Debunking 5 Financial Planning Misconceptions

November 2, 2023

Episode Transcript

Welcome to EWA’s FinLit podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.

And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome everybody to FinLit by EWA podcast. This week we are talking about five misconceptions around financial planning topics.

We’re gonna dive deep into those. I’m joined here with Jameson Smith today. So Jameson, what’s the first misconception that we see on a daily basis with new potential clients or just out there in the media?

First one we’re gonna look at is buying versus renting. We’ll spend some time on housing, it’s a huge hot topic. People get really passionate and opinionated about this one way or the other, which is interesting.

But yeah, we’ve analyzed this hundreds of times, the math behind the situation. Ultimately it’s a lifestyle decision though, but let’s dive into houses. So what are some things, Matt, that you’ve seen with clients that influence this decision?

Yes, I think it has to be, we’re gonna put a lot of resources out there in this one as well. So purely from a math standpoint, if you just look up statistics of how often people move, it’s, I wanna say it’s over seven times a year that someone moves.

Seven times a year, sometimes in a lifetime. Seven times in a lifetime, yeah, not in the year. Seven times in a lifetime. So let’s just use a half a million dollar home as an example. Generally speaking, there’s like a 6% transaction fee every time you do that, right?

So that’s 30 ,000 times seven. That’s $210 ,000 in fees if you were to. to buy every single home. That’s just one consideration. The second consideration is that there are a lot of phantom costs at the house, such as the biggest one most people don’t think about as home maintenance.

There’s taxes, there’s insurance, there’s taxes, there’s insurance, and then there’s also the interest on the loan you take out as well. But let’s just say hypothetically that someone takes out a $3 ,500 a month, $3 ,500 a month mortgage.

Just say that’s around a half a million dollar home. And so, and then let’s say that I do that, and then let’s say you rent for $3 ,500 a month. Okay, so no difference in cost. So just to the general public, they would say, well, you know, Jameson is flushing money down because that rent is just going away.

But in reality, if we look at, let’s assume my $3 ,500 a month is all inclusive of. my mortgage payment, which includes principal and interest, my taxes and my insurance. The home cost, you generally have to look at your home value, you know, 2% of the home value to minimum is gonna be spent, you know, that’s 10 ,000 a year.

If I have to replace a roof, my AC goes out, my HVAC, my landscaping, you know, whatever that maintenance is, and so if we just take $1 ,000 a month and I, and you, by renting, you don’t have home maintenance, if you take that $1 ,000 a month and invest it, or even stick it into savings, I mean, that’s $60 ,000 in five years.

Let’s say in five years I sell. When you look at the equity I’ve put in, I have established in my house minus the closing cost. Assuming you’ve invested that at a return of, you know, 7%, you’re gonna be way ahead.

And if we do that analysis in 10, 20, 30 years, you’re actually always gonna be ahead. So what most people look at is they just look at the rent versus the mortgage, but the phantom cost are what really get you.

So that, I am a big believer in owning a home, don’t get me wrong, but what we wanna correct from a misconception standpoint in this podcast is that it’s not, most people justify a big purchase, they justify, you know, upkeeping it, they justify a huge renovation saying it’s an investment.

And sure there is some value, but it is not an investment. An investment should grow within past inflation in a home generally speaking, that there’s certain hot poxics in the United States that we’re talking specifically that will, you know, get double digit returns, but consistently over time, I mean we’re looking at real estate, personal owned real estate under 4% a year.

So, you know, the misconception here is that we’re not saying it’s better to rent or better to buy. The two things we wanna point out is for renters, you should not feel bad about renting. As long as you’re disciplined in saving the difference of what you would have spent, and you know, there’s phantom cost, you’re in good shape, and you’ll have a flexibility.

If you need to get up and move, you can move. If you wanna stay in the city, but go to a different place, you have that flexibility. In a house, you’re really stuck because of those backend transaction costs and those phantom costs.

So if you’re gonna own, own, but make sure the timeframe is right, make sure you’re doing it for your family, your lifestyle because you want to, not as a justification process because you think it’s a good financial decision.

So both are good decisions because everyone needs a place to live, but the misconception here is that homeownership is so much better than renting. It may be so much better than renting from a lifestyle perspective, because you have control, it may be worse from a lifestyle perspective, because you have all this stuff, you know, responsibilities on your back.

That depends on the individual, but education here is key, so people know what they’re getting into either way. Yeah, I think a couple of things that I’ve heard, Number one, I agree with all that, but I’ve heard people say like everybody should own a home And I’m like, okay, I mean that’s really the misconception like everybody should at home It’s just a ridiculous statement.

Yeah, so situational and again from a financial standpoint There’s usually a seven -year break -even most cases Where you have to live in the house for seven years to break even and if you’re gonna move before that you’re probably gonna lose out with the Commission for the house sale the upkeep taxes, etc.

Second thing is With the upkeep I’ve heard all the time well I’ll just build a brand new house and I won’t have to do maintenance and it’s like okay Well, maybe for the first couple years, but if you were to look like a brand new house now Ten years from now you may put fifty thousand dollars hundred thousand dollars into a roof if you were to like amortize that out Of course that you’re in the course of time you’re in the house That’s where you know that ten thousand dollars a year makes sense because it may not all happen every single year But it may be these huge purchases, you know every five years or so on and the second thing with renting another thing with renting is Just the peace of mind that it provides a lot of people being able to move like you said Just not having to worry about the upkeep and one other thing I want to note that I think people get caught up on is like I guess this is probably like You just look back in history like the American dream like what is it?

1950s 1960s like it’s like you you know buy a house and that’s like the definition of success Which I think is a huge misconception and That’s why a lot of people feel this like pressure to buy like get out of school get a job and like buy a house Which like realistically it could be One of the worst financial decisions you make if you buy it when you’re young you move you end up losing money on it You have no idea what you’re getting into so I think there’s a lot of societal pressure and Things that people think makes them successful around owning a house, which is totally a misconception Yeah, no question and just to use my personal self as an example, you know I rented the first ten years of my career and And had I not done that?

So the first one was like ridiculous. I mean, this was like, I don’t know, 13, 14 years ago, but like it was $500 a month. And it was like one of four units in a house on that Washington. It was not ideal, we’ll put it that way.

It was ideal for the budget, but it was not an ideal living situation. But that allowed me to quit my job at a big four accounting firm and go to a broker dealer and start this company from scratch where I didn’t know where my first paycheck was gonna be from it was kind of like, you know, you eat what you kill model, not kind of it was, you had to get your own clients from scratch.

And if I had owned a home at that point, because I could have afforded it with the salary job I have, I wouldn’t have been able to leave that job. And we wouldn’t be sitting here today. Literally if I would have bought a home.

So that buying a home just impacts so much other areas of your life. And so then if we look at the other stages of life, how I was able to reinvest because I kept that rent low. And now that I do own a home.

I just laugh at myself because it’s like, we’re doing some landscaping in the front yard, just the rocks alone. I’m like, if I would have just taken the money I’m spending on these white rocks and put it in my Roth IRA, a granting is so much better from a financial perspective.

Now I’m happy because it’s our place. Yeah, it’s my daughter’s grown up there, et cetera. The dogs have a fence in the backyard. Don’t get me wrong, there’s many conveniences, but just like the coordination of the people that have to come in and out to like fix stuff.

Like the boiler is shot yesterday, garbage disposal went out. And like my time just coordinating those calls. I mean, if you look at the individual, I mean, it’s just ridiculous from a financial perspective how much I think renting is better than buying.

And I’m just gonna approve that for a second. So let’s just assume, for example, I don’t, cause I own a home now, just get that. You know, so I’m very unbiased advice. A thousand a month investment over 30 years.

Like if you decided to rent Jameson for the next 30 years, have you just invest that in like Roth 401K? So it’s all tax free in the backend, 7% return. You’re gonna have $1 .22 million on the backend.

What is that investing, just maxing out a Roth 401K? That’s just a thousand a month. A thousand a month. Yeah, so I’m just using the same example, like half a million or home, you rent. Now let’s say that you don’t rent, cause in Pittsburgh, I mean, you can get a really, you’re not gonna, it’s hard to even find a place that would cost $3 ,500 a month.

I’m just talking about other areas where the rent would be similar to more in Pittsburgh, like rent is cheap, right? Like what do you pay under 2000 a month right now for rent? It’s like 2000 all in with parking.

All in, okay. So let’s just say hypothetically that you were to invest the difference, so $1 ,500. Cause if you were to buy a similar place to what you have, now it’ll be like a half million art condo.

And you would be paying $3 ,500 a month all in. And say $2 ,000. Probably even more, I looked at it actually, yeah, it’s probably, yeah, whatever. $5 ,000 to $70 ,000. I already have this math done, so let’s just say it’s lower.

So you’re investing now, you’re renting for 2000 versus if you own a condo for $30 ,000. That’s a $1 ,500 a month difference in payment, plus you don’t have maintenance. So let’s just say you’re able to invest $2 ,500 a month if you difference over the next 30.

Now your rent would go up. So this math isn’t perfect, but your maintenance would go up with inflation. But just to prove a point here, I mean you invest $2 ,500 a month for 30 years as a renter because you don’t have any of these prizes and maintenance and phantom cost.

You have three million bucks. So sure that half a million dollar house may be worth, well let’s just do the math. A million, no maybe not a close to three million. Not even close, so $500 ,000 home that you own outright in 30 years.

3% growth rate would be worth 1 .22 million. 4% growth rate would be worth 1 .65 million. I hear all the time people like, oh real estate outperforms equities, like no it doesn’t. If you were to buy in Austin, Texas like 10 years ago, sure.

But like you really would have to find the right area. It’s just math. I mean the data’s out there. If you look at the last 50 years. We’re talking about long -term stock market returns are 9 .2% in the S &P 500.

We use seven long -term real estate returns are under 4%. Um, I’m talking personal real estate, not commercial. I’m not talking about, if you’re in, I’m talking personal residents, you’re not renting it out.

That’s a whole different discussion. We’re into the podcast on that. So, um, okay. So let’s move on from that. Any, any closing thoughts on the buying versus renting? Couple more things. Um, so like I rent right now and I get asked a question all the time, like, Oh, like you’re just flushing.

Aren’t you a financial advisor? Yeah. Why aren’t you buying a house? Like you’re a financial advisor. What are you doing? It’s such a horrible financial decision. But like the, I might, so I’m in my twenties, like work a ton.

And the amount of time that I don’t have to think about like dealing with, what did you say went out yesterday, the boiler or something like, Yeah, the boiler, the rocks, the white rocks. I have a thousand square foot apartment and it’s me and my dog.

And so like my biggest concern is like vacuuming the dog hair off the floor, which takes five minutes. I’m getting a call from the name. This is last year about the weeds. Yeah. So then I have to hire a weed person to pull the weeds as I’m getting calls from the neighbor about the weeds.

I’m getting a call from the weed person about the weeds. And it just like, it’s a lot to manage. I think like while you’re, especially while you’re like building a career, you’re one of focus on other things and you’re low on time.

Like it can give you, it frees up so much time. So you just don’t have to worry about it. There’s so much flexibility. So yeah, that there probably can’t even put a dollar amount on that. I’ve heard a quote honestly, like, and this is, this is hit like hard for me personally.

What you own ends up owning you. Oh yeah. Yeah. Think about that for a second. What you own ends up owning you. And this is so true from every perspective. My house, it consumes your mind. I got to fix this.

I got to do this. I’m not happy with this. My neighbor did this. I got to keep up with this. The car, you own it. One scratch, you’re like mentally, you’re like, oh business, everything. Right. But if you think, about when you lease a car, if it gets dinged, who cares?

If you rent your apartment and something like, who cares, right? So it’s just mentally freeing, honestly, to rent. And there’s both sides of this, because also like owning physical assets, some people don’t like the stock market as it goes up and down, it’s a very peace of mind.

I own this tangible asset, but there’s two sides. I think you have to figure out who you are. And I think, I don’t think there’s a right answer. And that’s not the goal of our podcast, is to prove one way or the other.

Our job here is to provide the framework into making good decision -making within boundaries of your specific financial plan. If you’re gonna rent, great. Here’s what to think about. If you’re gonna own, great.

Here’s all the aspects to think about. And that’s our job here, is to clear the misconception that it’s not one or the other. It’s whatever one is best for you. And once you decide that, then make sure it works for your specific life and your plan.

And most like purchase like this are bit long -term decisions. Like you’re not just buying a house and selling it a year, buying a car, anything. It’s a long -term decision that you have to like, it’s like a stock decision almost.

So those are huge things to consider. I think that people don’t think about them. They can just offload a house really quickly, which you can. But yeah, buying versus renting anything, it’s similar things.

So you want to dive into, wait a couple of other situations. Yeah, let’s talk about cars. Let’s talk about boats. Let’s talk about vacation homes. Let’s just hit these quickly. So cars in general, we actually did a video on this.

So you can look at this up on our website, ewa -lc .com, leasing versus buying a car. Generally speaking, most Americans actually who own a car own it for just around three years. So if you just look at the math, like if you buy a new car, it depreciates off the lot, then you sell it in three years.

Sure, you have some equity, but the payment you could have on a lease for those three years would be much less. You could invest that money and be way ahead of that car in the first three years. So buying, now this is math.

So we found if you own a car and you’re willing to drive it for like, it depends on the type of car, like Tesla Honda, they all kind of map out differently. But in generally speaking, if you’re able to own it for more than five years, then that’s a no brainer to always buy, as long as you’re willing to keep that same car for more than five years, including maintenance, all that kind of stuff.

We did tons of nerdy math behind this. If you’re going to own a car for less than like 3 .9 years, you should always lease it. Now there’s a purgatory kind of the difference between that 3 .9 to five because of there’s different kind of cars that lease better, that own better.

But in general, for any kind of car, if you’re going to own it for more, if you’re going to drive it and you’re willing to keep that for more than five years, own it. Or if you’re a business owner, have some tax benefits, own it.

But also if you’re a business owner, you can deduct the lease payment. So there’s tax benefits to both sides. But in generally speaking, there’s way too much time gets put into like car purchases. It’s just something that’s going to get you from point A to point B in my opinion.

My second opinion is if you’re married, household, generally speaking, own one and lease one. And have both options. Because psychologically, it is nice to have a new car every couple of years, and that allows you to keep switching it up, confined with the mileage limits, et cetera.

Yeah. If you’re married with kids and you have one that you own that you might have little kids that are going to beat the car up, and then you have the one that’s leasing, or I guess vice versa, maybe you don’t care about the lease.

But anyway, you get the new car that you could drive on trips or do things that you don’t have to. Absolutely. And some other tips around leasing is definitely negotiate buying your leasing. It’s been harder over the last two years of the COVID and the supply and demand.

But back in the day, we could negotiate. Oh, that’s crazy. But there’s insurance you can buy up front. So the lease, you can return it with up to, I think, the one I did on, like, I drove a Lincoln MXC or something like that, like five or six years ago.

And I bought insurance up front. It was a couple, I want to say it was under $1 ,000. But then it was like, basically, if you return the car with $7 ,000 worth of damage, which I knew 100% was going to happen with two Glam Retrievers, then you don’t notice anything.

So that was key, because it got scratched. It got dinged. So if you are going to at least buy that up front insurance, so you have the peace of mind, you know you can beat it up and turn it in without owing anything.

That makes sense. OK, let’s talk about boats. So in general, this is one that, at high maintenance, we’ve seen a lot of clients buy a boat, and then they use it once a year. So if that’s the case, definitely rent it.

I’m actually a member of something called Freedom Boat Club. Any location you can go out, you pay $350 a month, and then when you go out, you can take it out literally anytime, unlimited amount of times.

And you just pay gas, which is pretty cool. So I don’t have to worry about docking it. I don’t have to worry about maintaining it. I don’t have to worry about anything. You’ve been on it with me. It’s a little sketchy, because I’ve only.

You don’t know how to drive the boat. Park the boat. I know how to drive the boat. Parking the boat, I nailed it last time, but there’s been some iffy, some scary times. Did you have to get a voting license?

Yeah. Really? Yeah. It was tough. Yeah, it was tough. I did it in one day, though. Yeah. Yeah, there’s been some questionable times. Anyways, I rent. So if you’re voting every weekend on a boat, it makes sense.

And with that thing you have, you can use it around the world, right? So you can be in Europe. Absolutely. Yeah, it’s pretty cool. So that’s just my take on it. It gets similar to renting. It’s not something I’m passionate about.

It’s an option to have. We do team meetings on there every once in a while. It’s pretty cool. But just in general, if you’re going to vote, make sure your use has to be high enough to justify the cost.

Because even if you’re going to rent a boat for $500 or $1 ,000 for the day, and you do that twice a year, that is much, much better than going and buying a boat. Same thing with the house, the maintenance upkeep.

Absolutely. try to hit and cause. Yeah, but there’s a break even point. And the reason I’m not gonna give general advice on this podcast, it depends on the price point of the boat. If you are like an avid boat or out there once a week, then yeah, buy the boat.

But there’s definitely a break even point where if you’re gonna even probably under 10 times a year, you should be renting it, not buying it. Okay, next one, vacation house? Yeah, so vacation house, I think it’s really, obviously you wanna make sure that the financial plan can support it.

If the financial plan supports it, again, this is a lifestyle decision. And if it’s something, so I fear sometimes people say, oh, the reason that I wanna buy a vacation house is convenience, I can store my stuff there.

You know, and there’s other reasons like that. The reasons why the people that buy vacation homes often regret it is we’re bored. We don’t like going back to the same place. We also have seen that as a reason to buy a vacation home is to create memories, consistency, et cetera.

But there are some reasons where, you know, if it’s just consistency like having. You’re stuffing one place like literally go buy a new wardrobe buy a suitcase and just every time you travel keep it there Let’s say all in you’re under 10 grand like that’s a much better financial decision Then saying oh I have my clothes and stuff there at a place because we’ve literally had some people say that to us Rick But this is a very personalized decision.

It’s definitely not a financial choice If unless you’re going like Airbnb it and mark it out then it can become a great financial choice depending on the How good the area is because then you can actually profit From it, but then you know again the con of that is like oh You go there and it’s like 50 people have been there and touching all your stuff And so yeah, I would say the one thing that from clients that have bought or not bought vacation houses is If you’re still working You’re proud to be in a position to afford a vacation house You’re probably pretty busy successful professional and so you buy this vacation house It’s a struggle to get there enough may only go once or twice a year And then it’s like well we take these two week long trips a year But now we’re not traveling to see anywhere else in the world because we feel obligated to go to this house Yeah, yeah Then can be a different scenario If you’re retired a lot of advice that we’ve given and again This is from hearing this from a lot of different clients is beginning years in retirement travel Don’t buy the house maybe when you’re in like your 70s and you start to like Slow down a little bit and my saying you can’t be healthy and active when you’re in your 70s You absolutely can but when you’ve done all the traveling around the world Maybe then look to buy the vacation house We’re gonna spend more time there and consistently go to that’s great advice James.

Yeah, that’s great advice because another thing too like if you’re busy professional And you have a home here then a home somewhere else now You have to deal with two people with the weeds and two people to boilers two weed people to be loyal Yeah, it sounds like a nightmare, but anyways to each their own so Okay, that was number one buying versus running renting.

Number two is the misconception is I need to have my money spread out between advisors because I want to bounce ideas off of each other. I want to see who performs better. I feel safer if it’s spread out.

So let’s talk through that. Yeah. First thing, let’s look at fees. So most, if you’re an AUM based advisor, which works inverse of tax brackets. So our fee schedule, for example, first $500 ,000 is 1 .4%.

The next $500 ,000 is 1% and then it drops to .8. So if you have, I did the math before this, if you have $3 million account, $3 million portfolio, and you have that with one advisor, you’re going to hit breakpoints in the fee schedule.

That comes up to about $28 ,000 a year with our fee schedule. If we’re the… the most we would charge, I guess, per se. If that was spread out over three advisors, you’re gonna pay, again, just using our fee schedule, for example, that million dollars hitting the highest fee brackets is gonna be $12 ,000 at each advisor.

So that’s an extra $6 ,000 a year in fees. Maybe 8 ,000 a year. 28 versus 36. Yeah, 8 ,000 a year in fees. That you’re paying just for having your stuff spread out. So maybe the advice is that good that it’s worth the extra 8 ,000.

But generally what we see, just like if you, okay, so you’re getting surgery on your hip, whatever. How many doctors did you consult for that? Just one. A bunch of Pittsburgh before. Did they all give you different opinions?

15 years ago, yeah. And then they didn’t know. And then luckily I got a, actually the head doctor at Duke I got connected with and he knew that Phil Pond out in Vale, who’s like the best in my opinion.

And so he did my right hip, worked great. That was in 2008 and now fast forward to 2023 and we’re doing the, that was a long time ago, 15 years. So anyway, but you got like 10 different opinions. You can’t do anything.

You need no replacement. Literally he was able to arthroscopically go in, no replacement, no anything, very regimented therapy for like six months after, but now I feel great. Yeah, so same thing with an advisor.

You could ask three different advisors. They’re probably going to give you three different opinions on something that’s going to be all close to the same thing, but there’s probably going to be little nuances in all of them.

And so you’re just going to create such, from what we’ve seen, a headache. A lot of time the ego is getting away because every advisor wants to manage all the money. And so this guy is like not taking any advice from the other person and it just can be.

It’s chaos. Yeah, you’ve got more than one financial advisor. It’s just chaos. And the reason it’s chaos is not only from a fee perspective, but it’s also if you look at your time, like the number one thing an advisor should do is save you time.

If you have multiple advisors, they’re all going to be trying to meet. with you compete with each other and they’re just gonna waste your time, not save your time. Now you’re paying higher fees, you’re wasting your time.

When the sole job of an advisor and the team is to quarterback everything for you and to save your time, not waste your time. You have multiple meetings throughout the year. But then the other thing, let’s just talk about taxes is like one advisor could be doing a Roth conversion, the other advisor could be realizing gains in your non -qualified account and they’re not talking to each other, maybe you’re retired and now you’re paying a Medicare surcharge.

Yeah, and you’re saying we’re converting up to the 24% bracket because he realized a huge gain and his Tesla stock over here, now the whole Roth conversion isn’t done at 35 and now you’re just wasting money.

And I have many examples of this. That’s why we have a general philosophy. Now we have very few clients who have one other advisor, very few, but in general we don’t work with somebody unless everything’s consolidated with us and our advice is it doesn’t have to be us.

You should go find One team that you trust a quarterback everything it does not have to be us But that is the best interest of you and your family for your time For coordination for taxes for fees everything all the above and one example the prior broker deal We need a client that you know, he gave us a part of the pie And I was like in my third or fourth year in the business I was like, okay, it’s a good account and I take this and what happened is there’s always comparison We beat the returns like by double the first couple years.

He still didn’t move the rest of the money over and then there was always like our whole meeting Was basically asking us for advice and what the other advisor had given them We would give advice and then he’d implement it with the other advisor because Roth conversions We only had non qualified money.

So it was just Honestly, it was high stress for me and it was bad for the client He got good advice and he got a much better financial plan as a result, but ultimately we had to let him go because The time we were we were doing the job of like the other three clients Because he also had a CPA that was very opinionated and it was wasting our team’s time as well And I didn’t think it was good for him because he was paying higher fees than he had to and anyway, so real -life examples of misconception and need to have my money spread out between multiple advisors and that’s just we see that as the opposite and also with custodians like I didn’t have my money We see a lot of people like have, you know, 20 different accounts because they just feel like it’s safe If you have a reputable custodian like Fidelity or Charles Schwab, they have insurances, you know cash up to like literally above SPIC Limits of 500 ,000 they have insurance above that of 1 .9 million so that company goes under your state You’re totally safe and then from a securities perspective like Fidelity has up to a billion dollars per customer That’s protected So just not the case and in the more counts you have and the more spread out It is the more likely something’s gonna happen or identity theft or you’re just gonna lose track of it If it’s all in one place you can spot check it, you know weekly monthly and and make sure everything’s safe and insured at a time as well.

So not only from an advisor perspective, I also recommend if you can get everything under one custodian. Most people think that’s not safe. That is actually the safest thing you can do, assuming that you’re under those insurance limits between cash and investments, et cetera.

Okay, let’s go to number three. Number three is, and this is a big one, a lot of TV personalities believe in, I can, you can self -insure, like by term, so we’re talking about risk management here. So by term insurance, invest the difference.

And we have a lot of clients that do this. I own a ton of term insurance myself. I also own permanent insurance as well, whole life insurance for many reasons, but basically the misconception is what?

Do you wanna go by term invest the difference specifically? Yep. So that’s good advice for most people. We’re talking about high -income earners, high -net -worth individuals. Most of the population should, by term, invest the difference.

For sure. By high -income earners, let’s just say- Real quick with a misconception, even with a general population. So let’s talk about the middle class. Let’s talk about families that are dependent on a breadwinner.

A lot of advice we see from TV personnel is by a 20 -year policy, let’s say your age, so you’re 27, you buy a 20 -year policy, 26, you buy a 20 -year policy, at 46, that thing’s ending. At 46, you know, if they get a new health exam, a new approval, and who knows what’s happened to your health, you may never get approved again for insurance.

The question then is, have you been disciplined by 46 to accumulate enough of a net worth where, God forbid, you die, your family, your kids, everything’s settled? Statistically, 99% of the time, no.

The median net worth at age 65 is under $300 ,000 in America. So people just do not invest the difference. So I’m not saying the middle class should go by whole -life insurance. They shouldn’t. The common misconception is, oh, go buy a term insurance, invest the difference.

Like, first, you have to invest the difference. Most people don’t. Most people don’t. Secondly, you have to buy a term insurance program that is layered. Maybe your insurance needs to go down in 20 years, so get half of it in 20 years.

It’s certainly not going to be zero for most people, so then also layer a 30 -year policy or one that lasts till 65 in there as well. And then be disciplined. Work with an advisor, because most people just statistically do not self -insure.

It’s a pipe dream, and you can’t follow this TV personality, assuming you’re going to get 12% returns. You’re not. Most people invest in the market. They make mistakes. The average investor gets under 4% a year.

There’s many studies that prove that. With a good advisor, if you do it yourself or you stay in and follow the right principles of investments, ask the allocation diversify, stay in long -term, we’re comfortable assuming 7%, even 8%.

Most of our plans, we assume, under that just to be clear. conservative. So now with that being said, what about high income earners? So yeah, I mean, whole life can be a good alternative. I mean, a good place for them to store money.

But from a, are you want to talk about like self -insuring? Yeah. Even for a high income earner, let’s talk about self -insuring. Do you see that happen in 20 years? If you’re making a million dollars a year and someone’s 35, do you see them being self -insured at 55?

No, because you need, let’s think about this. So if we were to, if you’re making a million a year and you have, yeah, let’s say you’re 35 and a couple of kids, maybe spouse doesn’t work, which is common.

You probably need five million dollars at least of term insurance. And that’s going to cover probably a million dollar mortgage. You want to put the kid, you know, send the kids to college. That’s probably a million bucks right there.

Plus there’s income that would need replaced if the spouse isn’t. If you die and your spouse isn’t working, they need income. Not only would, yeah, that $5 million would cover that, but then that’s just going to get them to age 65, and you probably need another $5 million at age 65 to be financially dependent.

You would basically need $10 million in that scenario to cover financial independence and lifestyle for the next 30 years. Yeah, it’s happening if you die. The reality is, if you think about your life insurance, it needs a life acronym.

It’s liabilities, typically a mortgage. Federal school loans are forgiven if you die. It’s typically income replacement for your spouse or kids, and then it’s education, or the final expenses, F, and then education costs for your kids.

If you plan on doing private school or college. So 20 years, will your life insurance need to be less? Yeah, absolutely. Your mortgage will be less 20 years in. Your college costs potentially are now paid for and gone.

So then we’re just talking about income replacement. Have you done a good enough job saving if you pass 55 where you don’t need life insurance? And the answer, whether you’re making $100 ,000 a year, $1 million a year, what we’ve seen is majority of the time, unless you’ve inherited a bunch or sold a business, the answer is absolutely not.

Then the question is, what’s best? Should you layer term insurance 10 year, 20 year, 30 year, like we described, or does some permit insurance make sense as safe dollars, which can also be accessible in retirement, et cetera?

And I’m not saying one is better than the other. This is highly personalized. I think a good financial plan, you can buy term and invest the difference. But the general advice in there is get a 20 year term policy and start saving is irrational.

But also saying, I’m going to put all my money and whole life insurance and not going to invest in the market and get my 401k match worth. That is irrational as well. You need to have a good, well thought out plan, a disciplined plan.

For the majority of people, it’s going to be mostly layered term life insurance, 10, 20, 30 year policies. And then if you’re a high net worth income earner over $500 ,000 or more, then whole life insurance can make sense.

is a safe asset, tax -visioned asset protected, et cetera, and also serve as that gap, approaching retirement and then also throughout retirement because most likely your lifestyle needs will be much, much higher as well.

Bottom line is misconceptions people don’t have the discipline to invest the difference. And there’s no, just like renting or buying, it’s very individualized, very specific to it, you know, what type of term, how long, what type of insurance you have, et cetera.

So, okay, so what’s the fourth misconception is around retirement and tax brackets. So talk to us about how would you, if you were to say a statement, Jameson, what’s the misconception here? I will be in a lower tax bracket once I retire.

Therefore, I’m in a fun pre -tax dollar right now. Because I’m in the highest tax bracket. Absolutely. So we did a whole podcast on this, I think it was episode number two. Yeah, episode number two, Rai Roth makes sense for CPAs versus Nightmare.

So talk to us why this just isn’t the case for, especially for, so first of all, if you’re a low income earner, let’s say under a 24% tax break, you should be funding her off because that’s a great, you’re giving the money in, your paying tax is low now and then it’s tax free forever.

Who knows what happens in the future. Um, but let’s talk about high income earners. So let’s say you’re making a million a year now, you’re in 37% tax bracket. I’m like, okay, I should deduct my 401k contribution.

And then when I get to retirement, you know, my lifestyle is only $15 ,000 a month, $300 ,000 a year, you know, I’ll have, I need less money. That 300 ,000 is less than a million. I’m gonna be a lower tax bracket.

But if we were to project out what income looks like in retirement, let’s say social security, today’s dollars would be like 60 ,000 a year with 10, two spouses would say two spouses would say and cost a living adjustment would be higher down there.

Let’s say 60 ,000 a year in today’s dollars. A lot of times that you don’t fully, early years in retirement, you don’t fully retire. So maybe there’s some part time work, which I say there’s not. If you’re a high income earner, you’ve accumulated a lot of your money in non qualified assets.

So any capital gains or non qualified dividends show up as income on your tax return. So you get $100 ,000 gain. It’s a 15% tax on that, but that 100 still shows up as part of your income, figuring out what your marginal tax brackets are.

Yeah. So you probably have 50, you know, what we’ve seen of somebody that’s high net worth with a huge non, big non qualified account, maybe there’s 50 ,000 a year in dividends that’s getting added onto the income.

Any type of private equity, other alternate investments, that could show up. And then so that alone right there could be a couple hundred thousand dollars of income just from stuff that’s getting added onto your tax return that you’re not even taking as a distribution.

But the biggest thing is retirement on distributions. So you may say, okay, I’m going to retire at 65. I have Social Security, maybe I’m working part -time, maybe I have a pension. That’s going to give me a couple hundred thousand a year.

I’m good, I don’t need to take any money. If you take any money, I’ll take it from my non -qualified account. I’m not paying taxes. Well, you’ve accumulated a couple million dollars inside of a pre -tax IRA, and that’s great while you’re in your 60s and you’re not taking any distributions, and then that money is going to continue to grow, and when you’re 73, the government says, you have to start taking a portion of this out, whether you need the money or not.

That requirement of distribution now gets tacked on as income, and you’re just going to get crushed, and that’s going to immediately bump you up to high tax brackets, even if you’re not spending the money.

That’s the first thing is people really have no idea how much income is actually going to show up on their tax return in retirement. Anything down on that? As you’re saving 37, and most likely in that example, you’re going to be right back out in your pre -tax accounts.

A lot of it will be coming out at 32. So it’s 5% difference worth gambling on. tax rate code changes 30 years from now, Medicare rates, sequence of returns. And we address, there’s so many details, we could spend hours just talking about the benefits of having control on the Roth.

But then literally if you’re a high income earner as well, if you put in 30 ,000 to a pre -tax account and you save 10 ,000, let’s just say to keep the math simple in taxes versus put it in a Roth and then it compounds, is that the peace of mind you’re going to have on a Roth?

Not being tax later, not having required distributions, assuming you roll it to a Roth IRA every time, and not being subject to sequence of return risk. That not showing up as part of your magi modified just gross income, which is how your Medicare rates get calculated, etc.

All of those peace of minds, all of those actual logical statistical evidence, really you should have a balanced approach in how you save money, what’s going to be taxed now versus what’s going to be taxed later.

I’m not saying put everything in a Roth, it shouldn’t be, hey, get every tax deduction I possibly can right now, that will cause problems later. Yeah, one practical example that does go along with the misconception is like, we have had people that are, let’s say they’re 60 and they are in their high income, that’s their peak income earning and they’re going to retire in the next couple of years.

If they have done proper Roth planning beforehand, yeah, maybe we do take the deduction because literally they’re making a million a year now and we know in three years their income because the right planning is done is only going to be $200 ,000.

So there is a couple of use cases for this, but I would say in general, most of the time, don’t think you’re going to be a lower tax bracket. Absolutely. Okay, so that leads us to number five. So number five is misconception, is the thinking or the thought process of the more money I have means the more happy I will be.

So let’s break this down. Why is this simply not true? Give us some background on money is important for basic needs. and to provide and for opportunities, but there’s a certain cutoff point where there’s diminishing returns and effectively at certain points where it may actually make you less happy.

Yeah, so this is called the, I’ve heard this, but I didn’t know this was the name of it until I was doing some research, the Easterlin paradox. It was some economist and economist in the 70s that came up with this.

And basically money improves quality of life to cover basic human needs, which today that’s estimated to be like $80 ,000 a year. Meaning that you have like your shelter, your eating, your healthcare, your basic stuff.

That person that makes $80 ,000 a year and covering that, yes, they have a higher quality of life, they’re more happier than somebody making $20 ,000 a year and is struggling to do those things. So that’s kind of like not really debatable, but what the misconception is, is as income goes up that happiness gets higher, quality of life gets higher.

And so what this, study or this guy had come up with was that as income goes up, you basically get on the hedonic treadmill of wanting to compete with other people, wanting to compete with your neighbors, your coworkers, because humans are naturally very tribal and you want to fit in, you want to get approval.

If we were to think like life 10 ,000 years ago, you had to fit into a tribe to survive. You got kicked out of the tribe, there’s a really high probability that you’re going to get killed because you didn’t have that community of people around you.

So what basically ends up happening is you get on this hedonic treadmill and there’s a plateau of happiness because you always want the bigger house, you want the bigger car, nothing’s ever enough, which ends up, like you said, law of diminishing returns leads to being less happy.

And happiness is also very subjective, means different things to different people. So yeah, any thoughts on that? No, that’s so true. I’ve experienced that personally. And the other, it’s kind of like the using the excuse of like, once I do this, life’s going to get easier.

Like once I graduate high school, it’s going to be easier. Once I graduate college, it’s going to be easier. Once I get my first job, it’s going to be easier. Once I pay off my student loans, once I buy my first house, once I get married, once I get my first kid.

And the reality is life gets harder and harder and harder. So it’s not about a certain milestone and then it’s like life is fixed. It’s learning how to handle adversity, learning that you can get through hard much better than more experience you have.

And that money, it’s the same thing. It’s not just accumulating, for the sake of accumulating, thinking you’re going to fix a problem. Money actually puts a microscope on your problems. It doesn’t fix them.

It will put them under scrutiny. And it oftentimes cause a lot of issues and a lot of problems if they’re not prior address. So completely agree. We’ve seen that in clients. We have some of the happiest clients that are high net worth, but they have figured out a value system that they live by.

money supports that value system. And then we also have some clients that we’re helping that, they have a high net worth and they’re not happy and it’s figuring out, well, how do we reverse this? How do we make sure your money, instead of just accumulating it, for the sake of accumulating it, how do we get it to support you, your family, your kids, generations, and make sure it’s just a support system and a reversal system?

Because the reality is, there’s no one specific milestone that’s gonna make you happy. And money is certainly a small part of the happiness equation, but relationships, peace of mind, gratitude, purpose in life, there are so many more important things that are part of the happiness equation and money is just like a check mark.

And if more money is gonna help those, magnify those other things in a good way, great. But if it’s gonna take away from those things, so now you don’t have the time to focus on your purpose in life, passions in work, out of work, family, et cetera, that it can definitely become a paradox very quickly.

I didn’t know it was called that either. It was thanks for doing the research. Yeah, I’ve heard about that study. I read it in a couple of books, but then yeah. Yeah, Scott Galloway talks about that in his book.

Highly recommend, it’s a great book, Algebra of Happiness. You actually got me onto that one, I don’t know, five years ago, but yeah, really, really good book. I highly recommend that. He talks about this specific paradox in there.

Yeah, Algebra of Happiness, how money is part of it, but it’s not the end all be all. All right, we hope you enjoyed this podcast, and if you haven’t already, please hit the follow button and rate the podcast.

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