PODCAST EPISODE 223: Leaning in on Financial Faux Pas

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Paul 0:00

Hello, welcome to your business, your wealth. My name is Paul Adams. And I’m with Corey Shepard on my third take to start this episode Corey, how’s

Unknown Speaker 0:08

your day going? They just they just

Cory 0:11

don’t know what goes on behind the scene. Normally we don’t have to. We don’t do a lot of editing, we really don’t. I don’t lose it and say something inappropriate all that much every once in a while that happens. But every once in a while we have a morning where we just take a

Paul 0:28

little short on the campaign, I suppose. Yeah, yeah. Well, what I love, I love some of the things we’re talking about today query because we’ve got another set of articles that are just curious and lead us in a direction that if we’re not careful, will lead us astray. And some articles that leave out like the article itself isn’t bad. But it gives us a sense of how much sort of maybe drive by financial planning, whether that’s in the news, have something come by your mechanic saying something, and how that can lead us astray. And so I’m pretty excited to be able to dig into that today. I want to remind everybody out there that is you get an insight today, just put it in the comments. Give it a like send the episode to somebody if you enjoyed the episode today. If you’re just listening to podcast app, it’s easy. Just hit that share button. send somebody a text. You know, I think just about everybody, myself included. I love it when people send us articles for this. This podcast or somebody says, Hey, here’s a great article or podcast on some topic. So know that your friends, family, people that you care about will love hearing this. As one little example. I was talking to a client yesterday. And Cory, we didn’t talk about this before. So you guys can all watch corps reaction.

Cory 1:53

But welcome to

Paul 1:53

life. Yeah, this is kind of how Korea’s day goes. If so, this guy had started a 401k. You know, he’s kind of a solopreneur type guy, good earnings, started a 401k for he and his wife’s companies, and his Max contributing to them. But for years, he’s been doing a SEP IRA. And because he was like, Well, my CPA sort of handles this for me. And he likes that. And my financial planner, he’s got some financial planner, this is a person that I worked with many years ago, had a question wanted to reconnect, I was more than happy to do it. But there’s another financial planner he’s been working with, that he met somewhere, nobody has brought up like, oh, maybe you should take all of this IRA money, put it in the 401k and be able to do a backdoor Roth. And very simply as because two problems. One, they may not have seen it backdoor Roth is something that far too many advisors do not take advantage of or CPAs. And second, the threat of loss for one of them that they wouldn’t be managing the money. Because the CPA also has some kind of financial advising practice. So it’s just really curious when you notice the things that can happen inefficiently. If you don’t have somebody who has that broad based mindset that can look at all of the assets and be able to coach you. So for those of you listening, who don’t or not working with someone like us, who takes that big, holistic look that exposes some of those opportunities, some of which come from just having everything on one chessboard, so you can see it move, then, and the people who are clients of ours know that there are people in your world that have never seen that and could use one of these episodes will make all the difference in the world to them. I think I’ll end my proselytizing there. Good. Great. All right. So let’s hit our first article. And this one I love because it’s actually a pretty well balanced article and doesn’t say anything that I would say is like, wholly inaccurate. And it talks about the idea, and this is the general debate of pre tax like 401k versus post tax, which would be Roth, or Roth 401k. And the constant debate as held up by this article is it depends on whether or not you think you’re going to be in a higher or lower tax bracket one and this author actually does a good job Kate door does a great job of adding in that if you don’t have enough of that statutory income, you can actually do better on taxes. So security and even Medicare premiums, so at least she gets that thorough which is great. What Cory and I want to talk about is how it is that almost all of them miss the biggest difference between pre tax and post tax and that is who you are investing with. Okay, now we know

Cory 4:54

what are you right there. Someone’s saying, Who are you investing with? It’s just me. It’s just My Vanguard, you mean? Yeah, you’re right.

Paul 5:07

Yep. And that’s where they stopped. But you’re you haven’t invested my part. Yep. And that investing partner is the IRS. You see if you go pre tax you one day, oh, that tax. So if you were in a 35% tax rate, and $19,500, which is the employee contribution, if you don’t put it into the 401k, you will pay approximately $6,800 more in taxes that year, because you didn’t put the money in the 401k. But the misnomer is that if you put the 19, five in the 401k, you did anything to absolve you of the tax liability, you did, the only thing that you did is you put 19, five into a an account that grows tax deferred, meaning it doesn’t have to be taxed until we take money out. But it has to be taxed one day, so we’re just delaying the tax, and the calculation of the tax, which may work out in our favor or may not. So that’s that’s one failed, good.

Cory 6:16

You think about it, it is a partnership with the with the US government, you’re saying, Alright, fed, like we’re gonna, we’re gonna be in this together. And we’re hoping that things go well enough for you that you don’t have to raise taxes on on me. And you can have all the revenue you need like that is the kind of partnership that you’re that you’re in. It’s not that far away. You know, pre tax is not an abysmal thing to have, like, we just think about the balance of different risks, we’re taking across the portfolio

Paul 6:47

exactly in and be clear that your partner has unilateral decision about what amount they take when you take it out. Now, you can choose when to take it out, at least until age 72. But this is the big one, we got 95 in there, about 6800 of it belongs to the IRS, which leaves us with about $12,700 of our money co invested in there. Now that means that now the tax rate could go lower a little higher, and that might give you some marginal gain. But this is the bigger problem. It’s not all your money, you effectively put 12,700 in your 401k at a 35% tax rate. And the IRS added the other 6800. Versus if you did a Roth 401k. How much of the 19. Five is yours? Well, all of it, because we bought out the partner, right? The partner in our income that 19 Five, we just paid the taxes and then put 100% of our money in. Now, what I often think about with this is a little bit like, I remember riding on Southwest Airlines and the one thing you really avoided was wanting to sit next to the person that looked like they used to be a linebacker for the browns. And they’ve let themselves go since then like that’s the person you don’t want sitting next to you on the plane, mainly because they’re going to use up your elbow room. You got to share that little armrest with them. But if you have all the armrest in the case of a Roth, then you’re not sharing that contribution, therefore you get a full 19 Five into tax free a tax free account that grows tax deferred. So they’re both tax deferred accounts. It’s just how much of it do you want to own when you get to the other road and to Corys point and one thing, and I’m going to I’m going to find Kate and tag her in this because I think this is one of the best written articles, she actually goes out of her way to also mention RMDs. So for a short article and the difference between Roth and 401k. I think she nails it. I think what gets left out not by her, just her but everybody out there in the financial media is that what your real gain is, is that 19 Five is yours. In the plan, you own it 100% The IRS lets you have 100% of it when you take it out. Okay. So that Kate, great job. And we would love you to interview us. So you can write one that is extra complete on the idea of how much of it you own. All right, Cory, you ready for the next one?

Cory 9:26

And I say, Yeah, can I say one quick thing about person’s phone? Maybe? Right? So she talks about Medicare Part B premiums, which the more income you’re making. When you retired, you’re on Medicare, you actually there’s a base premium and if you’re making more money, they ask you to pay more Medicare premium into him. So that is a reason people might say Well, that’s gonna make me pay more. So I don’t want to have I don’t want to convert money to Roth. I want to I don’t want well, the higher you are above the base income, the less that that difference really makes. So if you do the math Most folks are saving more taxes by doing even Roth conversions past 65, than they are paying more in premium. So it’s just, you know, at by itself is not a thing to run from, we got to say, what’s the net impact of all those pieces over the long term, and you’re paying a little bit more to save a lot more in taxes in most cases. So yeah, if your financial advisor call us or email us at info at help doing that analysis,

Paul 10:31

right on and, and it is key, that what you do is be able to have, even if you’re doing this stuff on your own, don’t even take your own opinion, if you’re a DIY person, your listing is great. But put on one side of the ledger, this is the outcome if I do x. And then on the other side of the ledger and an Excel spreadsheet or whatever, just compare straight across, and the total outcomes, it will make a difference. And that’s what your advisor should be doing. Also, not just saying, You should do a Roth without comparing it don’t take their opinion, because if you allow them to teach you how they did the analysis, you will walk away knowing more and take that in your future. Corey, speaking of next to the future.

Cory 11:19

Yeah. Oh, it’s actually a really good article with a great concept and model for thinking but that it’s an example of a headline being so misleading, or potentially misleading to us that, like, we have to be so careful. So the headline is, student loan borrowers will get 15 billion of student loan cancel a question. Now, this is a new article from January 8, I’ve been following student loans really closely, I have a lot of physician clients that have big student loan balances. This is a really important topic. Well, so when I read

Paul 11:55

this, if you have a student, if you have a student loan, and you saw this headline, you are clicking on it, it doesn’t matter if you have 2000 or 200,000. You see that headline somewhere, you’re clicking?

Cory 12:09

Right. Right. What and, and so I’m thinking I missed something and all my research and Biden had been talking about writing off 50,000 per person, I didn’t know if they were adding that 50,000 together, and it’s for sure gonna happen. So anyway, we get into the article. And basically, what it’s saying is that the pause on student loan payments that the federal government has enacted during COVID, and the no interest accruing, and the fact that folks are on Public Service Loan Forgiveness plans that need a certain number of payments made over 10 years, you know, to qualify for forgiveness, like those are still counting as payments, even though no one’s making payments. They’re they’re saying like that part of the program is effectively canceling this huge number of, you know, amount of loans for folks, which is true, and it’s a wonderful way to think about it. And it’s actually a clever way for politicians to make that happen in the in the future. There’s other like, there’s so many things I’m into about this article. But Gosh, darn it, that headline is gonna fry some people because they’re gonna think like someone could now this isn’t the way I would do it. But someone could read that headline, and basically make a different choice about their student loans because of reading that that headline, which is not the responsible way to read the news. But if you’re making headlines, you’ve got to know that people want to do that. Like I just think it’s basic journalism. So great points for the context of the article, and the model of thinking to be grateful for what has happened through COVID If we have student loans, but headlines can be so misled so nicely, they

Paul 13:55

absolutely. Yeah. And and it is the reason why you’ve got to be cautious as you’re reading of like, what, for instance, setting the mood they’re trying to make you feel a certain way. We’ve talked about that on the show before that it’s the realization of what does this author want me to think? And then when I look at the facts offered in the article, do I still think the way the author wanted me to think and that’s a good way to think about the trustworthiness of the new source you’ve got coming? Right? Yeah. So good. I love that one. All right, Cory, our we’ve got one last article and then a very funny little screenshot that we’re gonna close out today with

Cory 14:43

this next one is really mind blowing. Excited.

Paul 14:47

Yeah, this thing is cool. So this is a basically a transcript from a podcast or video that was done and a little bit of a back and forth between two guys and I was just kind of bored and reading through and just Whoa, what are these guys saying about the market and all that. So he goes back and forth about the breadth of the market, etc. But this is what I think is the most fascinating part of this article. And, guys, if you guys want any of these, you can link to the show notes right in the description of this video or this podcast. And that’s going to take you to our webpage where we link to all of these sources. So you don’t have to just Google them all. Alright. But one of the most fascinating statistics, if you started at the end of 2019, so you take a two year view of the s&p 500 is up about 30%. It feels like more, because people remember from the bottom of 2020. So keep that in mind. Right? The s&p 500 is up 30. But it feels like a lot more because they had they anchored to the bottom of the COVID pandemic. But there’s a huge draw down the first part of that two year period, but the s&p 500 is still up. 30%. But if

Cory 15:59

you take still only like 15% a year, right? 15% a year since the end of 19.

Paul 16:05

Yeah, yeah. With the COVID pulled down in it. Right? If you take out the fang stocks, Facebook, Apple, Amazon, what’s that other end in there? And then the interviewer says Netflix. He says That’s right, Netflix and Google. You know what the return of the s&p 500 or the s&p 495 without those five stocks? Zero.

Cory 16:33

And that blew my mind. It was so hard for me to believe that that could be the case because isn’t growth aren’t growth stocks and large caps in general just doing really well. And by the way, all these corporations rebranding themselves are really messing with our acronyms. It’d be it’s Manna now, isn’t it? I just saw Apple, Amazon, Netflix and alphabet. It’s the man of stocks, like, like bread from heaven, to here to solve all of our our problems.

Paul 17:03

You know, like I, I think there might be some, when that starts becoming common vernacular, there’s gonna be all kinds of amazing biblical references to the bad and the good about data being laid before us.

Cory 17:15

Do the means the means that Paul is gonna send me Oh, my God. Yep. Prepare me. Have you seen this meme? I, Paul, if you haven’t sent it to me, the answer is no, I haven’t seen.

Paul 17:29

It doesn’t even need to ask me. As a matter of fact, I have a fully automatic meme cannon that I launch. But because I want to make sure that all of our clients are cared for and I don’t overly offend anybody. I have a group of like four people, of which Cory is one that gets hammered with all the memes that would otherwise get posted on social media. So for that, Cory, you’re welcome. Next, thank

Cory 17:52

crazy thoughts for Paul? Yes.

Paul 17:56

For those of you that don’t know what create Docs is, there’s another way to create the creepy yet better yet. Google creed thoughts, I promise. It’s not like a horrible thing to Google, like, Cory scheppers. So Cory Shepard toes in flip flops. Don’t Google that.

Cory 18:13

Maybe don’t do your five year old but you with your teenager? You could I actually don’t know. But you know, it’s somewhere around PG to PG 13. At most, I think

Paul 18:21

so to Corys point was like, that doesn’t seem believable. And so

Cory 18:26

or, or like it just it’s like, could really could it like maybe believable, but for sure. So

Paul 18:34

I pulled out another data driven thing that just looked at 2020. And what they did was slightly different. They just peeled out the top 10 weighted stocks in the s&p 500. Just for 2020, you could see the performance of those top 10 Did like 30% in a year. But there’s

Cory 18:58

a there’s a chart further down, that shows that of the top 10. That second five is only like 8% of the total weight. And it’s like 22% of the total weight for the the top five. That’s the other thing to remember about the s&p It’s a cap weighted index based, you know, the bigger the company, the more of it is there inside of the index. So the top five are something like 22% of the total weighting of the index to begin with.

Paul 19:29

Yeah, and a lot of people have heard of it as mega F, Microsoft, Apple, Google, Amazon, and Facebook is this top five. But it depends on your political persuasion. It’s either mag F or F Maga. It’s the same five stocks. So but you can see that in 2020 the remaining 490 stocks in this analysis lost money while those top ones were up a Little under 30%. It is shocking. But it’s something that corn I’ve talked about you guys go back and listen to one of our past episodes where we had this idea that the s&p 500 may be the biggest tech fund you never knew you own right. And not to mention that those top stocks in the s&p 500 the mega F, they make up 22% of the s&p 500 in weighting meaning if you had $100,000, in the s&p 500, you’ve got 22,000 in net now that’s scary. The scary part is the other 495 stocks have to split the other 78%, or in this case, 78,000. So it’s a big, big, highly concentrated portfolio, if you just own the s&p 502 things

Cory 20:52

jump out to me. One is the power of diversification. And we talk about if you’re creating a diversified portfolio, the winners win by so much more than the losers lose that you don’t have to try to sort out the winners from the losers to have some pretty good returns. Now this is not as diversified as it could be. And I would so this is what came to my head, would anyone have put a bunch of their money in just five stocks, no matter what they were like, if you just said, Oh, this, these five stocks are going to do gangbusters this year? Let’s put all of our money in here. No one would have done it. Well, not no one. But most of our clients, most folks that are trying to do something reasonable for the long term. But say, put a bunch of your money in the s&p 500. A lot of folks are like, yeah, let me jump on that index because it’s diversified. Well, we, it’s not as much as you think.

Paul 21:49

Indeed, it’s one of the reasons why one of the checks we do when we do it an analysis of somebody’s existing portfolio, is we’re looking at the concentration of the top 25 stocks. And, and we see some high levels of concentration higher than what we’re seeing the s&p 500 in their top holdings, which is why we try to keep those top 25 Holdings under 14% of the entire portfolio. So we don’t end up with these accidental weightings. And now, what you may not realize you might have, you’ve looked at your 401k, you selected the funds based upon past performance. But the reason they had similar past performance, they probably had similar investments. And many, many fund managers and the funds that are getting highlighted in 401, K’s or these growth oriented funds. So you might think, Oh, I got four funds in my 401k. But you may not realize they’re all growth oriented. They’re all copying the s&p 500. And you might have that same or worse weighting due to something called manager or fund overlap. So now, our fund one today, Cory to close us out. Now Cory get this swag before I bring this up, not photoshopped, nothing like that. This is something that literally came up on your phone like this

Cory 23:02

screenshot straight from my phone. I was I was looking up the price of Boeing on Apple stock because we have a lot of clients in the Seattle area folks that have or have worked for Boeing. It just it’s a stock a lot of people in the Seattle area pay a lot of attention to and I was just curious. I scroll down and see back to back. I thought it was a mistake it at first some kind of glitch. But literally in two successive days like Apple, I mean, Boeing stock underperforms the market, then the next day Boeing stock outperforms the market. Am i Great. Who who care? On a one day basis? One day basis? Yeah.

Paul 23:46

I mean, it is that speaks to a little bit of our, you know, many years ago, they said, you know, the attention span of a goldfish. And we’re shorter than that now or something like that. Well, this speaks to it so well, because they don’t even expect you to stumble across what they said the day before. Yeah.

Cory 24:08

And of course, the the phrase, the market and a headline is one of the most useless two words that you can ever, ever see in writing. Because, like, what, what is the market? What do they mean? They mean, every other stock out there in the world all rolled into one, do they mean the s&p 500? Like there’s, there’s no, there shouldn’t be a correlation, frankly, between an individual aeronautics company and the sum total of everything else. Very different baskets.

Unknown Speaker 24:39

It just doesn’t matter. If they did move in lockstep. You should worry

Paul 24:46

that I think that is a great place for us to wrap today. So all of you is you’re out there and you’re in your reading your friends are reading and people are sending articles and all that is this idea that you just got read beyond the headline, look at the facts they’re offering you. And then begin to construct how you might think about it. Maybe even before you go and talk to your, whoever, your financial coaches your advisor, because it’s going to give you the best ability to have already thought through and sort of separated yourself from some of the opinion or hype of a particular article or stock and be better able to receive the input. I’ll give it as Corey and I used to talk about this. And I think this applies to us individually. So at one point way, in the past, we would have people come into our offices who worked for us and say things like, Oh, I got this great, big problem. And you’d be like, Oh, that’s easy. Here’s the answer. And what they would do is like, re present the problem again. And again, as you’re telling them the original solution, which is the one thing that’ll work. And it’s almost like they get vested in the problem, or vested in their opinion about the problem. So we made a change to say that you couldn’t bring your problem to us, unless you thought of one solution. And I’m like, I’m fine. If the solution is dump gasoline all over your desk and put a match to it. It’s fine, you could have the most outlandish solution. I’m going to hire an assassin to XYZ, that’s great. You have to thought of one solution. Because what it does is it takes us from one gear, like you’re shifting a car, and you want to go from forward to reverse, you have to lean to neutral first. And that is what we sometimes don’t do we come so wound up all emboldened in our way of thinking. And because we didn’t pause long enough to start crafting a solution or making a comparison, you might go in and talk to your advisor, and actually just have what they give you offend your sensibilities rather than deepen your thinking about it. Because they might, if you’re coming to them with an opinion, they might offer you an opinion in reverse. And you guys go back and forth on that. But if you’ve already done some grounding and thought it through, you’ve got a solid chance of being able to receive that feedback. So, Cory, anything you want to add for Janelle? I

Cory 27:15

know I thought we were done. And then we’re like, oh, wait, we’re still we’re still Oh, there’s,

Paul 27:20

there’s two, there’s two more minutes of a bit of a mental burp. I needed to share with the audience that I like it would be helpful. So Alright, everybody, we hope that you guys have a great week. We’ll see you here next week. And I hope that this has been a contribution to you being able to design and build a good life.

 

 

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