Inflation, Charitable Giving Changes, and Avoiding the Action Trap
On this week’s Best of Simply Money podcast, Bob and Brian break down what the Fed’s preferred inflation gauge is signaling and why mortgage rates may stay stubbornly high despite potential rate cuts.
They also explain new tax rules coming in 2026 that could change how you give to charity, and highlight a new study showing many retirees may outlive their savings.
Plus, they unpack the “action trap” that even smart investors fall into, compare retirement systems around the world, and tackle your questions on umbrella insurance, capital gains, risk tolerance in marriage, and managing tech-heavy portfolios.
Download and rate our podcast here.
Bob: Tonight, what the Fed's preferred inflation rate says about where we might be headed. Plus, change is coming to charitable giving, and we answer your money questions. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
All right, let's talk about the latest on inflation because, yes, it is still a thing, it's hanging around. And what the Federal Reserve might do next could impact everything from your mortgage to your investment portfolio. Let's get into it, Brian.
Brian: Well, here's the headline, Bob, the Fed's favorite measure of inflation, the one they watch closer than any other, it picked up a little bit in July. Not a big jump though. This is the PCE index. It's the Personal Consumption Expenditures Index, which we know, that's the most riveting title we can possibly slap on things to start off a lovely evening here. But what matters is, it's showing the prices are still coming up. The personal consumption, the PCE index, it excludes things like food and energy prices. The Fed believes that that's a way to get a clearer picture of what's going on because those are particularly volatile. Although ironically, energy hasn't been a big concern from what I remember. Food certainly has lately. In any case, that core number is up 2.9% over the past year. Fed's target is 2%, so we're still running a little hot. But this is about the same range as what... We've been running a little hot for a while now. I think it's just a confirmation that we are still stuck in the mud here.
Bob: Yeah, I was listening to a couple folks talk over the weekend. I like to check in, I don't know, between football games. And I think what's interesting here, heading into this Fed announcement on September 17th, is even if the Fed cuts rates a quarter point, when you start to look at the yield curve going out 3, 5, 10, 15, 20, 30 years, the long end of the curve, it's steepening, it's not coming down. My point in saying that is... And I think this is why The President and Treasury Secretary, Bessent, keep lobbying saying that interest rates should be at 0.5% or 1%. I think they know that mortgage rates are not going to come down. The long end of this curve is not going to come down.
And let's remind everyone, mortgage rates are largely tied to the 10-year. My point is, even if we get a quarter point rate cut in September, that's not going to move the longer end of the curve at all. And if anything, we're starting to see it steepen because growth is good. I mean, the S&P earnings are 13% higher than they were a year ago. And so, I think the Fed's in a tough spot here with inflation. And we do see job numbers coming down. It's getting a little harder to find a job. So, the Fed is trying to balance a few different things all at once, which is what they always try to do. It's going to be interesting to watch here, Brian.
Brian: Yeah. And I want to break up another point. You mentioned mortgage rates. I want to be sure that everybody's clear out there. The Fed is not sitting here saying a 30-year mortgage is going to be X%. That's not what they do. We all get hung up on that because that's the most common place where interest rates directly and immediately affect us. So, Federal Reserve does set the federal funds rate, and then that trickles through the economy. But in addition, as you mentioned, the 10-year treasury yield, that's something that's driven by supply and demand and the overall market for bonds. Investors wanting to buy bonds or wanting to dump bonds will have an impact on mortgage rates. So, don't be looking to the Fed for the exact instruction on what a 15-year or a 30-year is going to be. It's a little bit different than that. But...
Bob: No, I think it's going to be fun to watch or interesting to watch because the Senate is back from their recess now that we're through Labor Day, and they've got to negotiate a budget here before we have a "shutdown" at the end of the month. You got the Fed meeting on the 17th, and more data flying in all the time. We've got some tariff news over the weekend. The courts have gotten involved here to potentially get in the way of President Trump's tariff policy. Sounds like that's heading all the way up to the Supreme Court, possibly. So, a lot going on here in September, Brian.
Brian: Yeah, let's throw out some other things too, because I think we've drilled a little more. The next thing you talked about there was the job market here. So, the average is just about 35,000 jobs per month. And that's about where we were after 2007, 2009. In July, we only saw about 73,000, while May and June were revised down by about 258,000 jobs. So, job market, there's a pulse doing okay, but a little bit less robust than initially reported. Unemployment is a little over 4%. That's about where we are in terms of full employment. And wage growth is moderately strong. We're looking okay on that front, about 3.9% to 4% year over year. So, I think there's some good things and there's some things that are concerning out there. Again, no reason for panic, but just things to pay attention to, as you said.
Bob: Yep. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right. Something else we want to draw your attention to here are some new tax rules for charitable giving coming down as part of the Big Beautiful Bill. Here's some minor changes here, and it could affect how much you give and how you give to charities moving into 2026. Let's get into that a little bit, Brian, because I find in client meetings, still people are not taking full advantage of how to do their charitable giving based on current tax policy.
Brian: Yep. The One Big Beautiful Bill did a lot of big things that was signed on July 4th of '25. But one of the things we haven't talked about a lot is it's going to reshape a little bit about how we benefit from charitable giving. This starts in 2026. And so, if you are a non-itemizer, that means that you have enough deductions that you're going submit... I'm sorry, you don't have enough deductions that you're going to take the standard deduction. If you can fog a mirror, you can deduct. A married couple can deduct $30,000. An individual can deduct $15,000 worth of income. If you are a non-itemizer, one of those standard deduction people, then you can take up to 1,000 bucks for a single, or $2,000 even if you don't itemize. If you do itemize, now you're facing a new hurdle. Only donations that are over a half percent of your adjusted gross income can be deducted. And supporters in that top tax bracket are going to see the value drop from 37% to about 35%. So, some changes come into if you were still taking advantage of that little bit that you could deduct while being an itemizer or a non-itemizer, be paying attention for how that's going to change here in 2026.
Qualified, charitable distributions, these are for those of you who are 70 and a half years old, where you're forced to take money out of your IRA. Now, remember, we always get confused by this. The required minimum distribution age, if you weren't there yet, is now 73, but they did not change the age for qualified charitable distributions. You are eligible to send money directly to charities from your IRA. And if you are of that age, it will qualify for your RMD. But those are still things that you can do, and that's something you should look into if you have hit that age.
Bob: Yeah, just to summarize here, and this is not a big deal, but just for the folks that are still taking that standard deduction every year, nothing changes. But I think for the people that do give that $1,000 to $2,000 a year to charity and didn't think they could take the deduction, you can starting in 2026. So, just something to look out for as you begin your tax preparation or planning for 2026. All right, we also want to hit on a new study that came out about people outliving their money, Brian. This is a new study from a firm called Seniorly, a senior living marketplace, and they reveal that retirees in 41 states, including Ohio and Kentucky, are projected to outlive their savings with an average shortfall of $115,000. Brian, this just means that folks are going to have to rely on kids, relatives, grandkids potentially. There's a lot of retirees that are struggling and at the risk of running out of their savings.
Brian: Yeah, and I always like to know. It's good to know what Ohio, Kentucky are kind of nominally, but how do we rank, overall? So, obviously, there are bigger problems elsewhere, as you might guess. Some of the states with the biggest concerns there are the more expensive ones. So, the worst outlook is New York, where there's a shortfall of about $450,000. Meaning most people, the average person needs $450,000 more to be okay. Hawaii's a little over $400,000, DC at the $407,000, Alaska $342,000, California $337,000.
But here in Ohio, projected out, nobody has enough money as this works out, but the projected shortfall for an Ohio and a Kentucky in around $115,000. So, at least, in this area, because we are a lower cost of living area, the gap isn't quite so scary. What they're doing here is they combine data on taking life expectancy at age 65, what's the average social security income, household, net worth? And so on and so forth. But just making sure that we look at all the different resources and figure out, you know... Really what matters here, Bob, is what are you going to do about this? This is a concern for you. And it always starts with knowing where you are right now. Understand what your resources are and have, at least, a basic idea on what you want to do with all of these things.
Bob: Yeah, and for the people that fall into this category, and we run into those folks from time to time, it's just like you said, a lack of planning. And some people, let's face it, they're in situations they can't control from a health standpoint or a disability or something like that. I'm not talking about those folks. But the key point here is, get out in front of this. Take a look and model out. I think a lot of people forget that inflation eats away at your purchasing power over time. And then the whole longevity thing that we talk about all the time, people are just living longer. So, when you just pull the trigger on retiring, a lot of people or some people just say, "Hey, it's all going to work out, blah, blah, blah." But they forget they're likely going to live longer. And inflation eats away at their savings. Some people are too conservatively invested. You roll all that up together and you run into a real potential problem here of running out of money.
Brian: Right. Now, it's not everybody. So, this same study does list a few states that actually have surplus. So, people that are doing okay are in Washington, Utah, Montana, Colorado, Iowa, Minnesota, and a few other states. So, not everyone is stuck in the mud here. So, that kind of shows that it is possible to pull it together. So, again, like Bob says, just make sure you know what your resources are and what you're shooting at. If you haven't had that discussion with your spouse, then it's really time to do that.
Bob: Here's the Allworth advice, take the time now to stress test your income and your savings. That's how you make sure you won't just retire, you'll stay retired. Coming up next, we're going to discuss something smart investors may fall into, something called the action trap. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. You can listen the following morning during your commute in the car or at the gym or on your walk around the neighborhood. And if you think your friends could use some financial advice, tell them about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead at 6:43, we're answering your questions about umbrella insurance, big tax bills, and what to do with $1.2 million in deferred comp plan assets.
All right, if you listen to our show each night, we know that many of you are already very smart with your money. You've built wealth, you've saved consistently, and you're in pretty darn good shape. And that doesn't happen by accident. But even the most seasoned investors, and Brian, we run into these folks from time to time, we're talking about folks who've been at this for decades, they can get pulled into what we're calling the action trap. Let's unpack this one, because this is a real thing that happens from time to time with folks.
Brian: Yeah, a lot of this comes from FOMO, right? Fear of missing out. There's a feeling, when the markets are volatile or the headlines are moving around, that if you're not doing something, then that must mean you're doing nothing, and therefore you're missing out. And over the decades that you and I have both been doing this, there's always some sexy thing out there that we're supposed to be chasing and is going to solve all of our problems. Most recently, it's AI and crypto. But in the past, it was internet stocks and real estate. And way, way back, there were oil partnerships and all that kind of stuff that everybody had to be doing. So, feels like standing still is losing ground, so we all kind of convince ourselves that we have to do this, have to do these kinds of things.
So, let's pump the brakes a little bit. So, the reason we're talking about this bankrate.com just did a really good breakdown on the difference between investing and trading. And it's a great reminder of the difference. So, investing is truly long-term. You're basically saying, "Yeah, I get how the economy works. I get that the United States, we're fortunate to be here in the first place, and it's the strongest place to make money on the face of the earth, if not the entire universe. Therefore, I'm buying into these companies that are profit motivated and I trust their decision making. I know they're going to find ways to make profits in whatever environment, and I'm going to trust them to do that." Trading is a little bit different. It's much more short-term. It's about trying to time the market, reacting fast, finding information that nobody else seems to have, and trying to outsmart that next step there. And that you can be right nine times in a row, wrong the 10th time, and you're going to go right back to the beginning.
Bob: Yeah. And the key word here is trying. Study after study shows that it's very difficult to trade successfully over the long haul, meaning outpace the market, outpace what you would have done with just a good, responsible, diversified investment portfolio. And, yes, there are people who win in short spurts, kind of like betting on college football. But to do that consistently and make money, the data just isn't there. In fact, most traders, short-term traders underperform the market, and some underperform it by a big margin. Brian, I want to backpedal a little bit and get into why. Because occasionally, I have people coming into my office and want to get involved with this stuff, and I think, especially retired folks. The two things that crop up to me are boredom. People, you know, they're not working anymore. They don't have enough to do and they're bored and they're consuming news all day and they just want to get involved because they're bored. And then second, a sense of control. You know, with so much going on in the world that is seemingly "out of our control," people think that by getting involved in short-term trading, they can regain some control over their life. And that boredom combined with that control, with having a lot of money and all these online platforms, you can do some real damage to your portfolio in a hurry if you're not careful.
Brian: Yeah, let's talk about that damage. We like our studies here. This actually is a homegrown one that I'm looking at right now from our chief investment officer Andy Stout. Andy went back... And he does this every now and then to update the numbers, but he has built a report for us to help our clients understand the impact of this. So, he went back and said, what if you invested a million dollars in the S&P 500 20 years ago and then completely ignored it? You went all Rip Van Winkle, fell asleep, woke up 20 years, what happens? Well, over the past 20 years, that million dollars would have grown to over $7 million, and it would have averaged about a 10.3% return. Again, that's if you completely ignore it, you don't goof around with it, you don't try to jump in, and out and so forth. However, let's pretend for a second that you do read the headlines and you get spooked and sometimes you pull it all out. If you accidentally miss the 10 best days of the market, right? So, we're talking literally 7,200 some 7,300 days in that 20-year period. If you accidentally missed the 10 best days, your 10% average that you got if you left it alone would have dropped to about 6%. Now, if you miss the 50 best days, believe it or not, now you have a negative rate of return over this 20-year period. So, yes, the data screams, just leave it alone, buy things that you trust, and don't try to get in and out, don't try to jump in and out because you will get hit by the train.
Bob: You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, here's something I tell people that just can't keep their hands off the lever here. You know, and I just say it like this, let's make sure we're separating your serious money from your play money. In other words, if you're somebody that just has to get involved in this stuff and feel like you're in the game and can beat the market and you just love doing this stuff, carve out, I don't know, 2% to 5% of your portfolio, and let's just call it a sandbox if you will and go for it, trade, go with your gut, try to outpace the market, do all those things. But also, have an accountability partner, meaning do it for 3, 6, 12, 24 months, and then be honest and sit down and say, how did you do? Did you underperform? What was the tax result? Did it take up a bunch of time and energy away from your family and other things that you probably should have been doing? You know, how did you do? Does it make any sense? And a lot of people just want to go have the activity and treat it like a hobby, but they don't want to look in the mirror and say, "How did I actually do? And was this worth all the time and the energy and potentially the losses involved?"
Brian: Yeah. And I'm always reminded of, there is one baseball player out there, Bob, one professional baseball player who in his career got one at that and got a hit. His batting average is literally infinity. There's only one guy out there in this situation. He never got another shot. And so, the point of all that is, is he the greatest hitter in history? Well, no, because nobody saw enough in him to allow him another at bat, let alone a longer-term contract, or something like that. So, my point in this is also don't get hung up on that one time where that one stock was a 10-bagger on you, which is great. That's awesome. But what I've found is oftentimes, people really get fixated on that and decide that, or worse, they'll hear from a friend who has a guy or has a woman who had these ideas, and the friend reminds them of this one time with this awesome return, and this person must be the next Warren Buffett. Meanwhile, nobody ever steps back and says, "Cool, what's the 3 year, the 5 year, the 10 year average? Is this all, you know, GIP-certified investment returns that we can really rely on or is this just a fun story to tell at a cocktail party?"
Bob: Yeah. And let's face it, human nature. I mean, everybody, if you're at the golf course or a dinner party or whatever, you're always going to hear about the winner, you know, but nobody's going to come and say, "Hey, let me tell you about these thousands of dollars that I lost." How many times have we heard that from anybody? Virtually zero.
Brian: And how many times did they lose it in an IRA, which means they don't even get the deduction on it, or worst case scenario, they lost it in a Roth IRA, which means they didn't get a deduction on the front end. They don't get a deduction for the loss. And now, there's a lot less money that's growing tax free and compounding tax free forever. That's the worst place to gamble with your dollars, is in a Roth IRA, in my opinion.
Bob: Well, and even with us saying all this stuff, there's a lot of people out there that just can't help themselves. They're going to have to scratch that itch. All we're trying to call out here is do it responsibly, do it with a very small percentage of your portfolio. And that sandbox account or play money account should be mentally and logistically separate from your core portfolio, different account, different login, keep it out of sight and out of mind when you're thinking about your long-term planning. Here's the Allworth advice, even the smartest investors can be tempted to trade, but long-term wealth is built through disciplined investing, not chasing all the short term action that's out there.
Coming up next, we're breaking down how retirement works around the world, and what you can take from these global systems to strengthen your own plan. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. So, we came across an article comparing retirement systems from around the world. We're not here to say the U.S. has it all wrong, or that other countries have it figured out. I'm not planning on moving out of the U.S. anytime soon. I don't know about you, Brian. But the different models, it's just interesting to study how governments and people in general try to skin the cat here. If you look at places like Denmark, the Netherlands, even Canada, it offers some interesting food for thought on how different countries and people approach retirement, especially if you're trying to make sure your money lasts that 30-plus years during retirement that we always talk about and we always encourage our clients to plan for, Brian.
Brian: Yeah, so the United States here, we have focused really, really, again, since the beginning, we have focused on private enterprise. That is really what everything is about here. And we have designed ways for people to benefit from private enterprise. That has to do with our bankruptcy laws, the depreciation rules that make it very friendly to invest in real estate, and just the overall our focus now on the idea that we're going to fund most of our own personal retirements with 401(k)s, which at the end of the day, you're winding up investing in private enterprise. That is, of course, not how it goes elsewhere. So, let's dig into this.
Let's start with Denmark. Denmark has a public pension system that is backed and supported by the government, but there's also, very widespread and negotiated workplace pensions in addition. So, this isn't forced stuff. It's just a culture and the structure. Everybody just kind of assumes that's how it is. We used to have a little bit of this '40s and '50s and '60s. We had a similar type of environment. But over time, again, as we've decided that private enterprise and growth of equity is more important than anything else, we've kind of made it less attractive to invest in pensions and more attractive to invest in the kind of things that, again, continue to support that crowdsourcing of private enterprise investment.
Bob: Yeah, and I think this is a good way to just call out, leaving the politics out of it. It's just a different philosophy of the role of government versus the role of businesses and individuals in terms of creating wealth for themselves. If you rely and take advantage of, quite frankly, the profit motives of U.S. companies, and let's face it, the U.S. stock market has done incredibly well over the long term, it's great for people that have been able to embrace that and participate in that. For the ones that have not or cannot, they're left behind. Because these pension plans, any kind of government pension plan... I mean, let's look at Social Security. It's underfunded. People that cannot get on board with the idea that you've got to take ownership of that and participate in the stock market long-term, that's what we're trying to call out here, the whole personal responsibility thing, and understanding where you live and how the game is played so that you can stack the deck more and more in your favor.
Let's talk about the Netherlands. They've created a multi-layered model with very strong regulatory foundation. They encourage savings through both employers and personal investing, and they are pretty transparent about long-term expectations. Proponents of that system say it gives retirees some predictability. And let's face it, Brian, a lot of people want that. They just want to know what they're going to get. What's my check going to be when I stop working? And in the United States, we get some of that through Social Security, but let's face it, most people can't and don't want to live on Social Security alone.
Brian: That's right. That leaves the question of, here in the United States, a lot of people... And I think this is what drives a lot of the concern, most people, of course, have 401(k)s, IRAs. We've invested because that's literally what we do. That's what we talk about on the radio all of these evenings. And so, what that means is that your "pension" can kind of go up and down a little bit, versus the more predictable locked in approach. However, that locked in approach isn't going to result in as much money. There is a cost to those guarantees. That does not make them bad, but it does change the math. And so far, it's easy to say, right, when the market is at a peak as it is right now, it's easy to say, this is the better way to go, but there will be some temptation the next time we go through a 2022 and/or a 2008. Those times are coming and they're no fun. We'll see them again.
Let's look to our neighbors to the north. How about Canada? So, Canada has a base public pension for everybody. And then on top of that, there are private and workplace options that really give people room to grow their savings. And proponents say that Canada is really good at providing the stability there of not the huge benefits, but consistent benefits, which is basically what I was saying. The United States is taking the opposite approach. We have bigger benefits, if not huge benefits. You can really build your own wealth, come from nothing here. This country is really the best place on the planet to do that, but you got to do it, and you got to do it right. That is at the expense of consistency. It gets scary here when we go through those bumpy markets. We have a lot of flexibility, a lot of choice. You want to retire at 62, start a consulting business, knock yourself out, go do it. If you want to convert part of your investments to a Roth and never pay taxes again, cool, do that too. That kind of control that we offer here is not universal. Some don't value it, but I think that's really because a lot of people just don't understand it.
Bob: Yeah, I think the key point we're trying to point out to folks here is, you know, regardless of whether you have these public pension plans in other countries or Social Security here, some people in the U.S. try to create their own kind of public, guaranteed income plan through things like fixed annuities and things like that, just that lower but safer income stream. The point is, no matter how you slice it, you got to figure out a plan, you know, factoring in taxes, what you plan to spend or want to spend or need to plan, and make sure the asset base is there, whether it's a guaranteed income stream, an investment portfolio or a combination of all the above.
And let's face it, 50 years ago, retirement might have lasted 10 to 15 years. Now, if you retire at 65, there's a good chance one spouse could live to be 95 or even 100 years old. And that's part of the struggle that all of these countries are facing, including the United States. When you look at building these public pension retirement options, fewer people in the workforce supporting more and more retirees that are living longer and longer. The math just doesn't add up a lot of times.
Brian: Right. So, what do countries do to manage that? Well, some have been raising retirement ages. France and China did this. Others increased payroll taxes, right? Let's bring in more income from the people who are working now to assist those who are not working. And some will reduce the benefits. And here in the U.S., and we talk about this just about every meeting it feels like anymore, there is talk about changing how Social Security is taxed, or even means testing future benefits. Neither of those is new, by the way. Social Security is taxed. You are paying taxes on when you get your Social Security income back. And I would argue, we already means test a little bit. The more income you make, the higher tax you pay on your Social Security. It's still among the most friendly of taxes on income here in this country. But rest assured, Social Security is taxed. And there is a hole in the bucket. So, we do need to either figure out whether we're going to tax more on workers or reduce benefits or change ages and all that kind of stuff. So, lots more to come on that.
Bob: Here's the Allworth advice, you don't need a government-mandated system to have a strong retirement. Learn from what others do well, then use your freedom to build something even stronger. Next, it's another round of Ask the Advisor. Big portfolios, big decisions and the strategies families want to know about. 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. Do you have a financial question you'd like for us to tackle? 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, leading us off tonight, Brian, is Dan in Columbia-Tusculum. He says, how much umbrella insurance do you really need, and can you provide a scenario where one would actually need to use it?
Brian: Oh, sure, scenario. Well, there's lots of scenarios. That's why we call them umbrella policies because they cover a lot of different things. So, really, the big thing here, umbrella insurance is the type of thing you tack onto your property and casualty insurance policy, your homeowner's insurance. And it's for, your dog bites somebody, or somebody slips on the ice in front of your sidewalk, or you have young drivers. That's where it really hit home for me when we started getting our kids licensed. So, there's risk there. And so, you have to start with, what do you have at risk? You've got home equity, you've got retirement accounts, brokerage accounts, maybe business interest, savings, those kinds of things, income potential over the next 10, 20 years. If you're 45, you're earning $200,000 a year, you could expect $2 million to $4 million of future income to be at risk. Where are you exposed? Well, if you're a homeowner, you've got a pool, a trampoline, dog, we've talked about all that. Lifestyle, maybe you like to have large parties. You're volunteering on boards where there can be liability, those kinds of things.
Most carriers will sell umbrella insurance in million dollar increments. So, a good starting point is 1 million to 2 million. That sounds like an enormous amount of insurance. However, don't forget that the risks that are covered here are relatively rare in nature. Therefore the coverage is cheap. The risks are rare, but if they do come up in your world, if your number comes up, they can be really, really expensive. So, hope that helps kind of clarify that question a little bit.
Let's move on to Bob in Amberlee Village. Oh-oh, I see one coming here, Bob, that I think we're going to have a little, here's what you should have done. My wife and I just sold, past tense, sold a rental property, and the gain pushed us into a higher bracket. How can we reinvest the proceeds without creating another huge tax bill? What happened here, Bob?
Bob: Well, I mean, obviously, we don't know the whole situation. And Bob, we're not piling on here. I think the proverbial water has flown under the bridge here, meaning you already sold it, you got the tax bill. What could you have done? You could have looked into things like 1031 exchanges. If you want to take that rental property and avoid the capital gains taxes by diversifying into a broadly diversified portfolio of real estate, that's something that we often talk to our clients about if they're faced with these massive tax bills when they're going to sell a piece of property. That's what you could have done.
What do you do moving forward? And by the way, there's nothing wrong with making a pile of money and paying taxes. So, we should also congratulate you on running a successful rental property business. Let's face it, you only pay taxes when you make money. So, good for you. Moving forward, when you reinvest that money, just use things like direct investing, tax loss harvesting strategies, have some things moving in the background with your newly formed investment portfolio so you don't get a surprise tax bill hit, you know, moving down the road in case you have a big winner in your overall stock portfolio.
All right, Kelly in Northside says, "My husband and I have a totally different risk tolerance. So, how in the world are we supposed to achieve financial freedom if we have completely different ways of wanting to go about it?" Brian, this is a great question and one that I run into from time to time.
Brian: Yeah, go figure. Husbands and wives tend to disagree on things. Who knew? Yeah, so this is fairly common. People come with different experiences in just different things they have been through, and that results in just totally different opinions on how we should handle financial planning. It's not uncommon that we'll have a married couple where one spouse is super aggressive, high roller, "I know the stock market is the best place to be over the long-term. So, that's where I just want to put the most money there." And then somebody else will say, "You know what, I'm just not comfortable with that. I can't handle the ups and downs. I get too upset when things try to drop." Now, obviously, the very first thing we need to be doing here is communicating. So, the fact that these two people are already in the same room and have had this discussion, good for them. Because so many people out there will just realize that there's a conflict and simply shut down. And that's a terrible way to run a marriage, let alone a financial plan. So, I'm glad that Kelly, you and your husband are communicating there.
Another way to think about this. You can, of course... You each control your own investments. You've each got 401(k)s, IRAs. Make your decisions independently, but understand how those puzzle pieces come together to form a plan that fits the whole family. Another thing might be, perhaps instead of worrying about different risk tolerances for the different investments, maybe this particular couple should look at a larger emergency fund. Let's carve out more dollars. If the average person has six months' worth of expenses, let's make sure we have 12 months or maybe even 24 months. Perhaps that can get Kelly to a position where she can say, "Okay, I get it. The investments, the longer-term stuff is going to be bumpy. I understand that. Because I've got two years' worth of expenses rather sitting in cash. So, if the stuff hits the fan, then I'll know we could float for two years without hitting those long-term investments." So, these types of conflicts about risk tolerance don't necessarily have to impact the investment portfolio. Find a different way to solve the problem. Just be open minded to what the solutions might be.
Tony in Lebanon. Tony, speaking of aggressive investors, "Our portfolio is heavy in tech stocks after that last decade's run up. If we turn these back now, what's the smartest way to rebalance this without getting absolutely hammered by these capital gains?"
Bob: Well, Tony, here's what I'd say in terms of how to start out here, get with a good, fiduciary financial plan or financial advisor. And let's just put the proverbial car up on the rack, hook up the diagnostic tools, and let's look at the current state of affairs. How much are the gains? What is the tax exposure? How overly allocated to tech, in general, are you or in any one company exposure are you? Let's find out what we're dealing with here, and then develop a strategy to gradually tackle the problem if there is one. You don't have to make drastic changes right away because that can tend to run up the tax bills significantly. So, there are strategies out there once we understand and get our arms around what the situation is. Things like direct indexing, putting collars around those large tech positions to protect the downside risk, and gradually manage out of that tax situation, assuming you've got one staring you in the face. Get with a good advisor, develop a plan, don't make any rash decisions right now. There are ways to gradually move yourself out of this situation and feel better about the overall allocation of your portfolio moving forward.
All right, coming up next, I've got my two cents on just helping our parents deal with latter life issues involving cognitive impairment. 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, Brian, I want to relay a meeting, just some contents of a meeting I had just last week heading into the holiday weekend. And it just brings up another reminder of the importance of being proactive and communicating with our parents and loved ones that are advanced in age. You want to get out in front of some of these cognitive impairment issues to prevent a potential disaster down the road.
In this case, this is a couple that I've worked with for over 30 years. Wonderful people. I love them dearly. The husband is a very independent-minded person, very smart. They've been great clients, but he's been diagnosed with Parkinson's. And so, you take this guy who has pretty much run the whole show financially for his family, wife's been minimally involved. And now, we're having to deal with what happens when the husband is getting to the point where he can no longer run the show and steer the ship by himself anymore. And it was a very difficult conversation or meeting to have. Thankfully, their son was there who's their POA. We've got some good things in place, but there's a lot of work to do here with their attorney, with managing bank accounts, with preventing their computers from getting hacked. You know, they're dealing with outdated computers. They don't really log into their bank accounts very much. And when they do, you know, I don't know how dated the passwords are. We talk about identity theft and other things all the time. There's just a lot of things to unpack here. And good meeting, but again, a reminder, get out in front of this stuff early at the first signs of any cognitive impairment to make sure that the train doesn't run off the tracks here quickly.
Brian: Yeah. And that's one of our roles as a fiduciary. And hopefully, anybody acting as a fiduciary watches for this stuff. So, as an advisor, we get to, of course, have some pretty intense conversations about money and things. And we ask a lot of questions and we receive questions. And sometimes those questions start not making sense, or sometimes, they were just asked five minutes ago. We see the same things as you do out there for your loved ones. So, we do have processes where we identify that and flag it so our other employees know that we need to think twice before we react to some of these things. Be on the lookout.
Bob: All right. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
All right, let's talk about the latest on inflation because, yes, it is still a thing, it's hanging around. And what the Federal Reserve might do next could impact everything from your mortgage to your investment portfolio. Let's get into it, Brian.
Brian: Well, here's the headline, Bob, the Fed's favorite measure of inflation, the one they watch closer than any other, it picked up a little bit in July. Not a big jump though. This is the PCE index. It's the Personal Consumption Expenditures Index, which we know, that's the most riveting title we can possibly slap on things to start off a lovely evening here. But what matters is, it's showing the prices are still coming up. The personal consumption, the PCE index, it excludes things like food and energy prices. The Fed believes that that's a way to get a clearer picture of what's going on because those are particularly volatile. Although ironically, energy hasn't been a big concern from what I remember. Food certainly has lately. In any case, that core number is up 2.9% over the past year. Fed's target is 2%, so we're still running a little hot. But this is about the same range as what... We've been running a little hot for a while now. I think it's just a confirmation that we are still stuck in the mud here.
Bob: Yeah, I was listening to a couple folks talk over the weekend. I like to check in, I don't know, between football games. And I think what's interesting here, heading into this Fed announcement on September 17th, is even if the Fed cuts rates a quarter point, when you start to look at the yield curve going out 3, 5, 10, 15, 20, 30 years, the long end of the curve, it's steepening, it's not coming down. My point in saying that is... And I think this is why The President and Treasury Secretary, Bessent, keep lobbying saying that interest rates should be at 0.5% or 1%. I think they know that mortgage rates are not going to come down. The long end of this curve is not going to come down.
And let's remind everyone, mortgage rates are largely tied to the 10-year. My point is, even if we get a quarter point rate cut in September, that's not going to move the longer end of the curve at all. And if anything, we're starting to see it steepen because growth is good. I mean, the S&P earnings are 13% higher than they were a year ago. And so, I think the Fed's in a tough spot here with inflation. And we do see job numbers coming down. It's getting a little harder to find a job. So, the Fed is trying to balance a few different things all at once, which is what they always try to do. It's going to be interesting to watch here, Brian.
Brian: Yeah. And I want to break up another point. You mentioned mortgage rates. I want to be sure that everybody's clear out there. The Fed is not sitting here saying a 30-year mortgage is going to be X%. That's not what they do. We all get hung up on that because that's the most common place where interest rates directly and immediately affect us. So, Federal Reserve does set the federal funds rate, and then that trickles through the economy. But in addition, as you mentioned, the 10-year treasury yield, that's something that's driven by supply and demand and the overall market for bonds. Investors wanting to buy bonds or wanting to dump bonds will have an impact on mortgage rates. So, don't be looking to the Fed for the exact instruction on what a 15-year or a 30-year is going to be. It's a little bit different than that. But...
Bob: No, I think it's going to be fun to watch or interesting to watch because the Senate is back from their recess now that we're through Labor Day, and they've got to negotiate a budget here before we have a "shutdown" at the end of the month. You got the Fed meeting on the 17th, and more data flying in all the time. We've got some tariff news over the weekend. The courts have gotten involved here to potentially get in the way of President Trump's tariff policy. Sounds like that's heading all the way up to the Supreme Court, possibly. So, a lot going on here in September, Brian.
Brian: Yeah, let's throw out some other things too, because I think we've drilled a little more. The next thing you talked about there was the job market here. So, the average is just about 35,000 jobs per month. And that's about where we were after 2007, 2009. In July, we only saw about 73,000, while May and June were revised down by about 258,000 jobs. So, job market, there's a pulse doing okay, but a little bit less robust than initially reported. Unemployment is a little over 4%. That's about where we are in terms of full employment. And wage growth is moderately strong. We're looking okay on that front, about 3.9% to 4% year over year. So, I think there's some good things and there's some things that are concerning out there. Again, no reason for panic, but just things to pay attention to, as you said.
Bob: Yep. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. All right. Something else we want to draw your attention to here are some new tax rules for charitable giving coming down as part of the Big Beautiful Bill. Here's some minor changes here, and it could affect how much you give and how you give to charities moving into 2026. Let's get into that a little bit, Brian, because I find in client meetings, still people are not taking full advantage of how to do their charitable giving based on current tax policy.
Brian: Yep. The One Big Beautiful Bill did a lot of big things that was signed on July 4th of '25. But one of the things we haven't talked about a lot is it's going to reshape a little bit about how we benefit from charitable giving. This starts in 2026. And so, if you are a non-itemizer, that means that you have enough deductions that you're going submit... I'm sorry, you don't have enough deductions that you're going to take the standard deduction. If you can fog a mirror, you can deduct. A married couple can deduct $30,000. An individual can deduct $15,000 worth of income. If you are a non-itemizer, one of those standard deduction people, then you can take up to 1,000 bucks for a single, or $2,000 even if you don't itemize. If you do itemize, now you're facing a new hurdle. Only donations that are over a half percent of your adjusted gross income can be deducted. And supporters in that top tax bracket are going to see the value drop from 37% to about 35%. So, some changes come into if you were still taking advantage of that little bit that you could deduct while being an itemizer or a non-itemizer, be paying attention for how that's going to change here in 2026.
Qualified, charitable distributions, these are for those of you who are 70 and a half years old, where you're forced to take money out of your IRA. Now, remember, we always get confused by this. The required minimum distribution age, if you weren't there yet, is now 73, but they did not change the age for qualified charitable distributions. You are eligible to send money directly to charities from your IRA. And if you are of that age, it will qualify for your RMD. But those are still things that you can do, and that's something you should look into if you have hit that age.
Bob: Yeah, just to summarize here, and this is not a big deal, but just for the folks that are still taking that standard deduction every year, nothing changes. But I think for the people that do give that $1,000 to $2,000 a year to charity and didn't think they could take the deduction, you can starting in 2026. So, just something to look out for as you begin your tax preparation or planning for 2026. All right, we also want to hit on a new study that came out about people outliving their money, Brian. This is a new study from a firm called Seniorly, a senior living marketplace, and they reveal that retirees in 41 states, including Ohio and Kentucky, are projected to outlive their savings with an average shortfall of $115,000. Brian, this just means that folks are going to have to rely on kids, relatives, grandkids potentially. There's a lot of retirees that are struggling and at the risk of running out of their savings.
Brian: Yeah, and I always like to know. It's good to know what Ohio, Kentucky are kind of nominally, but how do we rank, overall? So, obviously, there are bigger problems elsewhere, as you might guess. Some of the states with the biggest concerns there are the more expensive ones. So, the worst outlook is New York, where there's a shortfall of about $450,000. Meaning most people, the average person needs $450,000 more to be okay. Hawaii's a little over $400,000, DC at the $407,000, Alaska $342,000, California $337,000.
But here in Ohio, projected out, nobody has enough money as this works out, but the projected shortfall for an Ohio and a Kentucky in around $115,000. So, at least, in this area, because we are a lower cost of living area, the gap isn't quite so scary. What they're doing here is they combine data on taking life expectancy at age 65, what's the average social security income, household, net worth? And so on and so forth. But just making sure that we look at all the different resources and figure out, you know... Really what matters here, Bob, is what are you going to do about this? This is a concern for you. And it always starts with knowing where you are right now. Understand what your resources are and have, at least, a basic idea on what you want to do with all of these things.
Bob: Yeah, and for the people that fall into this category, and we run into those folks from time to time, it's just like you said, a lack of planning. And some people, let's face it, they're in situations they can't control from a health standpoint or a disability or something like that. I'm not talking about those folks. But the key point here is, get out in front of this. Take a look and model out. I think a lot of people forget that inflation eats away at your purchasing power over time. And then the whole longevity thing that we talk about all the time, people are just living longer. So, when you just pull the trigger on retiring, a lot of people or some people just say, "Hey, it's all going to work out, blah, blah, blah." But they forget they're likely going to live longer. And inflation eats away at their savings. Some people are too conservatively invested. You roll all that up together and you run into a real potential problem here of running out of money.
Brian: Right. Now, it's not everybody. So, this same study does list a few states that actually have surplus. So, people that are doing okay are in Washington, Utah, Montana, Colorado, Iowa, Minnesota, and a few other states. So, not everyone is stuck in the mud here. So, that kind of shows that it is possible to pull it together. So, again, like Bob says, just make sure you know what your resources are and what you're shooting at. If you haven't had that discussion with your spouse, then it's really time to do that.
Bob: Here's the Allworth advice, take the time now to stress test your income and your savings. That's how you make sure you won't just retire, you'll stay retired. Coming up next, we're going to discuss something smart investors may fall into, something called the action trap. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. You can listen the following morning during your commute in the car or at the gym or on your walk around the neighborhood. And if you think your friends could use some financial advice, tell them about us as well. Just search "Simply Money" on the iHeart app or wherever you find your podcast. Straight ahead at 6:43, we're answering your questions about umbrella insurance, big tax bills, and what to do with $1.2 million in deferred comp plan assets.
All right, if you listen to our show each night, we know that many of you are already very smart with your money. You've built wealth, you've saved consistently, and you're in pretty darn good shape. And that doesn't happen by accident. But even the most seasoned investors, and Brian, we run into these folks from time to time, we're talking about folks who've been at this for decades, they can get pulled into what we're calling the action trap. Let's unpack this one, because this is a real thing that happens from time to time with folks.
Brian: Yeah, a lot of this comes from FOMO, right? Fear of missing out. There's a feeling, when the markets are volatile or the headlines are moving around, that if you're not doing something, then that must mean you're doing nothing, and therefore you're missing out. And over the decades that you and I have both been doing this, there's always some sexy thing out there that we're supposed to be chasing and is going to solve all of our problems. Most recently, it's AI and crypto. But in the past, it was internet stocks and real estate. And way, way back, there were oil partnerships and all that kind of stuff that everybody had to be doing. So, feels like standing still is losing ground, so we all kind of convince ourselves that we have to do this, have to do these kinds of things.
So, let's pump the brakes a little bit. So, the reason we're talking about this bankrate.com just did a really good breakdown on the difference between investing and trading. And it's a great reminder of the difference. So, investing is truly long-term. You're basically saying, "Yeah, I get how the economy works. I get that the United States, we're fortunate to be here in the first place, and it's the strongest place to make money on the face of the earth, if not the entire universe. Therefore, I'm buying into these companies that are profit motivated and I trust their decision making. I know they're going to find ways to make profits in whatever environment, and I'm going to trust them to do that." Trading is a little bit different. It's much more short-term. It's about trying to time the market, reacting fast, finding information that nobody else seems to have, and trying to outsmart that next step there. And that you can be right nine times in a row, wrong the 10th time, and you're going to go right back to the beginning.
Bob: Yeah. And the key word here is trying. Study after study shows that it's very difficult to trade successfully over the long haul, meaning outpace the market, outpace what you would have done with just a good, responsible, diversified investment portfolio. And, yes, there are people who win in short spurts, kind of like betting on college football. But to do that consistently and make money, the data just isn't there. In fact, most traders, short-term traders underperform the market, and some underperform it by a big margin. Brian, I want to backpedal a little bit and get into why. Because occasionally, I have people coming into my office and want to get involved with this stuff, and I think, especially retired folks. The two things that crop up to me are boredom. People, you know, they're not working anymore. They don't have enough to do and they're bored and they're consuming news all day and they just want to get involved because they're bored. And then second, a sense of control. You know, with so much going on in the world that is seemingly "out of our control," people think that by getting involved in short-term trading, they can regain some control over their life. And that boredom combined with that control, with having a lot of money and all these online platforms, you can do some real damage to your portfolio in a hurry if you're not careful.
Brian: Yeah, let's talk about that damage. We like our studies here. This actually is a homegrown one that I'm looking at right now from our chief investment officer Andy Stout. Andy went back... And he does this every now and then to update the numbers, but he has built a report for us to help our clients understand the impact of this. So, he went back and said, what if you invested a million dollars in the S&P 500 20 years ago and then completely ignored it? You went all Rip Van Winkle, fell asleep, woke up 20 years, what happens? Well, over the past 20 years, that million dollars would have grown to over $7 million, and it would have averaged about a 10.3% return. Again, that's if you completely ignore it, you don't goof around with it, you don't try to jump in, and out and so forth. However, let's pretend for a second that you do read the headlines and you get spooked and sometimes you pull it all out. If you accidentally miss the 10 best days of the market, right? So, we're talking literally 7,200 some 7,300 days in that 20-year period. If you accidentally missed the 10 best days, your 10% average that you got if you left it alone would have dropped to about 6%. Now, if you miss the 50 best days, believe it or not, now you have a negative rate of return over this 20-year period. So, yes, the data screams, just leave it alone, buy things that you trust, and don't try to get in and out, don't try to jump in and out because you will get hit by the train.
Bob: You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Brian, here's something I tell people that just can't keep their hands off the lever here. You know, and I just say it like this, let's make sure we're separating your serious money from your play money. In other words, if you're somebody that just has to get involved in this stuff and feel like you're in the game and can beat the market and you just love doing this stuff, carve out, I don't know, 2% to 5% of your portfolio, and let's just call it a sandbox if you will and go for it, trade, go with your gut, try to outpace the market, do all those things. But also, have an accountability partner, meaning do it for 3, 6, 12, 24 months, and then be honest and sit down and say, how did you do? Did you underperform? What was the tax result? Did it take up a bunch of time and energy away from your family and other things that you probably should have been doing? You know, how did you do? Does it make any sense? And a lot of people just want to go have the activity and treat it like a hobby, but they don't want to look in the mirror and say, "How did I actually do? And was this worth all the time and the energy and potentially the losses involved?"
Brian: Yeah. And I'm always reminded of, there is one baseball player out there, Bob, one professional baseball player who in his career got one at that and got a hit. His batting average is literally infinity. There's only one guy out there in this situation. He never got another shot. And so, the point of all that is, is he the greatest hitter in history? Well, no, because nobody saw enough in him to allow him another at bat, let alone a longer-term contract, or something like that. So, my point in this is also don't get hung up on that one time where that one stock was a 10-bagger on you, which is great. That's awesome. But what I've found is oftentimes, people really get fixated on that and decide that, or worse, they'll hear from a friend who has a guy or has a woman who had these ideas, and the friend reminds them of this one time with this awesome return, and this person must be the next Warren Buffett. Meanwhile, nobody ever steps back and says, "Cool, what's the 3 year, the 5 year, the 10 year average? Is this all, you know, GIP-certified investment returns that we can really rely on or is this just a fun story to tell at a cocktail party?"
Bob: Yeah. And let's face it, human nature. I mean, everybody, if you're at the golf course or a dinner party or whatever, you're always going to hear about the winner, you know, but nobody's going to come and say, "Hey, let me tell you about these thousands of dollars that I lost." How many times have we heard that from anybody? Virtually zero.
Brian: And how many times did they lose it in an IRA, which means they don't even get the deduction on it, or worst case scenario, they lost it in a Roth IRA, which means they didn't get a deduction on the front end. They don't get a deduction for the loss. And now, there's a lot less money that's growing tax free and compounding tax free forever. That's the worst place to gamble with your dollars, is in a Roth IRA, in my opinion.
Bob: Well, and even with us saying all this stuff, there's a lot of people out there that just can't help themselves. They're going to have to scratch that itch. All we're trying to call out here is do it responsibly, do it with a very small percentage of your portfolio. And that sandbox account or play money account should be mentally and logistically separate from your core portfolio, different account, different login, keep it out of sight and out of mind when you're thinking about your long-term planning. Here's the Allworth advice, even the smartest investors can be tempted to trade, but long-term wealth is built through disciplined investing, not chasing all the short term action that's out there.
Coming up next, we're breaking down how retirement works around the world, and what you can take from these global systems to strengthen your own plan. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. So, we came across an article comparing retirement systems from around the world. We're not here to say the U.S. has it all wrong, or that other countries have it figured out. I'm not planning on moving out of the U.S. anytime soon. I don't know about you, Brian. But the different models, it's just interesting to study how governments and people in general try to skin the cat here. If you look at places like Denmark, the Netherlands, even Canada, it offers some interesting food for thought on how different countries and people approach retirement, especially if you're trying to make sure your money lasts that 30-plus years during retirement that we always talk about and we always encourage our clients to plan for, Brian.
Brian: Yeah, so the United States here, we have focused really, really, again, since the beginning, we have focused on private enterprise. That is really what everything is about here. And we have designed ways for people to benefit from private enterprise. That has to do with our bankruptcy laws, the depreciation rules that make it very friendly to invest in real estate, and just the overall our focus now on the idea that we're going to fund most of our own personal retirements with 401(k)s, which at the end of the day, you're winding up investing in private enterprise. That is, of course, not how it goes elsewhere. So, let's dig into this.
Let's start with Denmark. Denmark has a public pension system that is backed and supported by the government, but there's also, very widespread and negotiated workplace pensions in addition. So, this isn't forced stuff. It's just a culture and the structure. Everybody just kind of assumes that's how it is. We used to have a little bit of this '40s and '50s and '60s. We had a similar type of environment. But over time, again, as we've decided that private enterprise and growth of equity is more important than anything else, we've kind of made it less attractive to invest in pensions and more attractive to invest in the kind of things that, again, continue to support that crowdsourcing of private enterprise investment.
Bob: Yeah, and I think this is a good way to just call out, leaving the politics out of it. It's just a different philosophy of the role of government versus the role of businesses and individuals in terms of creating wealth for themselves. If you rely and take advantage of, quite frankly, the profit motives of U.S. companies, and let's face it, the U.S. stock market has done incredibly well over the long term, it's great for people that have been able to embrace that and participate in that. For the ones that have not or cannot, they're left behind. Because these pension plans, any kind of government pension plan... I mean, let's look at Social Security. It's underfunded. People that cannot get on board with the idea that you've got to take ownership of that and participate in the stock market long-term, that's what we're trying to call out here, the whole personal responsibility thing, and understanding where you live and how the game is played so that you can stack the deck more and more in your favor.
Let's talk about the Netherlands. They've created a multi-layered model with very strong regulatory foundation. They encourage savings through both employers and personal investing, and they are pretty transparent about long-term expectations. Proponents of that system say it gives retirees some predictability. And let's face it, Brian, a lot of people want that. They just want to know what they're going to get. What's my check going to be when I stop working? And in the United States, we get some of that through Social Security, but let's face it, most people can't and don't want to live on Social Security alone.
Brian: That's right. That leaves the question of, here in the United States, a lot of people... And I think this is what drives a lot of the concern, most people, of course, have 401(k)s, IRAs. We've invested because that's literally what we do. That's what we talk about on the radio all of these evenings. And so, what that means is that your "pension" can kind of go up and down a little bit, versus the more predictable locked in approach. However, that locked in approach isn't going to result in as much money. There is a cost to those guarantees. That does not make them bad, but it does change the math. And so far, it's easy to say, right, when the market is at a peak as it is right now, it's easy to say, this is the better way to go, but there will be some temptation the next time we go through a 2022 and/or a 2008. Those times are coming and they're no fun. We'll see them again.
Let's look to our neighbors to the north. How about Canada? So, Canada has a base public pension for everybody. And then on top of that, there are private and workplace options that really give people room to grow their savings. And proponents say that Canada is really good at providing the stability there of not the huge benefits, but consistent benefits, which is basically what I was saying. The United States is taking the opposite approach. We have bigger benefits, if not huge benefits. You can really build your own wealth, come from nothing here. This country is really the best place on the planet to do that, but you got to do it, and you got to do it right. That is at the expense of consistency. It gets scary here when we go through those bumpy markets. We have a lot of flexibility, a lot of choice. You want to retire at 62, start a consulting business, knock yourself out, go do it. If you want to convert part of your investments to a Roth and never pay taxes again, cool, do that too. That kind of control that we offer here is not universal. Some don't value it, but I think that's really because a lot of people just don't understand it.
Bob: Yeah, I think the key point we're trying to point out to folks here is, you know, regardless of whether you have these public pension plans in other countries or Social Security here, some people in the U.S. try to create their own kind of public, guaranteed income plan through things like fixed annuities and things like that, just that lower but safer income stream. The point is, no matter how you slice it, you got to figure out a plan, you know, factoring in taxes, what you plan to spend or want to spend or need to plan, and make sure the asset base is there, whether it's a guaranteed income stream, an investment portfolio or a combination of all the above.
And let's face it, 50 years ago, retirement might have lasted 10 to 15 years. Now, if you retire at 65, there's a good chance one spouse could live to be 95 or even 100 years old. And that's part of the struggle that all of these countries are facing, including the United States. When you look at building these public pension retirement options, fewer people in the workforce supporting more and more retirees that are living longer and longer. The math just doesn't add up a lot of times.
Brian: Right. So, what do countries do to manage that? Well, some have been raising retirement ages. France and China did this. Others increased payroll taxes, right? Let's bring in more income from the people who are working now to assist those who are not working. And some will reduce the benefits. And here in the U.S., and we talk about this just about every meeting it feels like anymore, there is talk about changing how Social Security is taxed, or even means testing future benefits. Neither of those is new, by the way. Social Security is taxed. You are paying taxes on when you get your Social Security income back. And I would argue, we already means test a little bit. The more income you make, the higher tax you pay on your Social Security. It's still among the most friendly of taxes on income here in this country. But rest assured, Social Security is taxed. And there is a hole in the bucket. So, we do need to either figure out whether we're going to tax more on workers or reduce benefits or change ages and all that kind of stuff. So, lots more to come on that.
Bob: Here's the Allworth advice, you don't need a government-mandated system to have a strong retirement. Learn from what others do well, then use your freedom to build something even stronger. Next, it's another round of Ask the Advisor. Big portfolios, big decisions and the strategies families want to know about. 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. Do you have a financial question you'd like for us to tackle? 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, leading us off tonight, Brian, is Dan in Columbia-Tusculum. He says, how much umbrella insurance do you really need, and can you provide a scenario where one would actually need to use it?
Brian: Oh, sure, scenario. Well, there's lots of scenarios. That's why we call them umbrella policies because they cover a lot of different things. So, really, the big thing here, umbrella insurance is the type of thing you tack onto your property and casualty insurance policy, your homeowner's insurance. And it's for, your dog bites somebody, or somebody slips on the ice in front of your sidewalk, or you have young drivers. That's where it really hit home for me when we started getting our kids licensed. So, there's risk there. And so, you have to start with, what do you have at risk? You've got home equity, you've got retirement accounts, brokerage accounts, maybe business interest, savings, those kinds of things, income potential over the next 10, 20 years. If you're 45, you're earning $200,000 a year, you could expect $2 million to $4 million of future income to be at risk. Where are you exposed? Well, if you're a homeowner, you've got a pool, a trampoline, dog, we've talked about all that. Lifestyle, maybe you like to have large parties. You're volunteering on boards where there can be liability, those kinds of things.
Most carriers will sell umbrella insurance in million dollar increments. So, a good starting point is 1 million to 2 million. That sounds like an enormous amount of insurance. However, don't forget that the risks that are covered here are relatively rare in nature. Therefore the coverage is cheap. The risks are rare, but if they do come up in your world, if your number comes up, they can be really, really expensive. So, hope that helps kind of clarify that question a little bit.
Let's move on to Bob in Amberlee Village. Oh-oh, I see one coming here, Bob, that I think we're going to have a little, here's what you should have done. My wife and I just sold, past tense, sold a rental property, and the gain pushed us into a higher bracket. How can we reinvest the proceeds without creating another huge tax bill? What happened here, Bob?
Bob: Well, I mean, obviously, we don't know the whole situation. And Bob, we're not piling on here. I think the proverbial water has flown under the bridge here, meaning you already sold it, you got the tax bill. What could you have done? You could have looked into things like 1031 exchanges. If you want to take that rental property and avoid the capital gains taxes by diversifying into a broadly diversified portfolio of real estate, that's something that we often talk to our clients about if they're faced with these massive tax bills when they're going to sell a piece of property. That's what you could have done.
What do you do moving forward? And by the way, there's nothing wrong with making a pile of money and paying taxes. So, we should also congratulate you on running a successful rental property business. Let's face it, you only pay taxes when you make money. So, good for you. Moving forward, when you reinvest that money, just use things like direct investing, tax loss harvesting strategies, have some things moving in the background with your newly formed investment portfolio so you don't get a surprise tax bill hit, you know, moving down the road in case you have a big winner in your overall stock portfolio.
All right, Kelly in Northside says, "My husband and I have a totally different risk tolerance. So, how in the world are we supposed to achieve financial freedom if we have completely different ways of wanting to go about it?" Brian, this is a great question and one that I run into from time to time.
Brian: Yeah, go figure. Husbands and wives tend to disagree on things. Who knew? Yeah, so this is fairly common. People come with different experiences in just different things they have been through, and that results in just totally different opinions on how we should handle financial planning. It's not uncommon that we'll have a married couple where one spouse is super aggressive, high roller, "I know the stock market is the best place to be over the long-term. So, that's where I just want to put the most money there." And then somebody else will say, "You know what, I'm just not comfortable with that. I can't handle the ups and downs. I get too upset when things try to drop." Now, obviously, the very first thing we need to be doing here is communicating. So, the fact that these two people are already in the same room and have had this discussion, good for them. Because so many people out there will just realize that there's a conflict and simply shut down. And that's a terrible way to run a marriage, let alone a financial plan. So, I'm glad that Kelly, you and your husband are communicating there.
Another way to think about this. You can, of course... You each control your own investments. You've each got 401(k)s, IRAs. Make your decisions independently, but understand how those puzzle pieces come together to form a plan that fits the whole family. Another thing might be, perhaps instead of worrying about different risk tolerances for the different investments, maybe this particular couple should look at a larger emergency fund. Let's carve out more dollars. If the average person has six months' worth of expenses, let's make sure we have 12 months or maybe even 24 months. Perhaps that can get Kelly to a position where she can say, "Okay, I get it. The investments, the longer-term stuff is going to be bumpy. I understand that. Because I've got two years' worth of expenses rather sitting in cash. So, if the stuff hits the fan, then I'll know we could float for two years without hitting those long-term investments." So, these types of conflicts about risk tolerance don't necessarily have to impact the investment portfolio. Find a different way to solve the problem. Just be open minded to what the solutions might be.
Tony in Lebanon. Tony, speaking of aggressive investors, "Our portfolio is heavy in tech stocks after that last decade's run up. If we turn these back now, what's the smartest way to rebalance this without getting absolutely hammered by these capital gains?"
Bob: Well, Tony, here's what I'd say in terms of how to start out here, get with a good, fiduciary financial plan or financial advisor. And let's just put the proverbial car up on the rack, hook up the diagnostic tools, and let's look at the current state of affairs. How much are the gains? What is the tax exposure? How overly allocated to tech, in general, are you or in any one company exposure are you? Let's find out what we're dealing with here, and then develop a strategy to gradually tackle the problem if there is one. You don't have to make drastic changes right away because that can tend to run up the tax bills significantly. So, there are strategies out there once we understand and get our arms around what the situation is. Things like direct indexing, putting collars around those large tech positions to protect the downside risk, and gradually manage out of that tax situation, assuming you've got one staring you in the face. Get with a good advisor, develop a plan, don't make any rash decisions right now. There are ways to gradually move yourself out of this situation and feel better about the overall allocation of your portfolio moving forward.
All right, coming up next, I've got my two cents on just helping our parents deal with latter life issues involving cognitive impairment. 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, Brian, I want to relay a meeting, just some contents of a meeting I had just last week heading into the holiday weekend. And it just brings up another reminder of the importance of being proactive and communicating with our parents and loved ones that are advanced in age. You want to get out in front of some of these cognitive impairment issues to prevent a potential disaster down the road.
In this case, this is a couple that I've worked with for over 30 years. Wonderful people. I love them dearly. The husband is a very independent-minded person, very smart. They've been great clients, but he's been diagnosed with Parkinson's. And so, you take this guy who has pretty much run the whole show financially for his family, wife's been minimally involved. And now, we're having to deal with what happens when the husband is getting to the point where he can no longer run the show and steer the ship by himself anymore. And it was a very difficult conversation or meeting to have. Thankfully, their son was there who's their POA. We've got some good things in place, but there's a lot of work to do here with their attorney, with managing bank accounts, with preventing their computers from getting hacked. You know, they're dealing with outdated computers. They don't really log into their bank accounts very much. And when they do, you know, I don't know how dated the passwords are. We talk about identity theft and other things all the time. There's just a lot of things to unpack here. And good meeting, but again, a reminder, get out in front of this stuff early at the first signs of any cognitive impairment to make sure that the train doesn't run off the tracks here quickly.
Brian: Yeah. And that's one of our roles as a fiduciary. And hopefully, anybody acting as a fiduciary watches for this stuff. So, as an advisor, we get to, of course, have some pretty intense conversations about money and things. And we ask a lot of questions and we receive questions. And sometimes those questions start not making sense, or sometimes, they were just asked five minutes ago. We see the same things as you do out there for your loved ones. So, we do have processes where we identify that and flag it so our other employees know that we need to think twice before we react to some of these things. Be on the lookout.
Bob: All right. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.