good, conservative advice. Don't take any unnecessary risks and so forth. But what happens is, by following that advice and continuing to do nothing, they missed out on years of low-tax opportunities in early retirement. So, when those RMDs finally require minimum distributions, by the way, is what we're talking about, that's when you are either 73 or 75, and you have to start taking money out to keep the IRS happy. So, when those finally kick in on their $2 million portfolio, their taxable income all of a sudden spikes that, and that robs them of flexibility. It results in higher Medicare premiums and they can't do any efficient legacy planning. So, they missed an opportunity. They celebrated the fact that they were in the lowest brackets of their lives right after they retired before Social Security kicked in, before requirement of distributions kicked in, and they ended up paying for it in the long run.
Bob: Yeah, Brian, I want to make sure we're not throwing accountants under the bus here with our hypothetical example. I mean, what I find...
Brian: No, no, but this is a specific situation.
Bob: Okay, all right. Well, what I find happens a lot of times, Brian, and feel free to disagree is, you know, the clients go to the accountant when it's time to file the tax return. And by then it's too late. You know, now it's time to file the return, spit out the answer, tell me how much I'm getting back or how much I owe. And, you know, if that's the time when people are asking about these planning questions, it is too late. And I can understand why an accountant might react in that way. What I have found in practice is when folks have a good fiduciary advisor working in tandem with the CPA, we can do some actual proactive planning, get out in front of this thing. And I find that virtually, every accountant I've dealt with is very open and very, frankly, excited about looking at some of these possibilities. But you've got to come to them in advance so everybody has time to run some numbers and do some planning. That's all I wanted to make sure to point out here.
Brian: No, and I think that's a great point, Bob. And people should not assume that they're going to get this kind of advice prior to the run up or during the run up to tax time in April or October if you're on extension. During that window, your accountant is doing everything they can to get the taxes filed on time for everybody. They don't have time to do the planning. So, planning is going to be, if you're going to work with your account, it's going to be a separate engagement. Look for them in the summer or maybe early November, something like that. That's when their window will open up a little bit. But, yeah, you're right, I think more brains are better than none. Have a fiduciary financial advisor in position who can work hand-in-hand with your advisor. So, Bob, this is another...
Bob: Yeah, well, again, these accountants, from between February and April, they're working 18-hour days just trying to spit out tax returns. So, yeah, it's a very, very busy time. Yeah, let's get into example number 2. We got a retired executive with $5 million in assets. He's conservative by nature, but not financially naive. Also, he retired in his 50s. And his longtime golfing buddy or friend says, "Hey, you got enough money. Don't take any chances. Don't take any risk. Just put it somewhere safe." And that's what he does. He parks it all in CDs, money markets, short term bonds. He doesn't lose money. He doesn't experience any market volatility. I'm sure he sleeps well at night. But the money doesn't grow. And over time, inflation just quietly chips away at the purchasing power of that $5 million. And that's where problems can crop up in maybe the 70s and 80s where purchasing power has declined. And then lo and behold, a long term care situation might come up. And this person that thought he was safe in his 50s is suddenly realizing, "Wow, inflation really is a thing, and it is eaten away at what I thought was my safe nest egg."
Brian: Yeah, going broke safely, as our old friend Ed Fink used to say on these very airwaves for a long time. There's more to it than just making sure your pile of money doesn't move. If your pile of money doesn't move, then so does your spending ability. And you've got to be able to make sure you can keep up with the lifestyle you've built for yourself. That's going to cost more money over time. Not to mention if we've got situations like long term care, as this individual specifically ran into. So, something's got to be grown. You got to find a way to carve out something to let it ride the rollercoaster a little bit. And this has everything to do with, let's start with figuring out what pile of my money does not have to grow like that. That's my emergency fund. If I've got that in place, then that frees up the other assets for more growth.
So, okay, well, let's move into it. Now, we've got a third example here. Another business owner, late 50s, recently sold his company for about $5 million. He's got a golf buddy who basically tells him, "Hey, you don't need to pay anybody to manage your money. Just sit on index funds and let it ride. That's all you got to do. Just buy S&P 500 and chill and ignore it." So, that's what he does. No advisor, no estate attorney, just a spreadsheet that he eventually stops updating because there's just not much point in updating something he gets on statements every month.
Anyway, fast forward five years. Now, he's paying more in taxes than he has to, triggering capital gains, and he's still got zero estate structure in place. Yeah, his pile of money grew, right? So, the low cost index fund is the only holding, isn't the worst idea in the world, but it's not protected in any way. And it's also not aligned with his goals because he never sat down to figure out what his goals were. He simply operated off of the structure that, "I just need a bigger pile of money and all my other problems will be solved." The interesting thing about that is, yeah, it solves a lot of problems, but at the same time, it brings along a lot more. Now, you've got an asset that you're always going to be hesitant to sell because it's got such a low cost basis.
I'm working with a situation right now with some people who maybe 20, 25 years ago just began piling up money into a single index fund and it's got a really low cost basis. Every bit of it that they sell is going to trigger capital gains. We're slowly working them into an equity indexed portfolio, meaning that, direct indexes when I'm referring to their meaning, that now, from here on out as it grows, we'll be able to do some tax laws harvesting along the way. That's never an opportunity they've had, and it would have been super useful for them over the prior 20 years.
Bob: You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right, let's get into an example number 4. A couple in their early 70s with about $3.5 million, modest, comfortable, and family-focused couple. After a family dinner, the husband's brother, who has read one financial book declares, "You don't need an estate plan. That stuff simply for the ultra-wealthy." So, they never create a trust. They don't update beneficiaries. They just assume that everything's going to be hunky dory with their $3.5 million and just leave where it passes to chance. And then lo and behold, the husband passes away unexpectedly and everything is tied up for probate for nearly a year. Obviously, it creates stress, legal bills, resentment among the kids, all because someone casually told them that they weren't "rich enough" to do an estate plan. Brian?
Brian: Yeah, so the interesting point here is that, at least, these folks, at least at some moment in time, consciously thought about a trust and decided not to create one, which might not have been the right idea. The trust is not always necessary, but they also didn't take any steps to update beneficiaries, which that's the root purpose of a trust, at least, name beneficiaries and stuff. However, we do run across situations somewhat frequently, where somebody does create a trust because the brother in law, the sister in law is an attorney, and was happy to do it for him. But nobody circles back to make sure the trust owns anything. So, thousands of dollars get spent on a document that ultimately does nothing because nobody ever retitled assets into the trust or named the beneficiaries on all the other assets to the trust.
So, there are extra steps that need to happen here. Even if you're not going to get into an elaborate estate plan, and then there's no law that says you have to, you do need to name beneficiaries. If you don't name beneficiaries on every asset that can clearly have a beneficiary named against it, then you are setting up your heirs for a lengthy probate stay. And that's going to be a lot of stress and bills and all that other stuff. So, there are very simple steps you need to take before you should consider an estate plan. Once you've done that, then you should look, "Is this enough for me? Do I have it? Is there anything complicated about my estate? Do I have kids that I'm not sure can handle the money all at once? Or maybe there's a spouse out there of one of my kids that I don't quite trust," perhaps there's a disability, something like that. All those things would indicate the need for a much more elaborate structure than simply naming beneficiaries.
All right. Example number 5. Last ones. We got a 60-year-old couple, Bob. Both of them are still working. About $6 million in net worth. Investment accounts, business, and some real estate, the whole shebang. And what is their insurance agent telling, Bob?
Bob: "Take a big chunk of money and buy a permanent life insurance policy because it's tax free, it grows, and you'll never have to worry about it again. What could possibly go wrong?" So, they follow the advice. They park about three quarters of a million dollars into some complex life insurance product they never understood in the first place. It has high fees. It has poor liquidity. It has surrender charges. And it isn't necessarily aligned with their actual estate needs because nobody really cared to ask what their comprehensive financial plan in a state needs even were. And when we come along and review it later, they definitely had alternatives to that complex life insurance product, like Roth conversions or tax loss harvesting, things that certainly would have kept their situation much more liquid and flexible. But, again, they were sold a product, not given a plan. And, Brian, we see this happen all too often. Somebody comes along and just sells a product rather than build a comprehensive plan for someone.
Brian: Yeah, in this case, nobody dug deep enough to understand really, truly, what are my goals here? Is it better to take that $750,000 and stick it in a place where I as the owner of the grantor, if you will, can't touch it ever again because there's no point in dipping into a life insurance policy if the goal was to buy death benefit in the first place. And what else could have been done with that money? This is somebody who had their $6 million net worth. There's an awful lot of pre-tax dollars buried in there that really probably would have been better off taking some of that, at least, some chunk of that seven hundred fifty thousand dollars, lower the life insurance, and pay some taxes on Roth conversions, make the whole thing more efficient. But like you said, this was, they walked into a hardware store and said, "Give me a hammer," and were sold a hammer. Meanwhile, they're trying to cut a board in half. So, nobody asked the question of, what are you trying to accomplish from a big standpoint? And then we will figure out which tools are necessary in this case.
Bob: Here's the Allworth advice, the worst financial advice often comes from people who don't see the whole picture or even care to. When you've built real wealth, you need more than quick tips. You need a comprehensive, tax-smart financial plan, preferably built by a fiduciary advisor and team of advisors. Coming up next, regulators are about to make day trading easier, while big corporations are buying back stock at record levels. How should you react? We'll discuss it 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. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. And if you think your friends or family could use some financial advice, tell them about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead at 6:43, RMD surprises, stock options, tax traps, and what to do with an inherited home. All of that coming up next in our Ask the Advisor segment coming up ahead. All right. Regulators are working to loosen something called the pattern day trader rule that's kept a lot of smaller accounts, people with very small accounts, from actively day trading. Brian, we're just going to hand the candy bowl to the children and hope they don't eat too much. I guess, that's where we're headed here.
Brian: Right. I'm not sure exactly what problem we're solving as a society and as a regulatory body here. But here's how this works. Under the current rule, if you make four or more day trades in five business days, right? So, day trade, of course, is in and out in the same day. And those day trades make up more than 6% of your trading activity, you're going to get tagged by your custodian, which is your fidelities or your swabs or whoever, whoever is holding your actual money. You're going to get tagged as a pattern day trader. They are responsible regulatorily to make sure that they know who their day traders are. And once you have that tag, you're required to maintain, at least, $25,000 in a margin account or face restrictions. So, this says that people who are into this, this has them scrambling to find any liquid dollar they can throw into that account. Even if they don't intend on trading it, it's got to sit there so that they can do the day trading of their little nickels and dimes.
So, Finro, of course, has voted to update that. Finro, by the way, is the regulatory body behind the stock trading industry. So, that plan is to replace that fixed minimum equity requirement with a more flexible intra-day margin rule. So, what that means is that your buying power during the day would need to be tied to margin calculations rather than a flat $25,000 threshold. In other words, basically, you can borrow some of that $25,000 to qualify for that rule. Again, I don't know who was being truly harmed that this rule was in place. It's kind of there to not be enough rope so that somebody can hang themselves. So, my Spidey sense is tingling here. I'm not exactly sure what the opportunity is here and how this is going to help people. What do you think, Bob?
Bob: Well, it seems like a solution in search of a problem. I mean, yeah, $25,000 threshold might not apply to everybody. I get that. And I guess, they're trying to let people with smaller accounts participate more and more in day trading. And, you know, I think choice is a good thing, freedom is a good thing, but when you've that margin requirement moves around every single second based on the amount of cash you have in your account and the value of any securities that you've bought. So, it's just one more watch out here. You know, kind of danger. Will Robinson, the FINRA rules give you an opportunity, but it's more of an opportunity to hang yourself and hang yourself quickly if you don't know what you're doing. And most people that venture into this world of day trading quickly exit and exit with fewer dollars in their pocket. Brian?
Brian: Yeah, my concern is that the people who do get truly into this stuff are trying to make a bunch of money overnight to really get themselves started. It tends to be younger people. And I would really jump up and down and encourage, build a core portfolio first before you get into this other stuff on the side.
Bob: Yeah, and maybe get a job.
Brina: Well, I'm assuming there is a job. Let's not throw everybody under the bus here.
Bob: All right. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right. We're also following some new data that shows that S&P 500 firms have authorized and are executing buybacks, stock buybacks at historic levels. Brian, this is some interesting data.
Brian: Yeah. So, let's talk about, first real quick, what is a buyback? Well, basically, what that means is that a company can go out on the markets and buy its own shares just like you and I can. It's a publicly traded market, so anybody can buy. What that does, if they take those shares out of circulation, then think about it, that's less dividend they have to pay. Every dollar that they earn is spread less thinly across a bunch of shareholders. So, share buybacks are a corporate strategy that has been in place for a long time. So, what's going on now is these buyback announcements from corporate America this year have reached a trillion dollars as of August 20th. That's the fastest pace ever going all the back to 1982. That information comes from Birinyi and Associates who pays attention to this stuff.
But, again, so that that will mechanically boost their metrics. Earnings per share goes up because there's fewer shares out there, return on equity, and so on. So, that can be an instant way to lift the share performance, to lift the share price without really necessarily improving business fundamentals. Doesn't mean they invented a new product or found a new market. Simply means that they rejiggered the numbers so that the share price would go up, which isn't any nefarious by any means. It's just how the math works. But it's a little different than growing organically to make the valuations a little better. So, what kind of things should we be watching for? Is this all bad news, Bob?
Bob: It's not all bad news. I mean, you know, their company might have different reasons for doing this. They might love the value of their stock. They might not like the alternatives that they have, you know, in front of them of what to do with that cash. They might have already done a lot of capital investment in their company, and they want to just let the business work for a while. It's not all bad, but I think some people are just fixated on price earnings ratios. Anybody that reads introductory books on investing and buying stocks, they tend to dial in on that PE ratio. And I think this is a reminder to also look at sales growth. Companies that are truly growing, truly building their business, it doesn't take a genius to figure out that they have growing revenues. Their sales are going up. So, if the sales are slowing down, but yet those earnings are going up, that can be a caution signal that, "Hey, there's just maybe some window dressing going on here through these buybacks." And that game can't last forever. Sooner or later, if you're not generating more revenue in your business, you know, it's a signal that the stock price might be headed down. Because you can only buy back stock for so much for so long, sooner or later, you got to actually grow the business organically, as you mentioned.
Here's the Allworth advice, when companies are buying their stock, dig a little bit deeper. Value isn't the same as appearance. Here's a question you might have asked yourself, should I quit, retire, or go part time? Coming up next, decision making tools for when you're financially ready, but professionally unsure. 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, joined tonight by our career expert, Julie Balky. Julie on the job. Julie, first of all, thanks for making time for us tonight. And we've got an interesting topic to cover with you. You know, some open-ended question here for you just to start. And I know you deal with a lot of people that are going through this question, should I retire altogether? Meaning just quit and hang it up and retire or go part time and what goes into making those kinds of decisions. So, we're interested in your thoughts on that, Julie, as you navigate these complex questions with your clients all the time in your practice.
Julie: The first thing, the analogy I always like to use when it comes to this is, you know how we all use Google Maps or Waze? So, when you think about when you want to get where you're trying to go with those apps, you put a destination in. You know exactly where you're trying to go. The problem with... So, I like to use that analogy to say, to really be successful getting someplace, you got to have some general idea of where you're trying to go. So, the first question I would ask someone is, if you're financially ready, if that's not an issue, how do you feel about the work you do right now? If you say, "I absolutely hate it and I can't wait to get out," then I think you throw the baby and the bath water out and start with a fresh sheet of paper and say, "Okay, I'm going to create something for the next stage of my life."
The next option would be, let's say, "I like parts of it. There's parts of it I'd love to keep doing." And in that case, I recommend you talk to your leaders about, is there a way that you could go part-time? Maybe just doing the things that you're uniquely qualified and skilled at doing. Just make sure you don't expect part-time pay for full-time work. So, what pieces of what I do now can I carve out in order to make that transition from 40-plus hours a week to zero hours a week much smoother? And then there are times when we can't. We say, "You know what? I want to keep doing what I'm doing now, but I only want to do it for another year or so." And so, in that case, what can you start doing to start filling up that other life bucket, let's call it? So, getting clear on what your situation is today and what your possibilities are.
You might work for a company that says, "Nah, we need you full-time or not at all." Okay, well, that's going to tell you what you need to do. And at that point, it's like, "Okay, now, I need to start planning for the day when the retirement party, they've taken the streamers and balloons down, and now it's time for me to go do something else." It is a wildly underestimated, under-talked about, stressful process to move into retirement.
Brian: Sure. So, okay, well, let's talk about that. So, yeah, it is very stressful. And you get to hear a lot of stories. So, Bob and I have our own war stories from the financial side, right? So, how do we make the numbers work from all this? What are some of the stories that you hear? But you're more on the day-to-day career side. So, let's say, you sense that somebody is there really kind of ready to go, but maybe there's not a little bit. What if somebody pulls the trigger a little bit too soon? What are the biggest regrets you tend to hear from people who maybe hung it up too early?
Julie: You know, the biggest regrets come from people who hung it up too early because they've not jumped at something that they're excited about. In other words, the dislike for what they were doing overrode their patience. So, they might say, "You know what? I'm going to go be a volunteer full-time," or, "I'm going to go play golf until I can't stand it anymore," or, "I'm going to go do more, spend more time on a hobby." I actually had a client several years ago who was on the road so much that when he got to the point that he could retire, he quit cold turkey. And he went, moved to Florida, golf, pickleball, tennis, racket golf. He did so much of it that he hurt his shoulder. And he's like, "Now," he said, "I jumped from 120% at one thing to 120% at another."
And he realized at that point that that life of 100% leisure while tantalizing in concept was not only not good for his body, but it also wasn't good for his mind. And so, he went back to work doing some consulting. And so, you know, you have to know, if your identity is tied up in your job, then you are going to have a harder time with it, or if you don't have anything that you're interested in. I've been talking about this with people recently, and with men, it's especially hard because they generally don't have the friend and support network that women do. And so, now, you're 60-some years old and you're trying to find people to do stuff with. And wives are saying, "We don't really want to be your 100% entertainment." And so, how should we then...
Brian: My wife would never say that. She loves every minute that we do that.
Julie: She just spit her coffee out right now if she's listening to this.
Brian: Oh, apparently you've met. Okay.
Julie: But, yeah, you have to get realistic about all the pieces of your life. If things are really, really, really bad, and you feel like you're being pushed out, and then it can be worth it to just stop, pull turkey, take a breath, and then rebuild something new. But if you generally like what you do or portions of what you do, the smarter play can be a slower exit, or you get a chance to try some things on the other end and to build on the other end before you go full-time. Because some of the things you think you're going to enjoy doing in retirement, you won't. And you're going to discover some new things once you allow yourself to be really open-minded around that, that you do choose to pursue.
It can be a really wonderful time, but it's not an easy time because you're also dealing with the mental piece, which is, "Oh, my gosh, this is that last portion of my life," which is really quite sobering. And so, you're dealing with a lot of that kind of stuff as well. Maybe some regret, maybe all that stuff that comes with a major transition. And so, be realistic. Be realistic about who you are, what your support systems are, what your hobbies and interests are. And you have to get out there and be bold and vulnerable a little bit, and know that you're really, in a lot of ways, building a brand new stage of life.
Bob: All right, Julie, in the minute we got left here, one of the best ideas I've heard on this topic, and I think the idea actually came from you in one of the prior segments we've done with you, and that's once you get to that point where you know you're going to probably retire in a year or a year and a half or what have you, that's the time to maybe take that one or two week vacation and actually trial run retirement. Now, that takes some planning, right, Julie?
Julie: Yeah, absolutely.
Bob: But pretend that you're retired on your vacation and actually plan out what you think you're going to want to do to make sure that that's really what you're going to enjoy. Am I on the right track there?
Julie: Yeah, absolutely. You've got to try things out. You've got to get out of your head. You've got to say, "Look, if my goal is to give back or contribute more in my community," maybe you take time to figure out, what is it? What is the way you want to contribute? Then start researching organizations that do that and figure out what your role might be. And so, you have to take this on like a project, and you're the project. And that's the stuff that's really, really uncomfortable for us because it causes a bunch of other stuff to surface that maybe we haven't dealt with.
Bob: Thanks for listening. You've been 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. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question, and it will come straight to us. All right, Brian, John and Madeira says, "Our required minimum distributions are going to be much larger than our actual spending needs. What strategies can help us avoid a huge tax bite?"
Brian: Yeah, very common question, John. Thanks for sending it in, and thanks for trusting us to provide you some feedback there. Well, we don't know John's age. He talks about RMD's requirement of distributions in the future tense. So, we're assuming he's not quite there, yet. If that's the case, then he's got a couple alternatives. John, you can be looking at Roth conversions. And the most ideal window for this is when you're in the lowest bracket you'll ever see. So, perhaps you're retired. Maybe you haven't turned on Social Security or pension benefits yet. So, there's no income generating tax taxation there. And obviously, you're not at requirement minimum distribution age. So, that's probably the lowest bracket that you've seen in decades. So, you might want to look at Roth conversions here.
Or even if maybe that's not on the table or maybe you got other things going on, another thing you can do is just start accelerating withdrawals. Don't rule out the IRA when you do need money for that vacation, the next car or whatever. Remember, you're in the lowest bracket of your life. If you take a chunk out, you can calculate what the bracket will be and get an idea for how you'll stay below whatever bracket you want to avoid. But don't always avoid the IRA because you know it's income taxable. Spread that out. More distributions over a longer period of time is going to stretch it out into more tax years, therefore less taxes percentage wise.
So, we will move on then to our next question here, which comes from Jerry in Lebanon. Jerry says he's the executor for his father's estate and he's got business interests. Well, congratulations, Jerry. That's going to be a couple of curveballs for you to go chase down. What steps does he need to take, Bob, to avoid some personal liability as he's selling this estate? It's a tough one.
Bob: Well, it is a tough one, Jerry. And I take these questions literally, and based on the lack of information contained in the question, that's not your fault. That's just the way you ask the question. Here's my advice, hit the pause button immediately. Don't do anything. And go network around a little bit and find a good, qualified attorney, someone that specializes in both business planning and estate planning. They're out there. Just network around a little bit and find one and don't take any action. Don't do anything until you have consulted with a good attorney. Perhaps it's your father's attorney, you know, who might be well skilled in these things. And if that person has retired or moved on or is no longer active, talk to your friends and colleagues and find a good attorney.
That's my best advice because if you're involved in making decisions on behalf of the business, or operating the business in any way after your father's passing, you want to be real careful, you know, to protect yourself. So, get some good legal counsel here. I know it'll cost a little bit of money to do that, but my experience has been, you know, a good attorney is worth his or her weight in gold and can help you avoid some possibly significant problems. That's the best advice I could give. All right, Kevin in Erlanger, Brian, he says, "I've accumulated stock options through work. What's the smartest way to exercise them without triggering a massive tax bill all at once?
Brian: Okay. So, this is another good one here. Some complicated features here to a very popular benefit plan that some employers share with their employees. So, your stock options are going to fall in one of two categories. They're either ISOs, incentive stock options, or they're NQSOs, non-qualified stock options. Big differences between them. If they happen to be of the incentive variety, then you can get a little bit of a tax benefit there. If you hold those shares, exercise and hold the shares one year from the exercise and two years from the grant, then you should qualify for long-term capital gains tax, which is the most favorable kind of tax. If we got to pay it, that's the one we want. But you want to watch out for alternative minimum tax. We can do a whole fascinating, boring show on the alternative minimum tax. We can't get into that here, but just be aware that if it's incentive stock options, that's something you're going to want to be paying attention to.
On the other hand, if it's non-qualified, those are going to be taxed as income at exercise. So, you're going to pay ordinary income tax on the spread, which is the difference between the market price, whatever everybody would pay for it on the open market, and whatever the strike price was, which you were given at the time of the grant. And then any further appreciation after you exercise this, that's taxed as capital gains when you sell. So, if you want to avoid this, you can spread it out over multiple years. Try to wait, or if you can wait until you have a lower income year, for example, let's say you're planning on retiring at the end of this year, awesome. Don't exercise anything now. Wait until January if you've got that ability through your employer.
And also, there may be options for cashless exercises, which basically means that you liquidate the whole thing. You don't have to lay out any cash. They'll pull the purchase value right out of the proceeds. And also, as always, you can consider some charitable giving to offset taxes. If you're already doing some of that anyway, then there may be a way to combine these things. So, get with a fiduciary financial advisor, and they'll help you put these puzzle pieces together. Next question. This one comes from Mark in Indian Hill. And Mark says, they've saved steadily, but they've mostly used mutual funds. And he's wondering if exchange traded funds, ETFs, or direct indexing might be a better option for them at this stage.
Bob: Well, Mark, I would say, all things being equal, of course, ETFs and direct indexing are more tax efficient than having everything in mutual funds. But first of all, congratulations for saving steadily and building a nice portfolio of mutual funds. Because I'm assuming you've done this over years and decades, and that was the only game in town. So, you did right. You saved. You accumulated. The industry has evolved over the years to have these ETFs and direct indexing and tax loss harvesting strategies. So, it's good that you're aware that those are out there. My advice would be, have a good fiduciary advisor, sit down, look at your portfolio, and there might be spots where you can gradually move into some of these more tax efficient strategies without causing you to just dump all your mutual funds, or most of them, and pay a huge capital gain tax bill in the process. So, it's important to look at the details. Have a good advisor sit down with you that could give you good, fiduciary advice, and help you transition responsibly into some more tax efficient strategies moving down the road. Coming up next, I've got my two cents on how maybe to evaluate what kind of financial advice you really need based on your situation. 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. All right, we started off tonight's show by giving four or five different examples of fairly well-to-do families that had gotten some bad advice, and kind of went to sleep on not doing some important things. I want to bring this back, Brian, to kind of real world, how should these people be evaluating their situation? And what I'm talking about here, and I run into this quite often, a lot of times people don't need or want a professional advisor to help them with everything. They might already have a good estate plan. They might be very comfortable, self-managing their portfolio. But there's some of these things like tax efficiency or more complex estate planning or distribution strategies that they haven't even thought of. And it can really move the needle in their overall financial plan from a tax standpoint and from a legacy standpoint to their families and chosen charities.
And so, my message tonight is be open to sitting down with somebody and be a little self-aware about what you haven't covered or you might not know or might not want to do. Because oftentimes, Brian, we don't do every single thing for clients, but there's one or two value-added things we can add to somebody's situation, really move the needle for them. And they walk away feeling glad that they worked with us or with another good, fiduciary advisor. That's my message tonight, is have an open mind as you evaluate comprehensive advice and comprehensive planning.
Brian: Yeah, and I would add to that, I would add this, one of my favorite times as an advisor is when I come across something where I can educate somebody using an actual real example. Because I think people are very comfortable knowing that they're not alone in whatever weirdness they're facing. Sometimes it can be good weirdness, right? "I'm fortunate, I've got a lot of money that provides a lot of opportunities. What do other people do in my situation?" And sometimes, it's terrifying stuff, you know, where maybe there's a health care problem or something in the mix. And I think the value that any advisor brings is the ability to say, "I've been through this before. Here's how other people who look just like you have responded to it. Here's the techniques they use. Here's the results that they got out of it. Here's the pros and cons of all the decision options that they had." And then everybody can move forward having made a confident decision. But it helps an awful lot to have somebody who is an independent bystander on arm's length away who can kind of guide you. Sort of the docent in the museum, if you will, of here's how things have worked for other people historically, and here's how it can work for you.
Bob: Yeah, it doesn't mean that you have to do what everyone else does. But to your point, Brian, just knowing what some of your options are, and maybe hearing some real life examples, three or four ways to possibly skin the cat, oftentimes, you know, the bells and whistles go off in people's brains and say, "Yeah, I never thought about it that way. I like that idea. Let's explore how that might impact my plan." So, yeah, keep an open mind. Keep an open mind to working with advisors, but pick advisors properly so that they're actually operating in a fiduciary role, operating in your best interest, not theirs. Thanks for listening. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.