Financial Planning / Podcast

YFP 317: YFP Planning Case Study #7: Balancing Student Loans, a Wedding, Home Buying, & Saving for Retirement

Posted on July 20, 2023July 19, 2023 by Tim U

The team at YFP Planning discusses a case study that includes balancing student loans, a wedding, home buying, and saving for retirement.

Episode Summary

Welcome to our seventh installment of the case study series with Tim Baker, CFP®, RLP®, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Angel Melgoza, MS CFP®. During this episode, we are sharing a fictitious case study with you about an engaged couple in their 20s. We delve into their finances, expenses, and their goals before discussing their assets, savings, investments, liabilities, and debt. Angel and Kelly discuss why they would tackle student loans before anything else in this couple’s financial plan, how recent changes announced to student loans will impact their loan repayment strategy, how marriage, children, and other big life events affect financial planning, and the importance of emergency funds and savings. Finally, we talk about why wealth protection is so important and why we see clients struggle with that the most.

Key Points From the Episode

A warm welcome to today’s guests, Kelly Reddy-Heffner and Angel Melgoza.
Some details of the fictitious case study we will be discussing today.
The first thing they would tackle with regards to this fictitious case study.
How Biden’s bid to forgive some loans will affect the power of PSLF.
How financial planners work with clients on massive life events such as marriage and children.
The importance of having an established emergency fund and focusing on savings.
Why clients struggle most with wealth protection and why it’s imperative.

Episode Highlights

“Figuring out a strategy is key to the plan.” — Angel Melgoza [0:11:48]

“Our clients need cash flow because – the goal is to pay off – the loans – sooner rather than later.” — Angel Melgoza [0:11:58]

“Clients do need to be candid about their goals and one of our objectives is to help clients do what they want to do within those realistic [goals].” — Kelly Reddy-Heffner [0:24:09]

“Layers of life typically influence how much [wealth] protection is needed and how comfortable you feel with what you have.” — Kelly Reddy-Heffner [0:30:36]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] NH: What is up everyone? Welcome to our seventh installment of our case study series. I am joined by Angel Melgoza and Kelly Reddy-Heffner. Guys welcome back. We have a great case study to talk about today. How is everything going? Angel, Kelly, what’s going on in your worlds?

[INTERVIEW]

[0:00:18.2] AM: Trying to keep up with the heat, trying to stay cool here in Texas. We’ve hit triple digits though, making sure my AC is still working.

[0:00:25.9] NH: How about you, Kelly?

[0:00:27.5] KRH: Yes. I know, what’s up with all the weather and weird things? I am avoiding the outdoors due to smoke infestation and hoping some Canadian wildfires get put out soon.

[0:00:39.7] NH: Yeah, our very own Paul Boyle sent out some pictures of where he’s at in Ohio and some of the smoke that’s coming down from the Canadian fire. So definitely has some air quality issues here in Ohio and Angel, I am with you. I am not in Texas, our case study today is actually in Texas.

But our AC is on the fritz and right now, we are kind of battling with our home warranty people to try to figure that out. So hopefully, we get that figured out before the hot temperatures get here to Ohio but good to have you guys on, and looking forward to run in through the case study here.

So what we’re going to do is we’re going to kind of go through the case study and then obviously, if you’re listening on the podcast, we’re going to talk through this as best we can. If you’re watching this on YouTube, you’ll be able to kind of see the case study as we walk through it. So we’re really going through it.

This is a fictitious couple, they are an engaged couple living in Texas and Angel will kick us off, and then Kelly, we’ll kind of go through some of the goals. I’ll go through the balance sheet, and then we’ll just kind of look at this case study, what are some of the things that pop out to us, and how we would approach this from a planning perspective.

So, Angel, let me share my screen. So the people that are watching can see this. Let me see right here, share. So without further ado, Angel, why don’t you take us away as this pops up here?

[0:02:00.4] AM: Let me kick it up, these are my fellow Texans, right? Even though they’re a little fictitious. So we have Meghan Myers, who is aged 29, is a clinical pharmacist. Mathew Higgins, age 27, he’s an IT tech. You know, pretty typical age of current clients that we have, right?

Salaries for Megan, she’s earning USD 150,000 annually. Mathew’s earning USD 100,000 annually with supplemental income, USD 10,000. I’m guessing that may be some add-on work that they’re just taking on. Currently, of course, single. Filing single but they are engaged to be married.

See, they’re residents of Austin Texas, five hours north of me. Tell me you’re Texan by not telling me you’re Texan. You mentioned this in five hours and not by having on debate. So on a combined gross income front, they’re both earning, combined 260,000.

A little bit about their expenses, we try to divvy up fixed variable and poor savings as well. From expenses standpoint, the fixed expenses or about 32.50 monthly, USD 2,000 on variable, and about 1, 242 in just savings commitments that they have.

[0:03:11.3] NH: Awesome. Kelly, why don’t you go take us through Meghan and Mathew’s goals?

[0:03:15.6] KRH Sure, so I have reached out to do some financial planning because they’ve got a couple of things on the horizon. There are some student loans, which is not uncommon for our client base and we know there’s been a lot of chatter all summer about student loans and finally, some of the next steps are starting to unfold. So that’s often a prompt to reach out and start a conversation.

So they want to have a plan in place for Meghan, she does work for a qualifying 501(c)(3). So PSLF and a forgiveness strategy is part of the conversation. They are planning to get married so honeymoon, wedding expenses, we know one of the inflation items that’s still up is travel. So they’re planning a very fun honeymoon, it is good to plan ahead for that and as far and advance as possible.

They are looking to make sure that retirement’s on track and feel like they’re a little bit behind. Also, again, not an uncommon feeling. So that’s one thing we will want to dive into and see what that looks like, try to come up with a student loan plan that also matches a strategy for some of those other goals like wedding, marriage, and retirement and then of course, big things with life in general, often include that first home purchase.

We know that’s been an interesting environment as well, so we’ll kind of talk through what the home purchase environment looks like, what the resources are available to expand, and be knowledgeable about that big, that big purchase. Children, not too far down the road as well, and then of course, vehicles, open to the conversation about owning versus leasing but do identify having a new car need in the next couple of years as well.

[0:05:09.2] NH: Yeah, good stuff Kelly. Thanks for taking us through that. So I’m going to go through kind of the balance sheet, the net worth statement. So I’m going to start on the asset side. So they have about USD 5,000 in checking and joint checking. USD 20,000 in joint savings. When we look at their investment accounts, they both have 401(k)s. Meghan has about 10,000 in her current 401(k). Mathew about 15,000 they’re both in target date funds.

About 90% in equity, so probably goes 20, 60 target date funds that are out there. Currently, they’re both putting in 5% but Mathew actually gets a match up to 6%. Meghan’s is 5% so that’s a plan and opportunity right there. Meghan has a little bit of money in her HSA, USD 2,000. I mean, she’s contributing the max to that and Matthew does have access to an HSA because he’s got a high-deductible health plan but he’s not getting enrolled.

I believe Mathew has a Robin Hood account that has about USD 5,000 and he’s putting about USD 200 a month into that and then Meghan is not sure what to do with her old 401(k), which has about 5,000. So total assets of about 62,000. On the liability side, so these are the things that we owe, it’s a little bit of short-term debt there, about USD 5,000 on a credit card for Meghan, USD 3,000 on a credit card for Mathew.

They try to pay that off monthly, Mathew does have a car note that is USD 250,000 per month at an interest rate of 4%. So we’ve seen those obviously go up recently, so not terrible, right? In this environment and then the big, you know, monstrosity there I think are the loans. So she has about USD 425,000 in loans between her private and her federal loans. So total liabilities of 453,000.

So that puts their combined net worth at negative 391,000. So just to reiterate, they’re doing their own taxes now. So definitely, something that we would look at as we’re looking at the student loans, and then we do have a section here for like wealth protection. Meghan does have group life insurance coverage so two times her salary at USD 300,000. Mathew has one and a half times so $150,000.

They both have, you know, kind of a standard work term and long-term disability policies through their employers so own-Oc for two years and any-Oc after that and then professional liability, Meghan does have her own policy, which is good to see, and then no estate plan at this time, so definitely something to look at. So to kind of reiterate, Meghan hates the loans and wants to see them gone but is open to hear about PSLS.

So that would definitely be something that we would want to walk through and show her the math. Mathew again doesn’t have any loans, student loans. They are looking into stopping and funding the taxable account and put those dollars towards debt, and then as Angel mentioned, Mathew does have some contractor work that he makes on the side. So as we look at this, Kelly, what would you say is the first thing that you would tackle with this particular client as you review the case study here?

[0:08:08.7] KRH: Well, I’m going to assume that probably, the prompt was the student loans to get that plan in place. So there are a couple of little low-hanging fruit items but they all do work together like pieces of a puzzle to fit. So I guess that would be where I would start to just have an idea of what that monthly payment would be so that we can build the rest of the plan around that.

[0:08:35.9] NH: Yeah. I mean, I think, for a lot of our clients, you know, the tail that wags the dog for their financial planning is the student loans. So as the loans go, so does the rest of the plan. So if we’re talking about this amount of debt, I think again, it’s not necessarily a push to pay them off. But more of a push to have a plan to pay them off.

So I think you know, one of the things and I’ll skip over to this tab here and that kind of outlines the student loans, I think really with this particular client, you have lots of moving pieces here. You’re probably going to have a strategy that is related to the federal loans and then a strategy that is related to the private loans.

I think the thing that I often say is that the range of outcomes here with regard to the loans can be vast and if you’re looking at our tab here, the total amount paid, and this is kind of the rough numbers given the present student loan plans that are out there, is anywhere from 143,000 to 480,000.

So we really want to make sure that as we are approaching the loans, the idea is that we’re going through our process. So what we typically do and what we do for this client is that we’re going to inventory the loans and we typically do this through the NSLDS ugly text file that we have you retrieve.

With potentially, with private loans, look at the credit report. Sometimes, we look at promissory notes as well, and then from the inventory, now that we know where we’re at, we’re going to look at all of the different possibilities related to said loans, right? So we want to put the emotion that Meghan has with her loans with the math that supports it.

I’ve joked about this, Kelly and Angel, in the past, that I remember talking to a client that basically is working 20 hours at a for-profit job and 20 hours at a nonprofit job and didn’t qualify for PSLF because you essentially need to be 30 hours and they were like – and they had substantial debt. I don’t think it was up to this and now but they were asking like, “What was my advice for the student loans?” and I was like, “If I can push a broom in a nonprofit for 10 hours a week, I would do that” because it just unlocks a lot of the benefit that PSLF affords.

So the third part of this really is once we figure out what that strategy is, we want to optimize that, and that’s where you know, looking at the tax situation, looking at the investment strategy and the pre-tax situation, making sure you’re filing the taxes correctly, so I would obviously want them to talk to Shawn Richards, who is our director of tax and make sure that the tax situation is jiving, not just with the financial plan but specifically the student loans.

So that’s my take. Angel, would you add anything kind of in the student loan picture as you’re looking at this? Obviously, it’s a huge decision in terms of what they’re going to do and will hugely affect the balance sheet as they kind of start, you know, their careers and their lives together.

[0:11:44.9] AM: Absolutely, just like you said, just like Kelly said, that figuring out a strategy is key to the plan. What I would do also is really engage in budget. You know, we have to understand that our clients needs cash flow because if the goal is to pay off you know, the loans, more sooner rather than later but the cash flow just isn’t there, then we have to say, “Okay, what adjustments do we need to make as planners to our recommendation?” PSLFP in the strategy but the repayment plan may be a little bit different than what they may expect.

[0:12:19.5] NH: Yeah, and to that point, the B word, the budget word never goes away. I mean, even if you are looking at you know, a retirement picture, we kind of know, have to know like what we need to build out as a retirement paycheck. That all stems from the budget, right? So I think that is going to be consistent.

I think to the sheet, I don’t know if we outlined it, I think there was a budget for like two to three thousand or three to four thousand for Meghan to apply towards the loans, and the strategy might be a compromise in strategy where we are aggressive with the private loans, try to get them into an aggressive payoff strategy because obviously, we know that those loans are not going to be eligible for PSLF.

But then we are doing what we can to maximize forgiveness on the federal loans and that’s kind of where the two-prong approach to the loans really stems from. Kelly, if we stay with the student loans, obviously, we’re still waiting for and waiting and waiting and waiting for the Supreme Court to kind of rule on Biden’s effort to forgive some loans and we think that based on that decision, the president or the government will try to put a plan out there that might be more favorable to borrowers.

Can you kind of elaborate a bit on what you’ve heard or what you’ve read about that and kind of how that could potentially affect PSLF and the power of PSLF in the future as we come out of the pause here?

[0:13:43.1] KRH: Sure. So, great, Tim, you were referring to that you know, one time, 10 to USD 20,000 discharge decisions. So you know for some clients, that’s a substantial part of their loans but for many pharmacists who have accumulated student loan debt, it’s not quite as big of a percentage.

So the kind of flip side to that that you referenced is, we’re still waiting to hear about new income-based repayment plan like new repay that would have a different formula to calculate the monthly payment. The goal with the PSLF program want us to complete it and be in it for the 10 years, 120 estimated payments but also to pay the least amount over time, which is why you see that 143,000.

I can understand Meghan’s concern about a 10-year period to have the loans in existence but referencing Angel as well with the budget, you know if you have USD 3,000 and you’re putting 20 – like 1,400 to 2,300 towards the private loans. One, there’s only going to be so much left out of that budget but two, why would you pay extra if you qualify and are doing the work in the nonprofit?

But you need to get the loans in the correct position. So if that new repayment plan comes out and is very advantageous, the formula, making that payment lower, will create a lower amount total paid over time, which is a win. It does feel like we’re continuing across a couple of presidential administrations to make PSLF as easy as possible. So sometimes, clients still have concerns, “Will the program still be in place, will I qualify?”

All the answers point towards yes based on what we know, you know across a couple of different administrations, there have been you know, programs put in place to make it easier but you do have to put the loans in the right position. So we’ve seen these wavers as well and there’s still one more waver until the end of the year to pick up as many payments as possible. Pretty much the key being that you did work for the nonprofit during the timeframe.

But if you had odd forbearances, if you were in the wrong repayment plan, if you were in the wrong loan type but that’s some of the work that we do as part of the planning processes. Making sure that every loan is in the correct position to qualify and to not have that outcome when you get a surprise. There’s no surprises, you’re keeping track of your cumulative account. You know, there’s – that’s what the issue was in the past.

[0:16:44.2] NH: Yeah, and shout out to Tim Ulbrick who recently held a kind of impromptu webinar about student loans and you know, what’s beyond the pause, I think we had about 600 people register for that webinar and there were a lot of questions about PSLF and there’s still a lot of misnomers out there about the program and is it viable, is it not viable.

To your point Kelly, there has been things that in the past, would lead borrowers to question the longevity. I would say that everything that I could have read about that has always been for future borrowers. I mean, if you’re in the program, I think they would grandfather it in. This is my belief and I think if you’re reporting a strategy of forgiveness, you know there’s a good case, especially if they put out this new payment plan that your balance is going to grow.

So to kind of take that away, you know, retroactively I think would be catastrophic, and even with tax law, they typically will write things and that’s why we have so many versions and layers of tax law. I will point out as we’re showing the slide if it is a pay as you earn, the numbers that we’re showing on the screen is, “Hey, in ten years, you’re going to pay off 143,000.”

There is two assumptions here that are, I think are wrong, one is if let’s say Meghan’s been at work for the last two years or maybe it’s the last year, she’s already a year in. So we’re projecting 10 years as if this were starting right now, so she potentially already has 12 to 24 months that are counted or potentially counted if we do the right things and then I think the other thing is that we’re showing a first monthly payment of a USD 1,080, which could also be a lot less given a new repayment plan.

So this again, so many advisors out there still to this day as I talk to a lot of prospects will say, “Hey, I’m working with an adviser and they say don’t worry about the loans, it will figure themselves out” which is the worst advice that you can give to many pharmacists that are dealing with six figures worth of debt or they’ll do a, “Hey, pay the highest interest rate off or pay the lowest balance.”

That quite frankly is subpar advice, so because the spectrum of outcomes is so why with regard to what you actually are paying out of your pocket for the loans, you want to make sure that you get a professional advice on this because it’s that impactful. So guys, let’s set the loans aside for a hot second and talk about the other parts of their plan.

Angel, obviously with wedding, honeymoon, first home, kiddo in the next two years, car in the next five years, how does a planner work with a client to kind of wade through all of these things that obviously are huge life events but obviously, from a planning perspective, hugely important to kind of road map? Walk me through how you would approach Meghan and Mathew in that instance.

[0:19:40.0] AM: Sure. I mean, I think firstly as we address the student loans, the second thing looking at their budget, what’s left over after we define a good repayment plan for them, and as a planner, we want to make sure that we are being very upfront, real, and having real conversations as to expectations, right? The last thing we’d want is to take out more debt when we don’t need to.

[0:20:04.7] NH: That’s right.

[0:20:06.2] AM: Just going through what their expenditures are, what’s left over, and coming up with a comfortable budget for all these things, you really can’t plan them for an additional family member but at least, you know jeffing up what does that look like on a nationwide kind of average scale. Typically, when I am working with younger individuals I like to throw in an extra two, three grand a month for raising a child.

You know, that is very subjective but that is very much kind of my flat conservative rule of thumb.

[0:20:37.5] NH: Yeah. I mean, I am a big believer in if I’m breaking this down with a client, and Kelly I’d love to hear your thoughts on this too, I’m a big believer in saying, “Okay, you know wedding, honeymoon, how much is that? Is that paid for? What other sources of income or what is the sources of savings for that?” “First home, okay, is it within the next year, the next two years? So what are we looking at for a down payment?”

Obviously, I want to put them in front of someone like Nate Hedrick, to help with an agent and finding an agent or even Tony Umholtz to look at First Horizon and potentially a PharmD loan and make sure that that is positioned and then you know, yeah, first child in the next two years, what does that look like from a daycare expense or just hospital bills, who’s and where are we funding that and then car.

You know, if that is a five-year, so kind of backwards plan into this and you know we talk about purpose-based investing. You know, kind of by proxy, I’m a big fan of purpose-based savings, so I would love to see a bucket for a house, I would love to see a bucket for a car, I would love to see a bucket for kiddos. Like I was joking around with someone, we have an ally account that is the kid’s account and the sub-accounts are Olivia, my daughter, Liam, my son, and Benji, our dog.

So, Benji, you know for his grooming and vet bills and things like that, Olivia for swim and other things like that. So it allows Shay and I to kind of break these expenses down when we throw all of these things against the wall, Kelly, it’s overwhelming, right? It’s just a lot of things one right after the other. So walk me through kind of like how you would approach that, how you would select buckets, how you would determine like, “Okay, overlaying the student loans” and maybe that’s where the student loans were like, “Well, maybe we need a little bit of extra discretionary income and go out.”

Not five years in the private loan but maybe 10 years to free up some income for us to do some things, so walk me through that in terms of the savings perspective.

[0:22:35.0] KRH: Right, because once we have like one set of numbers with the student loan, you want to build out, as you said Tim, those buckets but you need to run some estimates. So typically, you know I probably would start with the house but clients do need to be candid about their goals and one of our objectives is to help clients do what they want to do within those realistic like giving pros and cons and, “Well, that might take a little bit longer if you want to do it at that amount.”

So certainly it would be up to them, what the priorities are in terms of wedding, house, preparing for a child, and that new car but giving some context to those decisions. So like if the new house is in a year, you’d be looking at some estimates if you bought a USD 250,000 home versus a 450,000. Right now in the current environment, it’s super fun to do the two interest rates like this crazy but you know, are people still able to buy homes?

Yes, but you need to know what that’s going to look like in terms of a mortgage payment but then, I also like to run the numbers at like a 4% so in case the environment changes in the next year, it makes a big difference in the monthly payment. Are you doing a 3% down, a PharmD loan, or are you doing 20% down, something in between? So kind of run a couple of those numbers you can see a range.

You know, if this is what you want to do on the lower end or on the upper end, this is the amount per month in a year timeframe to do it and to get to the down payment. Definitely, childcare, one of the biggest parts of a child expense. So making sure that we have a good holding place in the budget for that. Looping back to the house, you know, it seems obvious but doing that amount for a year and knowing you can do it for a mortgage amount makes a lot of sense.

Like if your rent’s a thousand, you want to buy a house and the mortgage is 2,500, typically that USD 1,500 difference, can you consistently put that away for a year, one for the down payment but two, that’s becoming your new average monthly expense. So like if you can do it for a year that feels pretty good that you’re going to be able to sustain it and continue it. So yeah, putting some context, some hard numbers knowing they’re not going to be to the penny.

But this gets you or I say, we can calculate to the penny but there is going to be lots of things that happen in between, you know, anything. A job change, a new dog, all the things you know that help influence that monthly budget, you know, we need to have a placeholder for.

[0:25:33.5] NH: That’s right and I think one of the things that we haven’t really discussed that I think is important to discuss, you know typically when we talk about a budget, we’re always looking at where can we potentially cut expenses and things like that. The thing I would really dig in with Mathew, in particular, is, “Hey, you have supplemental income of USD 10,000, is there a way for us to grow the topline income that’s coming in?”

So can we push that 10,000 to USD 25,000 next year? Meghan, you know, if we do have pretty hairy audacious goals, are there ways for you to also make additional dollars by picking up extra shifts or whatever? So I think sometimes we always look at the expense side of the ledger and I want to grow the pie and make sure that’s looking healthy and we have other levers that we can potentially pull.

Angel, let’s shift to the wealth-building stuff real quick. They’re kind of just starting out, they had this one old 401(k), they’re in some target date funds in their current 401(k), we don’t have many IRAs established, which I don’t know if I would necessarily do that now. Mathew has a taxable account of USD 5,000, which again, I would try to apply like when we’re asking questions about, “Hey, how are we going to fund the home payment, home down payment, or the car?” That’s where I want to start drawing those lines but how would you approach the wealth-building portion of their financial plan with kind of the facts that we have?

[0:26:50.5] AM: With some of the facts that we have, wealth building, and what I’d like to look at first is, “Do you have an established emergency fund?” because we all know that things do happen and stuff. I want to make sure that our clients are prepared for that. More on the, “Are you on track with savings?” things of that nature. I would definitely start off by looking at the 401(k)s, making sure that they’re at least maxing out the amount that they would receive an employer match.

From looking here, I believe that Mathew’s more deferring 5% but the match is 6%, maybe trying to get him up to that 6% is the next step for him. On the HSA fronts, it looks like they don’t put any money into an HSA. I think that is a very good tool for young healthy couples, right? That you traditionally just have your physicals, your checkups, and maybe a couple of doctor visits because of a cold or flu, what have you, and making sure that those are maxed out.

You end up saving on the payroll tax front, you end up saving on the federal income tax front, and to the point of going back to the student loans, Meghan can also reduce her adjusted gross income and that will even save her on the back end to know but yeah, to your point on the taxable account, seeing what’s that account for, right? You have a lot of goals that you want to achieve and maybe putting some purpose behind it.

We have it here listed as a play account but to me on a scale, if we have a pyramid of what’s important, play accounts would be at the tip. That’s the cherry on top for me, right? I would definitely want to address the menial things like again, your emergency fund. Are you putting into your 401(k)s and are your current savings do they have a purpose?

[0:28:33.5] NH: Yeah, that’s right and I think to circle back, I think Meghan is contributing the max HSA even though it is not showing, it is just showing in text there and she has about USD 2,000. I’m assuming it’s in cash and not invested. I think the discussion I would have about that is, “Are we planning on using this for the birth of a child or do we see this as like a long kind of that stealth IRA?” and maybe it’s, “We’re going to use it for the birth of a child then afterwards, build a backup and then it will be a self-IRA” or something to that effect.

You know sometimes, it is good to be able to cash flow health expenses when you get to that point. So for the current 401(k)s, I think you know looking to make sure that those target date funds, Kelly, look good. You know, often times we like to get out of the target date funds because they are a little bit more expense and basically pick the allocation ourselves, and then probably the last thing that we haven’t really talked to is just what do we do with the 401(k), the old 401(k)?

Do we roll that over to a rollover IRA for YFP to manage on behalf of Meghan or do we move that over to a current 401(k) to be able to assess that? Let’s chat Kelly, really quickly about the wealth protection stuff. My initial gut on this is probably, they’re probably okay at this point in time and I would want them to focus on the debt and wealth building but probably phase two, phase three might be looking more closely at the wealth protection stuff.

What’s your thought on that? Do you kind of differ in your opinion or would you say, “Hey, let’s kind of get through some of these other things that are on fire and then kind of pivot to life disability, estate plan” et cetera?

[0:30:10.0] KRH: Right. I mean, certainly the wealth protection piece, you know as much as some of the other things feel overwhelming and the volume is to tackle this actually is probably the area where our clients struggle the most just to see like how much to prioritize and what they really want to have and to figure that out. So right, I would agree, you know layers of life typically influence how much protection is needed and how comfortable you feel with what you have.

I do like that Meghan has enough coverage to cover her private student loans. That’s an area that’s a bit grey depending on the loan’s officer. So she’s got that covered, so really we try to look at liability need like if there’s something that needs paid off, that would be a big one. From there, we do, do that as part of our planning to do a very thorough assessment, see what they have, but I would agree.

You know, the estate planning we can do some conversation and work on that during the protection meeting like checking your beneficiaries, making sure the titling is correct on accounts. That’s one layer ahead of getting a will and formal documents in place. So yeah, I would say that something that we work on, you know, as we move through the financial plan, it is important but the amounts of coverage do look fairly reasonable.

I probably would address at some point the own occupation for two years on those disability policies. Our gold standard is typically to recommend own policies for clients in that area but again, they do have coverage. That would be just a note that I would just check into further.

[0:32:08.8] NH: Yeah, I think in this regard, what I’m doing as I am going through the wealth protection part of the financial planning is I’m looking at what the baseline coverage is and I’m planting seeds. I’m saying, “Hey, it probably makes sense in the future to look at your own life insurance policy. It probably makes sense in the future to look at your own disability policy. It probably makes sense in the future to have an estate plan that’s drawn up by an attorney.”

You know, I think these are typically most important and I say this a lot when you have a spouse, a house, and mouths to feed and we know that Meghan and Mathew are kind of treading in that direction. I think anybody needs an estate plan if they’re a human and they want to kind of, you know, their care and be able to pay their bills if they’re unable to but I think the ante is upped when you have other people that are kind of relying on you for their livelihood and we want to make sure that we take care of the family.

So in my mind, I’m kind of planting those seeds that say, “Hey, this is important now, it’s going to be more important in the future. So let’s take steps when we kind of get the dust cleared and settled on the student loans and the investments and things like that, a budget can make moves here in the future.” So great stuff guys, I really appreciate the conversation. I feel like we could go on and on about this particular client.

So thank you for kind of going through this with me in the seventh edition of the case study series. If you are out there listening to this and you’re thinking, “Hey, this sound vaguely familiar to my situation” don’t be shy, reach out to us, book a discovery meeting, and you know, let us know if we would potentially be a good fit to work together. So Angel and Kelly, thank you once again and looking forward to doing this next time.

[0:33:47.9] AM: Thank you for having us.

[END OF INTERVIEW]

[DISCLAIMER]

[0:33:51.8] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 316: Real Tips From Recent First-Time Home Buyers

Posted on July 13, 2023 by Tim U

Neal and Kaitie Fox join Nate Hedrick, The Real Estate RPh, to reflect on the lessons learned as first-time homebuyers.

About Today’s Guest

Neal and Kaitie travelled from their hometown of Coshocton, OH to attend Cedarville University in 2011. A year later they married at age 19 and began their joint financial adventure. Kaitie began working at the University food service contractor and eventually became the Head Baker, supporting the family through pharmacy school and until the birth of their second son. Now, Kaitie is home raising Timothy, 5, and David, 1, while Neal works. Neal completed his PharmD at Cedarville and a PGY1 residency at Premier Health Miami Valley Hospital, a Level 1 Trauma Center with over 950 licensed beds and over 110 adult ICU beds. He currently serves as one of the Medical ICU Clinical Pharmacy Specialists and the Research Project Coordinator for the PGY1 pharmacy residency program. He occasionally gives lectures or hands-on training at Cedarville University while also taking APPE students from several pharmacy schools throughout the year.

Episode Summary

Buying a home can be a daunting, exciting, and overwhelming experience. On this weeks podcast, sponsored by Real Estate RPh, we are joined by Neal and Kaitie Fox to discuss how they went about buying their first home. Neal is a pharmacist and Kaitie is a stay-at-home mom, and in this episode, they tell us what made them decide to buy a house when they did, what they would say to someone wanting to purchase their first home, and how interest rates and other aspects played a role in their decision. They delve into how they chose a financial lender and why they decided to change who they financed their house with at the last minute before explaining how YFP assisted them in this process. When looking for a real estate agent, it is important that you find someone who takes your needs into consideration and communicates effectively, and Neal and Kaitie explain why they decided to change agents early on in their journey. Finally, our guests remind us to use our resources wisely and ask as many questions as possible when buying a home.

Key Points From the Episode

Introducing today’s guests, Kaitie and Neal Fox, and a brief overview of their careers.
What made Neal and Kaitie decide to buy a home when they did.
Their advice on a starting point for someone wanting to buy a home in the near future.
Why interest rates were a barrier for them when buying their first home.
Things to consider when choosing an area to look for a house in.
The importance of moving fast when you find a house you’re interested in.
How Kaitie and Neal navigated financing a house and what that process looked like for them.
Their home-buying team, changing agents, and why YFP was so helpful to the Fox family.
The importance of having clear and responsive communication with your real estate agent.
Why you must utilize your resources and ask questions when closing on a house.

Episode Highlights

“The biggest thing is to find that person who is your trusted expert in home buying.” — @ThePharmFox [0:05:10]

“Have at least two, maybe even three [financing] options because as long as your pre-approval is still valid, you should be able to pick the best option that fits you.” — @ThePharmFox [0:16:44]

“Utilize those resources that are right there [and] are helping you through the process anyway.” — @fox_kaitie [0:29:06]

“Expect the unexpected because it is a very long, complicated process and you will almost certainly run into something that you didn’t think about before.” — @ThePharmFox [0:33:51]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrick here, and thank you for listening to the YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom. Today, I pass the mic over to Nate Hedrick, founder of Real Estate RPH and cohost of the YFP Real Estate Investing Podcast, where he welcomes Kaitie and Neal Fox to talk about their journey as recent first-time home buyers. They discussed the lessons learned along the journey, including common pitfalls to avoid that will be helpful to anyone that is looking to buy a home for the first time. So let’s hear it from today’s sponsor, Real Estate RPH, and then we’ll jump into Nate’s interview with Kaitie and Neal Fox.

[SPONSOR MESSAGE]

[0:00:39.2] TU: Are you planning to buy a home in the next year or two? With the state of current home prices and mortgage rates, the home-buying process can feel overwhelming but what if you can leverage the knowledge and ongoing support of someone who has worked with dozens of other pharmacists through their home-buying journey, all at no cost to you? I’m talking about Nate Hedrick at the Real Estate RPH. Nate is a pharmacist who has been a partner of YFP for many years now and offers a home-buying concierge service that can help you find a high-quality agent in your area and support you throughout the entire process. So head on over to realestaterph.com or click on the link in the show notes to schedule your free 30-minute jumpstart planning session with Nate.

[INTERVIEW]

[0:01:26.1] NH: Hey, Neal, Kaitie, welcome to the show.

[0:01:28.1] KF: Hi, thank you.

[0:01:29.2] NF: Yeah, thanks for having us.

[0:01:30.4] NH: Yeah, absolutely. I knew when we had first talked that you guys are going to be fun to work with and I’m excited we get the opportunity to talk all about home buying today with a couple of recent home buyers, it’s going to be great. So maybe for our audience, just kind of give us a brief introduction on yourselves and a little bit about your pharmacy career and we’ll take it from there.

[0:01:49.7] NF: Yeah, sure. So I’m Neal Fox, I am a 2018 graduate of Cedarville University. I practice as a clinical pharmacy specialist in the medical ICU at a large level-one trauma center in Dayton, Ohio with just over 900 licensed beds and just over 110 adult ICU beds.

[0:02:15.5] KF: I’m Kaitie, I’m Neal’s wife, and I am currently a stay-at-home mom with our two boys and I’d previously been a baker for about eight years.

[0:02:24.7] NH: And we got connected, gosh, it was back in late 2022, talking about you guys are ready to buy your first home and we wanted to help you with that and so you know, what we thought we do today is get together with you guys, talk a little bit about first time home buying with someone who has recently gone through it and you know, talk through any pitfalls or words of advice. Things you guys learned along the way because I think a lot of our audience is sitting out there looking at current market conditions, looking at the current financial situation, and saying, “I don’t know if I can do this” or “I’ve got questions but I don’t even know where to start” or, “I don’t even know enough to ask questions” right?” I think if we talked through a couple of things, talk through the process, it might help a lot of the audience out there that might be trying this for the first time. So if you’ll indulge me, I’ll be firing off the questions and you guys just give me your hot take on what it was like and we can learn from each other. So does that sound good?

[0:03:14.1] NF: Yeah.

[0:03:14.1] KF: Right, yeah.

[0:03:15.0] NF: No problem, happy to share.

[0:03:16.5] NH: Awesome. So I think, you know, one of the things we focus here a lot at YFP is kind of the “why” behind the financial decision and it could be putting money in your 401(k) or paying off your student loan or in this case, you know, buying a home. Did you have a particular “why” behind you know, buying a home like when you felt you were – you felt like you were ready to do that?

[0:03:34.3] KF: Frankly, at this point, we have outgrown our current living space. We’re currently renting a two-bedroom apartment and we have two young children and then ourselves and it’s getting very, very cramped very quickly.

[0:03:49.6] NF: Yeah, home ownership had always been an intermediate to long-term financial goal for us. We definitely were not in a position to do that coming right out of residency but over the last few years, we’ve been able with YFPs help a lot to get into a better position and now for us, the living situation, the space, you know, we’ve been room sharing with our 14-month-old for 14 months.

[0:04:16.4] KF: 14 months.

[0:04:17.8] NF: So we don’t really have anywhere else to put him. So the “why” for this year was kind of that, like we didn’t feel like we had the option to wait much. So in some ways, that made it easier because we had the resolve to get it done, to go all the way through the process.

[0:04:33.4] NH: Yeah, I love that and I am sure there are many people resonating with that of like, “I am out of space” and sometimes it’s kids, sometimes it’s pets, sometimes you know, whatever it is, right? It’s time to make that move, so I think that totally resonates. What about you know the getting started process, right? So you have this “why” and you say, “Look, we’re out of space, we got to move, it’s time to buy” but how do you get started? Like, now that you’ve done this and kind of looking backward, you know, we talk about ways to get started all the time but for you guys, specifically, like what would you recommend as a decent starting point for somebody who is thinking about buying a home in the next, let’s say six months?

[0:05:07.7] NF:1 Yeah, for sure. So I think, the biggest thing is to find that person who is your trusted expert in home buying. So obviously, I’m not that person, that’s not what I went to school for and if you’re listening to this podcast, you’re probably not that person either, right? So you know, what I’ve always said, what we’ve always said working with YFP is they’re like our money mechanics. So in the same way, that I go to a mechanic for my car because I know nothing about my car, because again, that’s not what I went to school for, I need a trusted person, a trusted expert who can tell me what’s wrong, explain it to me in simple terms and then help me make a decision very similar to how they teach healthcare professionals that you know, we need to explain things in patient-friendly language. You know, I need that same person when it comes to money, financial decisions and that’s what YFP is for us, and then home buying is another like sub-specialty within that. So that’s why we immediately went through YFP to find a point of contact, which started with you, Nate, to guide us through the first part of that process.

[0:06:21.9] NH: Yeah, I think that makes a ton of sense and again, we’re biased here, right? At YFP because we like what we offer but I think you’re totally right, you don’t know where to start, getting a great expert on your team is a great place to start, you know? We’ll talk about this more in detail but we use the home-buying concierge services with you guys, getting you connected with a great real estate agent and then getting off and running. We even had a couple of bumps at the beginning, which I think I like to talk about here in a bit but you know, having that point of contact is how you get passed those bumps. I think that will resonate really well. So I appreciate you sharing that.

[0:06:49.9] NF: It was a really good way for us to initiate a process that we felt like we had studied and talked about but didn’t really know what to do and had never been through before.

[0:07:02.8] KF: Right.

[0:07:03.3] NH: Makes a lot of sense, I like that. One of the things that I think people are talking about right now that I think is kind of scary, especially when you’re thinking about getting started is that “current market” right? High-interest rates, lower inventory, do you feel like those were a factor, a barrier to you guys buying your first home?

[0:07:18.8] KF: To some degree, especially the higher interest rates right now because you know, we had this idea of you know, we have this wide range that we are able to buy from and so then looking at our interest rate and talking to our realtor, we were able to decide like, “Okay, we need to look at this you know, lower end spectrum” to say, “You know, we’re comfortable with this monthly payment” because of the interest rates. I feel like we didn’t really run into like low inventory in our area. I mean, hundreds of houses that were for sale but again, it was making sure that they were within our budget, that we had kind of decided on, that we were comfortable with paying like every month.

[0:08:01.4] NF: Yeah, and we’ll talk about this more in a moment but there was definitely, Kaitie was doing more of the house watching and there was a decent amount of turnover even though there were constantly houses up, they weren’t staying on the market in general for very long and what we realize, so what Kaitie was alluding to is we kind of had a number for total purchase price that we thought we would be able to get to. And then we realized that it was less about total purchase price and more about what our monthly payment would be because you know, we’ve worked with YFP for years on thinking about like a zero-based budget and you know, you can have whatever purchase price you want but if that monthly payment doesn’t fit within what you can reasonably do and right now, we’re a one-income household, you know, that was the number that we needed to focus on more.

So once we realized that, the thing about the market in our area that I came to realize was that it’s not homogenous, that different neighborhoods, even different sides of the same highway, obviously different school districts and things like that, there is a wide variety in terms of what you were going to see in price per square foot and stuff like that and thinking about us, for our family, you know we’re thinking about possibly private school for the kids. So public school district wasn’t as important in considering these things, we actually shifted our focus to a different area within our geographic region that’s really only like, five minutes away or so from – at least, in terms of distance – from my work from where we are now and where we had been looking and that made a big difference in terms of the length of time that houses were staying on the market and their cost per size.

[0:09:48.8] NH: It totally shows how local real estate is, right? It can be different 20 minutes away, 10 minutes away sometimes. Just like you said, you know if you shift that locust of search from a five-minute geographic area to a different five-minute geographic area, you’re going to get totally different results. So that’s good to hear that you know, I think you guys went into it with the right mindset but were able to shift as you started to learn more and see what made sense in terms of the areas you were looking in and the numbers and ultimately, that monthly payment is what made that determination, so that’s cool. Did you lose out on any houses? I know you said that the inventory was turning over quickly, did you lose out on any houses or anything? I mean, I know a lot of people are struggling with that right now.

[0:10:26.8] KF: The first couple of houses that we looked at were super early in our process. We kind of went into them thinking you know, we probably aren’t going to put an offer on these but we want to get the feel for actually physically going with our agent to a house and looking at it and seeing what that feels like but I think both of those houses went off the market that night. Like, the night that we looked at them, they went off the market.

[0:10:49.2] NF: And both of them, we went there and either someone was already showing when we got there or someone showed up to show before we left. So that was in the initial “hotter market” near our geographic area but even though we weren’t planning necessarily to make an offer that early in the process, it did give me some trepidation. This feeling like, “Oh man, when we find the right house, we have to move really, really fast or we’re going to lose out on it.” You know, that’s how it made me feel, that was my initial impression to the market, these houses just gone.

[0:11:29.1] NH: I think a lot of people feel that way and it can feel more overwhelming, especially if you’re like, looking at a house and someone shows up and you know, waiting for you to leave so they can go look at it. That feeling is like, I’m with you. I totally get it.

[0:11:39.2] KF: It was a little scary there first, you know, not knowing if we were going to be able to get the house that we wanted.

[0:11:44.5] NH: But I like your approach of you know, even though we’re not maybe a hundred percent ready or these aren’t houses that we’re a hundred percent certain on. It’s nice to go through the process, walk through the steps, and understand that, what that looks like so that when you were ready, when that house did pop up and come along, you can make the action point very quickly. So I think that was a smart move, that makes a lot of sense. You know, so talking about looking at houses then the big thing that I think people run into at that point too is, “Okay, well now, I’m ready to look at homes, I figured out my budget, you know, all these pieces are in place but what about financing?” I think that paying for a new house is a pretty overwhelming part of the process. How did you navigate that I guess and what did that look like for you guys?

[0:12:20.1] NH: So through our local realtor contact, we first were talking to her about – we had talked with YFP over the years about the different options available to healthcare professionals like pharmacists, you know the “physician style loans” or healthcare professional loans, whatever and particular institution chooses to call them and we’d said, “Hey, you know, this is something we’re interested in because we’re pretty sure we qualify and do you know anyone who does this?” and she got a contact that she was pretty sure did. So that was the first bank loan officer that we talked to and separately, through YFP, we had a resource that let us look by our state and my degree, which is pharmacy, PharmD, and see what banks have the pharmacist included in their physician-style loan programs. So we kind of had that list and then we had this contact and we worked through the process of pre-approval and kind of talking about some of the things and we actually found out that that bank didn’t routinely include pharmacists. The loan officer was super great, she felt like she could get us an exception and essentially get us one of those style loans, and then the week that we went to get that pre-approval all the way through, get that loan kind of nailed down was the week that there was some kind of like banking crisis, some bank in California.

[0:13:53.0] NF: Collapsed?

[0:13:53.4] NH: Collapsed. Yeah.

[0:13:54.4] NF: Something like that.

[0:13:55.6] NH: I remember.

[0:13:57.1] NF: And so that bank institutions were not doing any exceptions right now.

[0:13:59.7] KF: Yeah, they completely locked on exceptions for all of their loans.

[0:14:02.4] NF: So she put together the best custom loan that she could do for us and we went ahead and got that pre-approval but even she said like, “You should talk to another lender and see what they can offer you.” So then we went back to that list that we had through the resource from YFP and talked to one of those lenders and they, who did explicitly include pharmacists in their healthcare professional loan program and we went through the process with them as well of getting pre-approved. Now, their pre-approval was a little more vague in terms of what the interest rate would be in things. It was a lot of like, “You’re pre-approved but you won’t know any details until you give us like a purchase price and a date” kind of thing.

[0:14:49.3] KF: Yeah.

[0:14:53.1] NF: So we actually ended up going all the way through the process, getting to the point of making an offer, starting off with bank B, and then when we got the final numbers, it was not good.

[0:15:04.3] KF: They were terrible.

[0:15:05.6] NF: They were not good compared to bank A, and so we ended up switching lenders in that final week of between putting in the offer and having the offer accepted. We ended up switching lenders because everything across the board between the two offers was better for bank A, even though it didn’t end up being explicitly like a physician-style loan program. So that was surprising to me, it definitely wasn’t something I was expecting. I also didn’t fully realize before the process that pre-approvals only last for a certain period of time and because they’re a hard check on your credit, you obviously don’t want to go and get pre-approved at like 10 different places. It was definitely a process but we started with our local realtor to get someone that she was familiar with and had worked with before and that’s ultimately where we ended up back and so that ultimately was a good experience but there was definitely some angst. Once we started getting –

[0:16:06.4] KF: To put it lightly.

[0:16:08.0] NF: Once you started getting those final numbers from the second place that on paper, should have been better.

[0:16:13.4] KF: Better for us.

[0:16:14.1] NF: But again, we’re really focusing on like, “What is that monthly payment going to be?” Of course, we were talking about like PMI, we were going to like have to have PMI with the second place and I don’t really know why. One of the big distinctions with those healthcare professional loans is the amount that you need to put down in a down payment and we’re going to have to put down a lot more for Bank B. So like all of these things, again, just everything across the board ended up being better for Bank A. So I’m so glad that we talked to them first and had the option. That’s the bottom line is have at least two, maybe even three options because as long as your pre-approval is still valid, you should be able to pick the best option that fits you.

[0:16:56.0] NH: So many good nuggets in there and I want to make sure we highlight a few because I think you guys hit the nail on the head on all that stuff, right? So point one that I want to highlight is shop the lender, right? Talk to multiple lenders, don’t just buy into one person and lock into it. I am notorious for this. I will like, convince myself that once I’ve had a decision that like, I’m just going to stick with it because I’ve already made a decision, and even if it’s the bad one, I don’t care like I’m in, right? Don’t be me on that, right? Shop lenders upfront, that’s super smart.

Then, what I loved too is that you mentioned about changing the lenders along the way. So many people don’t realize you can do that, right? Even when you’ve put an offer in already, with the pre-approval letter, you can go back and get a different lender after the fact, right? You can’t be a week away from closing and change lenders but if it’s still early enough in that process even after the contract’s been accepted, you can change lenders. So definitely approach it for you guys on that and then the other thing you mentioned too was the hard credit checks. I advise my clients, any time they’re shopping around, try to do all of your pre-approval shopping within a two-week period that will ensure you only get one credit check. It will basically you know, trunk it down to one credit check across all those lenders, and then if you have to re-up your letter in three months, you know, you can do that for another poll but at least it won’t hurt your credit nearly as much.

So really, really good stuff you guys mentioned in there, I love that.

[0:18:10.4] NF: Well good, because we learned it by doing it.

[0:18:12.7] KF: As we were doing it.

[0:18:14.5] NH: It wasn’t that we knew it going in, which again is the point of this conversation.

[0:18:18.6] NF: Yeah, that’s exactly why I wanted to talk about this stuff because it’s those things that you don’t even know to ask those questions until you’re in the middle of it and then you learn it, you’re like, “Oh, wish I would have known this.” So yeah, I’m glad we’re covering this. Talking a little about the lender piece, you’ve mentioned your real estate agent a few times. We talk a lot here at YFP about using a team, right? Especially when making a financial decision, especially in the world of pharmacy, you know just about everything can benefit from that team approach. Were there other people on your team or were there key pieces of your team that you felt like were essential that maybe we haven’t mentioned or anything you want to highlight within the team that we’ve already touched on?

[0:18:51.0] NF: When you think that you know, it started with our YFP financial planners and so we’ve worked with YFP for three and a half years about. We started early 2020, actually just pre-COVID, which was a really fun time.

[0:19:04.3] KF: Yeah.

[0:19:04.9] NF: To get started, we were actually a week away from refinancing our student loans when the lockdown hit and everything. So I mean, we were on the cusp. So all that to say just to give people some context, so we’ve had three different people that we’ve worked with as our one-on-one financial planner and we actually started with Tim Baker, which is a ton of money.

[0:19:25.7] KF: Yes, it was.

[0:19:26.6] NF: And so along the way with all three of them, we’ve talked about our goals and we’ve talked about home buying, so it always started there and we definitely went there first to get in contact with you. You got us in contact with our local real estate agent. Our local real estate agent got us in contact, like I said, with our loan officer. Those were really the main people. They kind of facilitated most of the communication with all of the other, to use medical lingo, all the other consultants, if you will. We did a little bit of emailing back and forth with like a title agent and some things like that but I don’t feel like I knew those other people the way that I feel like we knew and talked a lot with our loan officer and our realtor.

[0:20:14.4] KF: Yeah.

[0:20:15.0] NH: Yeah, that makes a lot of sense and I know we touched on this a couple of times but you know, you guys used the home-buying concierge service that we offer here at YFP, and for those who haven’t heard about it maybe, basically it’s a free service that we offer, not just to planning clients but to anybody who’s interested. You can go right to our website, yourfinancialpharmacist.com, and click on “buy a home” and right there, you can sign up for a call with me. A 30-minute phone call or less, we can talk about your goals, we can talk about what you want to achieve, kind of home you want to buy, and then we’ll get you connected with a great real estate agent and something we really like to be upfront on here, right? Is like it’s not always perfect, right? So we’re pretty good at what we do, matching people up with great agents but sometimes the communication isn’t there upfront. So when we connected with you guys with the first agent, somebody that we’ve actually used in the past for other clients and has been fantastic the communication just wasn’t there, right?

[0:21:05.2] KF: At very first, things were fine. You know, we email back and forth, we were trying to set up a date to have a not really face-to-face but –

[0:21:12.9] NF: A more in-depth.

[0:21:14.1] KF: Like a more in-depth –

[0:21:14.8] NF: First conversation.

[0:21:15.6] KF: Conversation to get to know each other a little bit and what we’re kind of looking for and I had told her, “You know, we’re free at these three or four days the following week” and I never heard back from her and two weeks go by and I still haven’t heard back from her. I’ve reached out a couple of other times and so then we reach back out to you, Nate, and we’re like, “We don’t know what’s going on. We hope she’s okay but she’s not responding to anything. So what do we do?” and you were like, “You know, I’ll reach out to her, see if we can get you guys back in contact. If not, let me know and we’ll move on from here.” I was like, “Okay, great” and then we still didn’t hear from her.

So then you got us in contact like the very next week with our current real estate agent and she has been absolutely amazing. You know, she’s been very responsive, she’s been easy to communicate with, almost overly so. You know, there have been a couple of times that she’ll email us back and you know, “As soon as I get back from the gym, I’ll call you and do this, this, and this” and like, “Wow, you do not have to email me while you were working out but okay, thank you.”

[0:22:26.2] NH: Yeah, that’s good and it just shows that like you know, real estate is like any other business, right? There are good people and bad people within every business and there are good times and bad times for those same people, right? These are agents that we’ve worked with in the past and it just maybe there is something going on with their life that doesn’t work and this isn’t the right time for that connection to take place. So one of the things we really try to focus on with the concierge service is not just giving you an agent and walking away but being part of that team, right? YFP stays a part of your team the whole way so that if you do have that, we can come back, get you reconnected, and get you on the right path.

So again, I like to be really transparent with these conversations and tell people exactly what it’s like because it’s not as easy as picking up the phone, calling the first agent with the most highest reviews and then you get off and run, right? It doesn’t always work out that way, so I’m glad we get to share that story a little bit and it sounds like once you guys got off and actually looking at houses, it was the right fit and you guys were able to close, right?

[0:23:20.5] KF: Yeah.

[0:23:20.8] NF: Yeah, absolutely. Everything went well from there and honestly, like probably would have been fine because we were starting very early in the process but just again, with so much uncertainty and ignorance, for lack of a better term, on our part we wanted to start really early because we didn’t actually even know if that was early. We thought maybe six, seven months from our target buy date might have been late. We didn’t know and so that’s why we were really keen to start having conversations with someone and so that’s why we’re willing to go ahead and make a connection with someone who’s going to be able to interact and respond to us right then. So it was really nice, like you said, to have that lifeline of being able to come back to you, Nate, and say, “Hey, is there another direction we can go?”

[0:24:09.3] KF: Yeah.

[0:24:09.7] NH: Happy to do it. I mean, now that you’ve worked with an agent and again, gotten to the closing process. Are there tips you have for people out there that might be vetting their own agents or maybe not using our concierge service, like things that you think are super important to have as part of – as a good real estate agent?

[0:24:24.0] KF: I mean, I think we already said it a couple of times but I mean, being able to have clear and responsive communication.

[0:24:31.3] NF: Yeah, reasonably responsive, you know? I don’t need my realtor text if I send an email at midnight because I’m up just worried and thinking about something, I don’t need you to respond at 1:00 in the morning that kind of thing but you know accessible was certainly a thing, especially because there were times, there were parts of the process that we were working through on weekends, in the evenings. That week of like putting in the offer and getting the offer accepted was a very hectic four to six days and it felt like we were emailing and communicating and doing stuff –

[0:25:08.6] KF: Phone calls, texting.

[0:25:09.5] NF: Finding any paperwork, getting the paperwork signed.

[0:25:11.8] KF: Scanning stuff.

[0:25:12.7] NF: Doing all of this stuff nonstop for that whole week.

[0:25:16.4] KF: For that six days, yeah.

[0:25:18.0] NF: So you know, that’s important but I’d say the other piece and you can speak to part of this honey, is like having an agent who’s really listening to what it is that you’re looking for in a home not just in terms of price and that’s the piece you can speak to but also you know, if you’re saying or you’re finding, that was something we found things that were important to us that we didn’t realize were important to us once we started looking at homes and actually picturing our self living there with our family. You know, so the simple example for us is like we really wanted a fenced-in backyard, you know, just the idea of like being able to tell the boys, “Okay, go outside and play” and not have to worry about wildlife or somebody’s dog or whatever, you know?

As I started looking at different houses, some that had it and some that didn’t, I found that that was important to me and we were able to communicate to our realtor that. And then when you see that they’re responsive and they start then bringing you homes that match what it is that you’re saying that you want and what you’re finding that you want, I think that is really key. You know, if you are working with someone and they’re continually bringing things to you that are outside of your price range or not matching what you say you’re looking for, then that person for whatever reason may not be the right agent for you to find your home because it’s about you finding your home.

[0:26:48.7] KF: Right. Our agent said that to us a couple of times. She goes, “Well, this is not my home. So you know, if you like this that’s great.” That was really fun to hear her say that. What Neal was eluding to earlier was when we had initially talked to her, we had this really broad price range that we were looking at and you know she’s like, “All right” so she put it into her system and was able to email me houses to look at. Once we got closer and we were seeing, “Okay, these houses are probably way out of our comfortable price range” I emailed her and I said, “Hey, let’s change that filter to this price range” and she did it that day and I never received a house after that that was over that price range. So that was really, really nice to see her be responsive in that way, especially that quickly.

[0:27:39.3] NH: That’s great, I love it. I appreciate you guys giving that synopsis because I think those are all super important pieces and things that, like you said really well, it’s the things you don’t realize until after you’ve gone halfway down the process, you’re like, “Oh man, this is important and I didn’t know it’s important.” So that’s really key. So I want to go back really quickly to one other thing you mentioned about that crazy six days that you mentioned, right? So after the sort of like place is under contract, now what? Anything really stick out in there, things like tips you would give to people? I know it’s a ton of hurry up and wait and 30 people are emailing you that you don’t know any of them and they all need documents from you, right? I always know that process is hectic. Any tips or words of advice you can give to our audience that like, “Hey, do this upfront so that the six days aren’t as crazy.”

[0:28:23.8] KF: Well, it’s something that we did really early on in the process with our agent before we had even looked at a house at all was ask her for all the papers that we’d be seeing at closing. So she emailed us all the blank documents, we were able to read through those. We were kind of half-familiar with them by the time we were actually signing them so that we weren’t totally drowning in all that information all at once. So that was something really good that we were able to do but then I feel like something else that we were able to do was utilize our real estate agent and say, “Okay, what does this mean? Why are we doing this? You know, is this reasonable to ask the buyers for this or the sellers for this?” or whatever. Just utilize those resources that are right there that are helping you through the process anyway.

[0:29:11.2] NF: Yeah, I’d say, you know, it’s really easy to get overwhelmed and one thing that you definitely should do is actually sit down ideally together if you’re a couple and read the documents that you’re about to sign because sometimes, there might be things in there that you don’t either understand or didn’t expect. You know, if they say that they’re taking all the appliances out of the house and you didn’t know that –

[0:29:36.3] KF: That’s a big deal.

[0:29:37.6] NF: You need to know that. So that’s like a really simple thing, it’s very easy to skip over that and there were a couple of times where we were like, “Wait a minute, why is this number this? Shouldn’t it be different?” you know, we add a lot of communication about that. I didn’t realize our final closing cost changed multiple times because it’s like a projection and it had things in the projection and then they took them out and then they put them back in.

[0:30:03.7] KF: We thought they were a different price when they put them back in.

[0:30:05.6] NF: And we actually ended up scheduling our wire transfer for amount X and then it changed like 48 hours later and we had to call the bank and change the wire amount again, change it, and that was a little stressful, you know? Because we’re talking about a lot of money so you really don’t want to mess it up.

[0:30:22.5] KF: Right, that is where our loan officer came in. You know, I talked to her three or four times on the phone a week of closing and she was very, very good about walking me through like, “Okay, this is what’s happening right now, this is why the amount says this. This is what it should be closer to actual closing” and again, communicating with her and having her be accessible as well was really good for us not to get lost in the process.

[0:30:50.5] NF: Yeah, if you see something weird or you have a question, you should ask. If you don’t feel comfortable asking, you should take a big step back if that’s a big red flag. It is too big of a decision to go into it not knowing and understanding a lot of it. Now, that being said, I felt like when we actually finally signed our documents electronically, there was like a whole set. I mean, we did a physical signing part too, that was fine.

[0:31:16.4] KF: That was it.

[0:31:16.8] NF: There was like this whole section that was basically like, what is a home loan for dummies, and all this terminology. I was like, “Why isn’t this the first thing they send you?”

[0:31:26.7] KF: Yeah, why isn’t this the first thing that you read?

[0:31:28.6] NF: Somebody take these last 20 pages and just send it to me at the beginning and that would have made things a lot easier but overall, you know because we felt very comfortable asking questions and we just did, we just asked questions all the time.

[0:31:42.0] KF: I sent so many emails and so many text messages.

[0:31:45.2] NF: That helped. I mean, being organized, you know we had a lot of our documents saved like in a folder on the computer for like home purchase documents. That made it really because you’re going to have to upload a million things. Even something as simple as if you have the ability to scan documents, if you are printing them manually, signing them, or you have the ability to sign things electronically, you will make that process go a lot faster. If you have you know, a touch screen device and a PDF editor that you can sign right there, you know, like that is so much faster than printing and signing and going to the library and faxing it to yourself, so whatever.

[0:32:23.2] KF: Yeah, you know whatever you have to do.

[0:32:25.1] NF: You know, whatever you have to do to get all that paperwork done, it’s quite a process. Yeah, so it was fun for lack of a better word and we got all the way to the physical signing and it really was what everybody tells you like you’re going to sit there for an hour and a half and sign documents and get a cramp in your hand. Something that was interesting like we never ever saw our sellers. Like they had done everything ahead of time and just have like their representatives there.

[0:32:49.8] KF: Yeah, they’d pre-signed.

[0:32:51.4] NF: Kind of wasn’t expecting that but it did made a difference. There was even like a little hiccup at our closing, where the title company wasn’t sure that we had actually given them earnest money and we had and so then there’s –

[0:33:04.9] KF: Well and our loan officer was at our closing and she was like, “We definitely have this on file, we sent this to you.”

[0:33:10.7] NF: You know, so and if the title company, you know they have just like someone that they’ve hired, a third party like be there to do all that process so –

[0:33:18.8] KF: She has no idea, she doesn’t know us at all. She doesn’t know anything.

[0:33:21.9] NF: Yeah, she just has a file that’s like four inches thick with all of their documents and these notes in it, so then she’s talking to the title company people and they’re talking to the realtor and you know –

[0:33:34.5] KF: And they’re talking to the bank and we’re just sitting there like, “Okay, better run snacks to the boys.”

[0:33:40.4] NF: It all worked out but all that to say, I think that’s to say you know, do as many preparations as you can but don’t be surprised when –

[0:33:48.5] KF: Surprises come up.

[0:33:50.2] NF: Unexpected that you know, expect the unexpected because it is a very long complicated process and you will almost certainly run into something that you didn’t think about before or you haven’t heard that term or whatever.

[0:34:04.5] KF: Yeah.

[0:34:04.9] NH: Well, I really like the expectation setting, right? Like this is going to be a little crazy, be prepared for that and all the other prep work, the tips that you guys gave and I think creating a file in your computer that’s a great one. Being able to save documents because you might have to send them multiple times, referencing them, right? In case you did send the earnest money, you’ve got a document that says, “Hey, look, this is here” just in case someone else didn’t have access to that. So again, really great tips and it’s very clear that you guys have been through the process because I’m thinking about all these pieces like, “Oh yeah, I remember that. Oh yeah, that’s a problem. Oh yeah, I see my clients running into that.” So you guys are not alone and again, it’s nice to hear hopefully for some of our audience just how overwhelming it can seem but how you can make it through with a little bit of prep work and access to good resources.

So I really appreciate you guys hearing your story today, giving some first-time homebuyers out there some confidence that they can make it through and get to where you guys are now and again, just congrats on the new home, and seriously, thank you for sharing your story. It’s been awesome.

[0:35:01.6] KF: Yeah, thank you for having us.

[0:35:02.2] NF: Hey, thanks for having us.

[0:35:03.2] NH: Yeah, take care guys.

[END OF INTERVIEW]

[0:35:04.3] TU: Nate and I have covered a ton of information in this podcast. So imagine working with Nate one-on-one through your home-buying journey and having his support to give you much-needed peace of mind. We know many pharmacists want to feel confident about big financial decisions including a home purchase. So if you have fears of being house forked, concerns about the impact a home purchase might have on your other financial goals, Nate and his home-buying concierge service can help all at no cost to you. You can visit realestaterph.com or click on the link in the show notes to schedule your free 30-minute jumpstart planning session with Nate.

[DISCLAIMER]

[0:35:43.6] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 314: RMDs: What They Are & Why They Matter

Posted on June 29, 2023June 28, 2023 by Tim U

Tim Baker, CFP®, RICP®, RLP® discusses RMDs: What they are, why they matter, and factors to consider when building a retirement paycheck.

Episode Summary

No matter where you are in your career journey, it’s never too early to start optimizing your retirement plan. One important factor to consider when building your retirement paycheck is Required Minimum Distributions (RMDs). RMDs refer to the minimum amount that you must withdraw from certain retirement accounts each year after reaching a certain age.

On this week’s episode, YFP’s Co-founder and Director of Financial Planning, Tim Baker, CFP®, RICP®, RLP® unpacks the many intricacies of RMDs, like which accounts demand RMDs, which ones don’t, and what to consider when planning how to build your retirement paycheck. You’ll learn about how RMDs are calculated, the penalties you can expect when you don’t fulfill RMD requirements, how to optimize and reduce the impact of RMDs, and why optimizing your retirement strategy starts in the accumulation phase.

Key Points From the Episode

Introducing Tim Baker and today’s topic: Required Minimum Distributions (RMDs).
Planning for retirement and the taxes you typically need to pay.
The importance of understanding RMDs, even if you aren’t near retirement age.
How the IRS defines RMDs and a run-through of the accounts that typically include RMDs.
An overview of a Roth IRA and how it is contributed with after-tax dollars.
How contributing after-tax dollars allows your retirement to grow tax-free.
A rundown of what happens if you inherit a Roth account.
The primary benefit of Roth accounts: control.
Why traditional accounts are still beneficial despite RMDs.
A breakdown of how RMDs are calculated in various scenarios.
The rules and penalties if you don’t fulfill your RMDs.
What to consider when planning how to build your retirement paycheck.
Why optimizing your retirement strategy starts in the accumulation phase.
How to optimize and reduce the impact of RMDs.

Episode Highlights

“The government doesn’t really care because they’ve already taken their bite of the apple. With Roth IRAs, and then Roth 401Ks, 403Bs (especially heading into 2024), you’re not required to take RMDs.” — @TimBakerCFP [0:10:53]

“With Roths, it’s about control. It’s the control of when you’re paying your taxes or a known quantity of what your tax bill is going to be but then it’s also [that] I don’t have the burden of being forced to distribute the account when I don’t want to.” — @TimBakerCFP [0:13:03]

“So much of building a retirement paycheck (and all this strategy we’re talking about) really starts with ‘in what buckets are you saving?’” — Tim Ulbrich [0:27:16]

“I would still advocate for the use of these accounts because the long-term benefits of having tax-deferred growth is a huge benefit. – I don’t want people to think ‘I don’t want to use these accounts because I don’t want to have to pay RMDs’.” — @TimBakerCFP [0:30:01]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey everybody, Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome YFP co-founder and Director of Financial Planning, Tim Baker, to talk about required minimum distributions. Also known as RMDs. We discuss what they are, how they’re calculated, strategies to optimize, and why this topic matters to building a retirement paycheck.

As a supplement to today’s episode, make sure to download our free checklist; What Issues Should I Consider When Reviewing My Investments? You get a copy of that resource by visiting yourfinancialpharmacist.com/investmentreview. Again, that’s yourfinancialpharmacist.com/investmentreview.

Okay. Let’s hear from Justin from the YFP team and then we’ll jump into my interview with Tim Baker.

[00:00:55] JW: This is Justin Woods from the YFP team with a quick message before the show. If you listen to the YFP podcast, you may learn something every now and then, either from Tim Ulbrich, Tim Baker or one of our guests. A lot of people listen to the show but they may not execute or implement the things they learn.

As pharmacists, we know the impact of non-adherence on patient outcomes and their overall well-being. As a pharmacist myself and part of the YFP team, I talk with pharmacists every day who are confused about how to implement financial knowledge. Pharmacists share with me that they’re treading water financially. Maybe took a DIY approach, reached the plateau and are confused about what to do next. Or those who work for decades can see the light at the end of the tunnel and feel uncertain about how the next chapter will unfold. If that sounds like you, one, it is not uncommon to feel that way. And two, does it make sense for us to have a conversation to see if YFP planning can help you? Visit yfpplanning.com or follow the link in the show notes to find a time that works for your schedule.

[INTERVIEW]

[00:02:01] TU: Tim Baker, welcome back to the show.

[00:02:03] TB: Good to be here, Tim. How’s it going?

[00:02:05] TU: It is going well. Last week we talked about four reasons that we believe you should have your financial planner manage your investments. Great episode. If you haven’t yet, check that out. I hope you will do so. We’ll link to that in the show notes.

This week we’re going to be talking about a topic that we have not really covered before at length or in depth. And that is around required minimum distributions or RMD.

Tim, maybe not the most exciting topic to talk about. But considering some of the questions that we’re getting considering some of the rule changes have come around this with the Secure Act and, obviously, an important part of the retirement planning, a topic that we need to address.

[00:02:43] TB: Yeah. It’s one of those overlooked things until you’re kind of right up against it, unfortunately. And we kind of talk about it at a high level more with regard to your investment assets and what has yet to be taken by Uncle Sam.

I always kind of talk through, if you have a million dollars in a traditional IRA, a million dollars in a Roth IRA and a million dollars in a brokerage account, like how much money do you have? And unfortunately, it’s not $3 million. Because at least in the traditional IRA, when that money goes in pre-tax, it’s tax coming out. So if you’re in a 25% tax bracket to keep the math simple, you have 750,000 of that and Uncle Sam has 250,000. So you’re in a partnership with Uncle Sam in that account.

The big difference or when where RMDs come into play is that, just like when we retire, or how we retire, or things like that, we’re not always in control of how that money is to be poured into retirement. And, essentially, what the government says is, “Hey, remember all of those years that you were able to defer? Now we’re kind of requiring you to distribute those assets over time based on a table in terms of how much you actually have to do or actually have to distribute.” So we’ll kind of talk about that in this episode.

[00:04:16] TU: Yeah. And I really do believe, while this is a topic that I think tends to focus more on those that are nearing retirement planning, to build that retirement paycheck. Really, for folks at all stages of their career, even if I’m early on in my journey, really understanding how RMDs can be helpful in understanding, as you mentioned, the different bucket than how you’re saving and even some of the early investing strategies. So stay tuned regardless of where you are throughout your career.

Tim, let’s start with the definition. What exactly is an RMD? Requirement minimum distribution?

[00:04:49] TB: So this is the minimum amount that you must withdraw from your retirement account each year. I think that’s how the IRS defines it. And essentially, what it means is that if you have that million dollars in your traditional IRA that we talked about, you don’t have to pour all million dollars out in one year and Uncle Sam gets 250,000 and you get 750,000. That’s just used for kind of illustrative purposes.

But depending on your age, you have to pour out a portion of that million dollars. And essentially, what it’s doing is it’s forcing you to pay the tax on those pre-tax retirement accounts. And this has moved over time.

I think, Tim, when I first started learning about studying for the CFP and things like that, the age four required minimum distributions was 17 and a half years old. Now it’s 72. And this is part of the changes of the Secure Act. It’s going to move to 73. And then I think starting in 2033, the age will be 75. That’s a benefit for us. Our required minimum distribution at present will be 75 years old.

What that means is that we can hold on to these investments in the tax-preferred account longer. Now what the government is saying is that, yeah, you could hold on it longer. We also know that you’re living longer. So that’s one of the things that you’re trying to do.

The accounts that are in question, Tim, that often require – not often but do require minimum distributions are the 401K, the 403B, the 457, the TSP, the traditional IRA, SEP IRA, SARSEP IRA and then the simple IRA. These are the ones. Again, most people don’t have SARSEPs these days.

And then what’s weird is most Roth accounts do not require RMDs, which is one of the main advantages of a Roth. However, today, in 2023, and this will change in 2024, if you have – with YFP, we have a 401K with YFP. Part of the dollars that I invest into our YFP 401K goes to a pre-tax, a traditional 401K. But a good chunk of my dollars go into a Roth 401K.

If I were 73 and I had a balance in that Roth 401K, technically, I would still have to take an RMD from that account. In 2024 and Beyond, RMDs will no longer be required from those designated Roth 401K, 403B. So another little quirk in the –

[00:07:34] TU: Tim, just to highlight that for a moment because I think that’s point of confusion that’s going on right now. Roth IRAs have been like that. If you have a million dollars in a Roth IRA, as you highlighted, the buckets, a little bit earlier, you’re not required to draw from that in terms of what would come out of it with taxes. And we’ll talk about how that could impact beneficiaries if that money was transferred here in a moment.

And so, really, the change you’re referring to is for what has been a more popular employer-sponsored account. We see more and more people that are in these Roth 401Ks or in Roth 403Bs. Where the Roth is a part of an employer-sponsored account. And up until – coming up in 2024, those would have required an RMD even though they had the Roth term. But that’s going to change. Correct?

[00:08:22] TB: Correct.

[00:08:22] TU: Okay.

[00:08:23] TB: Yep.

[00:08:24] TU: So will that be a part of it will, part of it won’t? I’m thinking about my situation, right? I’ve got all this Roth 401K money that’s sitting in that bucket that’s pre-2024 and then after 2024. So some of it will be subject to RMD. Some of it will not?

[00:08:43] TB: No. When you’re in retirement, the only thing that’s going to be subject to an RMD for you would be what’s in your traditional 401K and any – if you still have a 403B, if you have a 457, a traditional. So it won’t be – that rule, you’re not going to have to take a little bit out of the Roth in 401K in the future. No.

I guess, in 2024, no one will be taking any money out of a Roth 401K or 403B for the purpose of an RMD. It was just one of those weird rules that kind of just needed to be satisfied. And I think that was put into the Secure Act 2.0.

[00:09:21] TU: Got it. Okay. So talk to us about Roths. And one of the main advantages I often – I guess debates I often hear around Roth is the whole tax rate today, tax rate in the future. But I think what we don’t talk enough about is the benefit of Roth’s not being required to withdraw that money until after death. So not only not having an RMD, right? Which is a positive. But also, that there’s not a requirement of those monies being withdrawn. So tell us more about that.

[00:09:49] TB: Yeah. So as part of the Roth – and again, you think about it from the government’s perspective. So the government, although we joke inefficient and like why the heck are we doing this? Or why is it written this way? From the government’s perspective, they’re looking to access tax dollars where they can. And for a Roth, they’ve already taxed those monies.

A Roth IRA is contributed with after-tax dollars. Again, the example I use is if I make $100,000 and I put I put $5,000 into a Roth IRA, the government taxes me in that year as if I made $100,000. So I don’t get a deduction for that. So it goes in after-tax and then it grows tax-free.

As those investments – as that $5,000 grows to 10,000, 15,000, I’m not paying capital gains tax on those dollars. When I pour that out in retirement, that doesn’t hit my 1040. I don’t get a 10 – like I’m not reporting that as taxable income. So the government doesn’t really care because they’ve already taken their bite of the apple. With Roth IRAs and then Roth 401Ks, 403Bs, especially heading into 2024, you’re not required to take RMDs.

Now if you inherit a Roth. Say you inherit a Roth from a deceased spouse, essentially, what you’re going to want to do is roll that over into your name and then no RMD will be required. If you inherit a Roth, say, from like a parent or something like that or any type of non-spouse, typically, there is an RMD required and it’s typically over a 10-year timeline. And that’s just the kind of exhaust the legacy account and close that out.

That’s one of the major bene – so I think one of the major benefits of the Roth and probably not talked about it directly is control, right? Because in a Roth, you are controlling when you’re paying the taxes, today. Whereas in a traditional, it’s kind of you put your finger in the sky. You don’t really know what your tax – your marginal tax rate is going to be in the future. We have no idea.

The government, the Congress could say, “Hey, these are the new –” the IRS could say, “Hey, these are the new tax brackets.” They’re a lot more than what they are today. Or they could go down. I think most people think that taxes are going to go up. That’s one of the benefits of like, “Hey, pay the tax now and go from there.

But the other thing that often doesn’t get talked about is, if I’m going to retire in Florida, Tim, we know that Ohio – one of the reasons I put a lot of money into Roth now is because – because we’re business owners, one of the weird nuances is that we don’t get hit with taxes for the first set amount of dollars that we make as business owners.

Right now, I’m like, “Okay, that’s a good opportunity for me to kind of circumvent.” It’s almost like I live in Florida or Texas from a – but if I didn’t have that and I was going to retire to Florida or Texas, where I don’t have state income tax, and I’m going to pour that out then, then that’s another thing that we have to kind of consider.

With Roth, it’s about control. It’s the control of when you’re paying your taxes or a known quantity of what your tax bill is going to be. But then it’s also I don’t have the burden of being forced to distribute the account when I don’t want to.

That is a huge benefit to a lot of people, is being able to have control over the tax rate and the time. And again, that’s not to say that these traditional accounts are bad. They’re not. They’re good, in fact. But when we kind of get the question of like where should I have my money? It’s a little bit in pre-tax. It’s a little bit in after tax. And it’s a little bit in tax-free. And I think all of those are going to play an important part as you approach retirement.

[00:13:53] TU: Yeah. And Tim, I wasn’t aware of the difference between the spouse versus non-spouse with a Roth being passed on to a beneficiary.

[00:14:03] TB: They’ve changed those rules like recently too. Yeah. Because it used to have stretch. And the stretch IRAs and inherited IRAs. And there’s lots of different nuances with that. And even the rules around inherited IRAs are pretty complex. Like they’re not straightforward if you’re an entity, versus a non-spouse, versus a spouse, versus keeping it in the decedent’s name or your name. There’s lots of different things that are going on there.

[00:14:31] TU: This too is another example we just talked about in the last episode of how we don’t want to look at any in a silo, right? For our younger practitioners who are listening that may be working through something like a student loan, forgiveness strategy, right? Implications here of traditional versus Roth contributions on the student loan equation.

We’ve talked about that before. We don’t need to go down that rabbit hole now. But when we talk about like Roth or traditional, another example yet where it’s not just a blanket, this one is better than the other, right? It really does depend in someone’s whole situation.

[00:15:03] TB: Yep.

[00:15:04] TU: Tim, how are the RMDs calculated?

[00:15:07] TB: The required minimum distribution for any year is – essentially, the way I learn this is that you look back for the balance. So this is the balance of your 401K, your IRA, your SEP IRA. So you look back at 12-31 of 2022 as an example. And then you look ahead, essentially, the year of – so if I’m turning 76 this year, that I look at that year as the year that I need for the IRS’s uniform lifetime table.

What do I mean by that? Let’s do an example to kind of flush this out. Let’s pretend it’s June 2023, which it is. And I’ve just turned 76. Or I’m about to turn 76. Essentially, when I look at age 76, the IRS uniform lifetime table returns a column. It’s distribution period in years of 23.7.

As a 76-year-old, essentially, I have 23.7 years to distribute the account out. So that’s the factor that I use. I go and I pull my statement from the end of last year and I see that, in my traditional IRA, I had $250,000. I take that $250,000 and then I divide it by that factor from the IRS table as a 76-year-old. $250 000 divided by 23.7. And it says that my required minimum distribution for that year is $10,548.52.

That is what I’m required to distribute to kind of – to not be penalized by not taking the proper RMD. Essentially, I would work with my advisor and I would say, “Okay, at a minimum, I need to, either in a lump sum or in payments over the course of – we would probably just build this into the retirement paycheck. That, hey, we need to essentially allocate this amount of cash from the IRA and make sure that that satisfies the RMD requirement. That’s the first example, Tim. Did you have a question?

[00:17:18] TU: Yeah. And so, in that example, 10,548, right? You mentioned $50,000 balance in your traditional IRA. [inaudible 00:17:25] 10,500, that would be the required minimum distribution. That 10,500 is then taxed as ordinary income, correct?

[00:17:34] TB: Correct. If the custodian is what we use that TD Ameritrade, which is TD Schwab. Essentially, TD Schwab would send me a 1099R and it would show that distribution. And essentially, I would be working with Sean, my CPA, when I go to file my taxes. And that would show up as income. I might still have some W2 income or I might have some other 1099 contract income of doing some consultant and when I’m 76. Maybe I’m doing that for YFP in the future.

I might have some W2 income. I might have some 1099 income. And then this 1099R our income would be recorded on my taxes. And then depending on what tax bracket I’m in, that’s when I would be taxed.

Right now, if I’m in a 25% tax bracket versus maybe when I’m 76 – I know I’m conflating years and everything. But maybe when I’m 76, maybe I’m in a 12% tax bracket. So that would be benefit to essentially – let’s say I’m earning less than $90,000, which is the 12% bracket for married filing jointly. That’s kind of what’s at play here. You basically get the 1099R and record it in your taxes in that year.

[00:18:50] TU: Okay. Got it.

[00:18:52] TB: Another example of this is let’s pretend, Tim, that I have a traditional IRA, a SEP IRA and a 401K. Same fact pattern. It’s June 2023. I’ve just turned 76. And that distribution period in years is still 23.7. When I look at my statement, I see that, okay, I still have the $250,000 IRA. But I also have $100,000 in my SEP IRA and I have $500,000 in my 401K.

My RMD this year, if I take 250,000 and divide it by 23.7, it’s still at 10,548. The SEP IRA, $100,000 divided by the same factor, 23.7. The RMD for that is now $4,219.41. That’s still in addition to the 10,500 from the traditional.

And then the 401K of half a million dollars I have to distribute. So, $500,000 divided by 23.7. I have to distribute 21,000. We’ll call it 21,1000. $21,000. My total RMD across all three of those accounts is $35,865.

Now just to make this even more complex, Tim, with the traditional and the SEP, I could take all of that out of my traditional. That’s the bigger account. Or I could take that all out of the SEP if I wanted to. With the 401K, I have to take it out of the 401K.

Or let’s say I had a 403B. I would have to take it out of the 403B. So those that are administered by the employer, or in my case, a previous employer, I have to take it out of those plans if I have those IRAs that I’m managing. Or an advisor is managing for my benefit, I can aggregate those and have that come out of one. That’s one of kind of the nuances there.

[00:20:53] TU: That makes sense. So the I in IRA is an individual account, right? It stands for individual. In that example, we had a traditional and a SEP. You could take the RMD out of one of those accounts. Either the tradition or the SEP. But since the 401K was an employer-sponsored account, that RMD has to come directly out of that account.

[00:21:11] TB: Yep. Correct.

[00:21:12] TU: Okay. Got it. So we’re going to talk in a little bit about why this topic really matters and some of the strategies to reduce CRMDs. But let’s talk about the penalty side of this. What happens if, Tim, I don’t take an RMD? So maybe I’m not familiar with the rules. I’m DIYing this and just not paying attention to logistics or something gets overlooked. What happens in that case?

[00:21:33] TB: In the old rules, before the Secure ACT 2.0, it would be basically 50% of what you fail to take that would be taxed. In the case that I was saying, it’s like if I had to take 10,500, 5,200 of that would be basically the penalty. And then you’d have to file form 5329 in your federal tax return for the year that the RMD was not taken.

With the new rules, it’s basically they tried to make this less – they try to soften this a little bit. So now it’s 25%, which is still substantial. And then if you correct it within two years, it’s 70 – it’s 10%. Excuse me. One of the things – again, one of the weird nuances is let’s say I’m turning 72 this year. Technically, I don’t have to take the R in the first year. Don’t ask me why is this, Tim. In the first year, I don’t have to take the RMD until April of next year.

But then every subsequent year I have to take it before the end of the year. Let’s pretend I say, “Oh, I didn’t take it. I’m taking it April 15th right before I file my taxes.” But then in that same – if I have to take that 10,500. In that same year, I have to take another RMD for 73. That’s another one of the weird nuances. Yeah, it’s 25%. But 10% if it’s corrected within the first two years.

[00:22:54] TU: I mean, even 10% is no joke though, right?

[00:22:58] TB: Yeah. I mean, some of these rules is like if you over contribute, it’s like a 6% excise. When you go from 50% even down to 25% or 10%, it’s – and the dollars get bigger. I mean, your balances are supposed to get smaller. But every year – so when you go from like 76, where the factor is 23.7, the next year at 77, it’s 22.9.

And one of the things that the IRS has done is they extended it out. I think it goes all the way up to like age 120 and older. But at 110, as an example, the factor is 3.5. If you have a million dollars at 110, about $300,000 and $400,000 is what you have to distribute in that year. The factors get smaller, which means that the RMD gets bigger as you age. Again, if you’re not doing it properly, the penalties can be quite robust.

[00:23:54] TU: Whether we like the rules or not, Tim, they are what they are, right? We’ve got to factor them in. We’ve got to plan for this. And my mind is spinning around, “Okay, I’ve got all these different buckets of funds that I’ve been building throughout my accumulation phase.” Right? We’ve talked about some of the alphabet soup here in this episode. And now there’s this strategy of how I withdraw not only from those buckets. But also, how do I factor in the RMDs? And in which order? Which priority?

At the end of the day, the topic matters, I think, as you try to build a retirement paycheck and think about the order of withdrawal and how you’re going to put together that paycheck in retirement.

[00:24:33] TB: Yeah. I mean, if you look at what are the sources of income that you’re going to have in your retirement paycheck, one of the big ones is going to be Social Security, which, as we continue to go on, more and more people, their Social Security will be taxed. Because a lot of the phase-outs for that have not been adjusted for inflation.

But if you think about it, the average today, Social Security check, per month, per recipient, it’s like $1,780. Just about 21,000 and change per year. That might be your baseline. And then for most people, if I need $80,000, then 60,000 is going to come from your traditional investments.

And what we’ve seen here is, in this example, 35,000 of that has – in this example, has to come from the traditional, right? So then you’re playing the game of like, “Okay, if I’m trying to get to 60,000, that still puts me in a 12% tax bracket.” Again, if I’m just looking at myself and not necessarily Shay.

What is she getting from Social Security? What does her RMD look like? Are we going to try to fill up the 12% tax bracket? Are we looking at the 225 tax bracket? Are we pulling anything from Roth at all?

I think, again, having the ability to pull from pre-tax, you have to, especially with the RMDs. But then to then move to something like a brokerage account, which is after tax to a tax-free, which is a Roth. All of those things are going to be in play to make the most efficient play at building a retirement paycheck.

And depending on where – again, if you have certain assets in certain accounts, they are not going to be optimized with kind of the strategy. You have to be wary of that too. What are the things that are going to be most volatile or higher risk, higher return? Most capital gains, things associated with that. Those are all going to be important when you’re kind of building this out.

Is there an annuity? A lot of annuities if you buy a qualified annuity. If you take some money out of your traditional IRA, so to speak, to buy an annuity, those have RMDs. And a lot of that can satisfy the RMD or delay it. There’s some strategies there. There’s lots of tax implications. But also, how does this relate to your investment allocation? The location of certain assets? It’s all very nuanced.

[00:27:10] TU: Yeah. And Tim, the place that I’m thinking about right now, I’m 15 years into my career. I put myself in that mid-career bucket. But so much of building a retirement paycheck and all this strategy we’re talking about really starts with ‘in what buckets are you saving’, right?

I think sometimes there’s a tendency that, “Hey, we need to save whatever big number.” Right? Two, three, four million dollars. And we just start saving, saving saving.

And saving is good, especially if we’re doing it over a long period of time. But saving intentionally so that we’re thinking about this from a distribution sense, I think we often disconnect that accumulation and decumulation phase. And, really, prioritizing that. Really, the accumulation, optimization, and the strategy around that, especially in a tax-efficient way, really starts back in the accumulation phase.

[00:27:58] TB: Correct. Yeah. It’s kind of building – we talked about building a foundation of an emergency fund and getting the debt – the consumer debt in line and having a plan for this student loan. But this is right there in terms of, again, bucket selection. But then inside of those buckets, what assets are we actually put in? And are they the best for the long run? Yeah, those are definitely in play.

And again, I think it’s often an overlooked thing. And this is where – and again, it’s not necessarily like if you’re required to distribute your account, that doesn’t necessarily – it doesn’t mean that you have to consume it. You can always direct those dollars elsewhere. Whether it’s a brokerage account or it could be real estate. It could be paying for a grandkid’s education or something like that. There are things that you don’t necessarily have to like move those dollars off your balance sheet.

But, essentially, what’s in play here is the efficiency related to tax. And, again, in the context of like, “Okay, what is it that I need to sustain a retirement paycheck for from now until age 95, 100, 105, 110?” And that’s difficult to do.

[00:29:13] TU: Yeah. And I’m thinking about this from a household perspective, right? Tim, you mentioned you’ve got, often, two people, multiple accounts. So now you’re talking about additional layers of complexity. Maybe different timelines of retirement and when they need those funds and goals that they have. This is where I really want for Jess and I. I want the two of us with our CFP and the CPA in the same room whiteboarding and kind of masterminding this to make sure that we’re really thinking about it from every angle.

[00:29:43] TB: Yep.

[00:29:45] TU: Finally, I know many of our listeners are thinking what I’m thinking, which is, “Hey, what can we do to optimize this? What can we do to potentially reduce the impact of the RMDs?”

[00:29:55] TB: Yeah. So there are a few things. RMDs are inevitable, right? If you use any of these accounts – and again, I would still advocate for the use of these accounts because the long-term benefits of having tax-deferred growth is a huge benefit. I don’t want to say it’s not. I don’t want people to think I don’t want to use these accounts because I don’t want to have to pay RMDs.

There’s a few strategies that you can employ. If you are still employed and you’re kind of within that RMD age. Let’s use 72, 73. You can delay your 401K RMDs. Not necessarily your IRA RMDs. But your 401K RMDs from your employer until you retire. You just can’t be a 5% owner, Tim, for you and I. Like that wouldn’t imply. We would still have to take RMDs.

Probably one of the biggest things that you can do is just get money out of those buckets. So this would be things like Roth conversions. Essentially, over your career, you can identify times that it makes sense because of lower earning years. You’re still paying the taxes on it. But you’re doing it in more of a controlled way versus here’s the balance, here’s the factor, and then that’s your RMD.

One way that you can do it is just manage the distribution. So most people take RMDs either in a series of payments or through like a lump sum at the end of the year. One strategy that you can, which, again, we bring up annuity, which is sometimes a bad word for people. But you can invest in a QLAC.

A QLAC is a qualified longevity annuity contract. This is the deferred fixed annuity that you purchase with funds from your retirement account. Like a traditional 401K or a traditional IRA. And typically, because there is a promise in the future to pay out those funds, one of the special things about this is that there’s no required distributions until 85. Until age 85. You can push that out for a decade or so.

The big selling point for this is, if you’re looking at – in the example I gave, “Hey, I had $500,000 in my 401K.” And that means that the RMD for this year is 21,000. I really don’t want to do that. I can peel off 100,000 or 200,000 and put that into a QLAC. And that lessens the burden from what’s coming out from the 401K. That is a strategy that you can use.

Charitable donations. So you can either – you can do this one of two ways. And I think it just depends on the tax situation. You can make a QCD, a qualified charitable distribution, which is a direct transfer from your retirement account right to a qualified charity. And this will be basically excluded taxable income, which will lower your tax bill. Or you can use your RMD to make charitable donations and kind of get a – that’s typically where, again, you’re going to use the itemized deduction and maybe want to do a bunch in strategy or things like that to get the most benefit. So those are ways to kind of reduce or delay or get around the RMD, which at the end of the day is inevitable.

[00:33:17] TU: Tim, great stuff. I feel like we’ve covered a lot of length in a short period of time a topic, again, that we haven’t talked about in great detail. We’ll certainly be coming back to this more as we talk about some of the retirement planning strategies. But again, a great episode regardless of what stage of career that you’re in.

For those that are listening and say, “Hey, I’d love to have someone in my corner really thinking about this from an investment, retirement planning strategy,” we’d love an opportunity to talk with you further about the financial planning services that we offer at YFP planning. You can learn more and book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com.

Tim, great stuff. We’ll be back here in the future.

[00:33:57] TB: Thanks, Tim.

[OUTRO]

[00:33:58] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists unless otherwise noted, and constitute judgments as of the date publish. Such information may contain forward-looking statements are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacists.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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YFP 313: 4 Reasons Your Financial Planner Should Manage Your Investments

Posted on June 22, 2023October 5, 2023 by Tim U

Tim Baker CFP®, RICP®, RLP® discusses the 4 reasons why your financial planner should manager you investments on this podcast episode sponsored by First Horizon.

Episode Summary

Financial planners often get a bad reputation because people either don’t trust them or they feel like planners are a waste of time — they could be doing the job themselves. So on today’s episode, sponsored by First Horizon, YFP’s Co-founder & Director of Financial Planning, Tim Baker is here to discuss the four reasons why having a financial planner is crucial for managing your investments. From our conversation, you’ll gain a better understanding of the type of accounts that a financial planner could manage on your behalf, what an Investment Policy Statement (IPS) is, and why it’s vital for your financial plan. Then, we dive into the 4 reasons why, if it is the right fit, having a financial planner manage your investments is a good idea. Spoiler alert…hiring a financial planner to beat the market didn’t make the list!

Key Points From the Episode

Introducing Tim Baker and today’s topic: Financial planners managing your investments
Taking a closer look at the investment accounts that a financial planner could manage for you.
What an investment policy statement (IPS) is and why it’s important.
How having a financial planner will save you time and bring you peace.
The importance of an integrated financial plan, and how a financial planner can help.
How a financial planner will ensure that don’t fall victim to behavioral mistakes and biases.
Using a planner to avoid technical mistakes, and the common technical errors that Tim sees.
Why the role of a financial planner is not necessarily to help you beat the markets.
What you can look forward to in the next episode.

Episode Highlights

“On my time off, on the weekends or whatever, I would rather pay a professional that knows what the hell they’re doing — they’ve done it, it’s not their first rodeo — than me waste a weekend.” — @TimBakerCFP [14:33]

“The more that you continue on and accumulate wealth; working with a coach [or] a planner is in line with that. The management of the investments and the stress of it should be delegated to someone else.” — @TimBakerCFP [15:31]

“If we don’t have the assets and the investment management integrated with the plan, it’s almost like we’re trying to fight with one hand tied behind our back.” — @TimBakerCFP [19:13]

“I often say that with investment, you often want to do the exact opposite of what you feel. But the statement that you have to make, even before you make that, is that investment is an emotional activity. It is. [And] a lot of that has to do with our aversion to loss.” — @TimBakerCFP [25:12]

“[Go] by the market, don’t try to beat the market, and the market will take care of you — if you invest in it consistently without bad behavior over long periods of time.” — @TimBakerCFP [36:46]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome YFP co-founder and Director of Financial Planning Tim Baker to talk about four reasons you should have your financial planner manage your investments. Spoiler alert, beating the market did not make the list. As a supplement to today’s episode, download our free checklist, “What Issues Should I Consider When Reviewing My Investments.” You can get a copy of that resource by visiting yourfinancialpharmacist.com/investmentreview. Again, that’s yourfinancialpharmacist.com/investmentreview.

Now, at YFP Planning, our team of fee-only certified financial planners pride themselves in helping clients manage their investments in a tax-efficient, low-fee manner. While that in and of itself is a win, that’s just one part of the financial plan. Our planning team that services more than 280 households in 40 plus states guides clients through the entirety of the financial plan, including retirement planning, debt management, wealth protection, and more. All centered around our philosophy of helping you live a rich life today and tomorrow. You can learn more about our one-on-one planning services while visiting yfpplanning.com. Again, that’s yfpplanning.com. Okay, let’s hear from today’s sponsor, First Horizon and then we’ll jump into my interview with Tim Baker.

[ADVERTISEMENT]

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[INTERVIEW]

[0:02:40] TU: Tim Baker, good to have you back on the show.

[0:02:42] TB: Good to be back, Tim. How’s it going?

[0:02:44] TU: It is going well. We’re going to be doing back-to-back episodes focused on managing investments. Next week, we’re going to talk about RMDs or required minimum distributions. We’re going to get in the weeds a little bit over the next two weeks, which I’m excited to do as we talk about some of the investing side of the financial plan. Tim, today we’re going to talk about four reasons you should have your financial planner manage your investments. Now, before we get into those four reasons, I want to make sure we’re all on the same page with what we mean by this. So, having your financial planner manage your investments. Talk about this at a high level, so we can have the right context throughout the show.

[0:03:23] TB: Yes. My attitudes have changed about this over time. Really, this is because of just working with pharmacists on their financial plans and just some of the things that we’ve come up against with regard to being effective and efficient with the financial plan. When we say we feel that your advisor, your planner should manage the investments, what we’re talking about are the investments that you’re managing, that you don’t necessarily need to. This means – these are things like your traditional IRA, your Roth IRA, your brokerage account, old 401(k)s, old 403(b), TSPS, 457 Plans. These are things that you’re not actively contributing to as part of like an entire employer-sponsored retirement plan.

What we found over the years, because I used to be more location agnostic, meaning, my viewpoint was, it didn’t really matter where it was. We either manage it or help your management. I think, in theory, that sounds nice. But in application, it’s not, it’s messy, there’s lots of hands in the cookie jar. There’s lots of moving pieces in regards to the financial plan that the investments are absolutely part of that. Our belief is that if there are held away assets, so held away are defined, you know, when advisors talking about this or assets that are not at their custodian. We use that YFP Planning, we use TD Ameritrade, which is recently merged with Charles Schwab. Schwab will be the predominant brand there. We feel that those client assets that can be managed by us, the advisor should be managed by us. We’ll get into a few reasons of why that is. That’s held away piece.

[0:05:25] TU: Let me give a for instance to define these just a little bit further, and hopefully put something that people can hook on to. Tim, if I, let’s say, I’m working with Kroger pharmacy right now, and I’ve been with them for five years, contributing to their 401(k). Then prior to that, I worked for, let’s say, CVS for five years. Once I left CVS, that money, I moved into a traditional IRA, let’s just say for that example. I’ve got $100,000 in an IRA, and then I’ve got this, let’s say, another $100,000 in my current employer, Kroger, with the 401(k).

When you say held away, that Kroger, my current employer count $100,000, would be a held away asset through my current employer and the contributions I’m making. When we talk about today, managing why you should have your financial planner manage your investments. We’re talking about that previous $100,000 that’s sitting in an IRA that maybe I’m self-managing right now, or it could be someone’s listening to another advisor that’s managing for it. But that’s a differentiation we’re making, correct?

[0:06:33] TB: Yes. You’re going to have held away accounts that some are going to be eligible to potentially be moved over for us to manage. That would be like the old employer, and then you’re going to have some that aren’t because you’re actively contributing to said account. Yes, that would be the distinction I would make.

[0:06:50] TU: Okay. An assumption I want to put out there before we get into the weeds here is that when we say why we believe your financial planner should manage your investments. The assumption we’re making is that that planner, from our perspective, best practice is, there’s a fee-only with a fiduciary responsibility. They have a really thoughtful approach to how they’re managing their investments, which would include an investment policy statement, an IPS, where you’re really spending time with the client to understand their goals, understand their risk tolerance. All of that is informing the direction that we’re taking with the investment. Let’s spend a moment just to break that down a little bit more in terms of what is an IPS, and why is that important? Obviously, the context here of fee-only as well.

[0:07:37] TB: Yes, IPS is not something that every advisor has or even employees. I think regulators like this because it’s kind of a set of instructions for them to see how they are managing client accounts. When I was in my first job in financial services, we didn’t have an investment policy statement. We knew, based on a risk tolerance assessment that we give them, that, “Hey, they’re conservative, or they’re a moderate, or they’re an aggressive investor,” but that was essentially it. We had it in their file that that was what they were, and then we try to match up their portfolios at such.

The way that we do it is, before we invest any dollars on behalf of our client, so let’s pretend that we moved that $100,000 over to a rollover IRA at TD Schwab for us to manage for the benefit of the client. Before we do anything with those dollars, we essentially go through a risk tolerance and questioning goals about the investments. And we issue an investment policy statement, so this is something that we send to a client via DocuSign. In the investment policy statement, it’s essentially an executive summary. What the purpose of the document is, and it’s really to outline investment goals, expectations, strategies, and responsibilities related to the portfolio? It’s to create reasonable objectives and guidelines in the investment of your assets.

We outline things like, what was your risk tolerance, what portfolio do we agree to, what is the asset allocation. Is it a moderate 60-40, or is it more aggressive 90-10, or an all-equity portfolio? What is that investment objective? Is it aggressive growth or growth with income? Are there any type of liquidity needs, any type of tax considerations that we should be aware of? What is the time horizon?

If Tim, you’re the client, and you have 25 years left to retire, then the time horizon is 20, 25 years. What type of accounts most of – a lot of our clients will have an IPS, an investment policy statement for retirement accounts, but they might have something that is related to a tax bomb or a more near-term goal. So we have a different asset allocation. We outline what are the duties and responsibilities of reporting. I think one of the fears that people have, if they’re having their advisor manage their asset is, I think they fear that the money’s not theirs. One of the things that I’ll say is that we don’t have necessarily access to the money. We trade the account, but I can’t go in there and say, “Hey, Tim, you move from this part of Ohio to this part of Ohio.” You have to do that yourself. Because they want to make sure that the chain of custody from where they’re sending account statements is not broken. We used to be able to do that recently.

It’s very, very much like we have very deliberate and specific responsibilities related to the portfolio, but we’re not – it’s not our piggy bank, which I think sometimes people get afraid about that. So, we do know the custodian does all the reporting with statements. We talk about what our responsibility is with rebalancing, how often we’re going to review the count if we take discretion or not. Then, part of our IPS is we outline the different positions that we’re in. So we go through what’s our large cap, or mid-cap, and all the different positions that we’re in related to the portfolio, what the allocation is, some nerdy stock analysis.

What parts of the world that we’re invested in, so whether that’s North America or Asia developing, Asia emerging, Latin America, what the bonds look like, so if they’re double A or single A, we show performance. We look back one, three, five years and show the annualized return, the risk, some charts. We’ll show what the income is on this portfolio. It’s a look back in terms of what the yield is, the stress test, which is a big thing. In the subprime mortgage crisis, this is how the portfolio would react, or when coronavirus happened, or the tech bubble? So, we show some of the stress testing on that. Then, the expense, which often is a huge driver in the overall ability for the portfolio to grow, what does the expense of the overall portfolio look like? That’s our north star, Tim. That’s the document that we use to trade and manage the portfolio as we go here.

[0:12:44] TU: I think that’s time really well spent, right? Because I think for folks, as you mentioned, especially I would say for people who have maybe not worked with an advisor before, who have gone through this type of process or experience where you have someone that is helping to manage your investments. This can feel scary, it can feel big, it can feel — at least as you hear, for the first time, a little bit like a black hole. I think when done well, and that’s the backdrop. We’re assuming as we go through these four points here today. When done well, as you just described in great detail, there’s a lot of time spent, a lot of thought, a lot of attention to make sure that there’s alignment and the decisions that are being made.

Obviously, that’s an important part of the trust process as you’re working with a financial planner, and that should be something that you feel good about, number one. And that you understand and make sure you understand as you’re reviewing those documents and having the conversations with the planner.

[0:13:34] TB: Yes, absolutely.

[0:13:34] TU: With that in mind, let’s talk through four reasons that we believe you should have your financial planner manage your investments. Tim, number one, perhaps most obvious on the list is saving time. I’m busy; I don’t have to worry about this, maybe less stress involved as well. Tell us more about this.

[0:13:50] TB: Yes, I definitely think it’s a time thing. Obviously, this is something that we often talk about, less is more. But I think having your hand on the wheel with regard to this is important. I probably even more so than time; it’s just the brain capacity, Tim. I think sometimes we often really undersell or overlooked fee, the things that drag on our mind that don’t necessarily need to. I always – we’ve kind of talked about how the two of us were not necessarily the most handy people in the world. Could I go out and learn basic plumbing and things like that? Yeah.

But I look at that as, like, on my time off, on the weekends or whatever, I would rather pay a professional that knows what the hell they’re doing; they’ve done it; it’s not their first rodeo. Than me waste a weekend, and either complete it at an hourly rate that is well below that than what I would make during my day job, or that it’s half done or not done. That’s the thing, is like –

[0:14:58] TU: With some curse words.

[0:14:59] TB: With a lot of curse words, and stress, and things like that. That’s just my mentality. I think that becomes more of a thing. The more you look at yourself as a professional as pharmacists should, right? To me, this is an area. We talked about this with small – it’s kind of a no-brainer with small business owners. The first thing that probably needs to go is bookkeeping. It’s one of those things, and I would say that the more that you continue on and accumulate wealth, this thing, working with a coach, a planner is in line with that. And the management of the investments and the stress of it should be delegated to someone else. Obviously, again, it assumes you trust the person, the team that you’re with, which is not something that I take lightly, or anyone takes take lightly. One on our team takes lightly.

One of the things that I really like about being a financial planner is that you’re in that position of trust, and I think pharmacists can relate to that. Again, not taking that lightly, I think is important. But just think about the convenience, and ease of management, paperwork that’s involved. I would love to be more paperless than we are now. We’re getting there. But it’s a slow go. But the ongoing account maintenance, rebalance, and other strategies that you’re going. If you can delegate that to others, I think that’s a huge time savings, but just a brain capacity savings. Then, I think you see this with people in the accumulation stage. But I think, even more so, retirees. I’ve joked about this with my dad, like when he retired, he was no longer doing his day job. He knew that I was, obviously, building out my business and I’m a financial planner.

It was almost like every time that we talked, we talked about the market. He almost preoccupied this, and it was almost a substitute for his job. His livelihood is very much connected to what the market is doing. But I think if you’re doing it correctly, you want to inoculate yourself as best you can. Those near-term ups and downs should not really affect your overall well-being. So to me, a lot of people miss the mark on that. I think that’s where a professional can help you as well.

[0:17:22] TU: Tim, that’s a really good example in terms of the retirement and the preoccupied nature of investments. It’s funny, my father, father-in-law, every time we visit, this comes up within 10 minutes prior. We’re talking about the markets and trends. I think it’s just human behavior that now you get more time available than you did, obviously, than when you’re working. But you’re thinking about things like distributions and strategies, especially if you’re DIY’ing this and not working with a planner.

The ups and downs of volatility, especially the period we’ve been in here the last couple of years that can weigh on you. I think having someone in your corner to help talk you through that, coach you through it, making sure that we’re sticking to the plan, and that we have accountability to stay to that plan, it’s important all the way throughout, but probably even more important than that time period, where you just have the time and it’s front and center top of mind.

[0:18:14] TB: Yes, and I probably should give my dad less of a hard time. He’s probably just trying to find ways to engage me and talk about my business and things like that. But I know for a lot of retirees, definitely one of the things that they talk about quite a bit.

[0:18:29] TU: Number two on our list is ensuring an integrated approach, that we’re not considering this in a silo. Something we talked about often on the show, Tim, that it’s really important we look across the entire financial plan. When we’re looking at investments, retirement planning, debt pay down, insurance, any part of the financial plan that we’re really looking in its entirety, and we’re not just focused on one part of the plan, perhaps at the expense of other parts. Tell us more here.

[0:18:58] TB: Yes. I think, just like we talked about systems of the body, everything’s interconnected. I think one of the things that we’ve learned over from my time at script financial and now, YFP Planning is that if we don’t have the assets and the investment management integrated with the plan, it’s almost like we’re trying to fight with one hand tied behind our back. What we’re really trying to do here see the full picture. We want to make sure that the investment philosophy and management of such assets is aligned with your goals and your life plan. I’m a big, big believer in purpose-based investments. Another buzzword. But what I often find with people that are coming in the door, even do-it-yourself investors is, I’ll say, obviously, Roth 401(k), a Roth IRA, a traditional IRA, we know that those are for retirement by and large.

But I’ll often will see brokerage accounts and accounts like that. I’m like, “What is this money for?” It’s like, “Well, I don’t know.” Why do we even have it? So really aligning and drawing clear lines of distinction between what this bucket of money is for and executing to that. But probably – so you have that, which is more broad to the overall financial plan, but then making sure there’s alignment with other technical areas of the plan. Whether that be debt, the tax situation, retirement. It could be estate and charitable given. All of those things are interconnected. I think if you don’t have eyes on our hands on that, again, it makes our job a lot easier. From the depth perspective, Tim, we know this with regard to PSLF, and non-PSLF, that these things are interconnected. Oftentimes, they are disconnected if they’re not managed, I think, by a QB, one person that is overseeing the plan.

We know that tax is another thing. Is there synergy with the financial plan and the tax plan? By and large, most advisors will say, “Hey, that’s a tax question, go talk to your accountant.” Which is like nails on a chalkboard for me. That’s one of the things that we do differently. We have YFP tax that works in concert with YFP planning. We have a CFP, that is your financial planner, that is working in tandem with a CPA, which is your tax accountant. Looking at things like, are we going to have a big refund? Are we going to owe a lot of taxes at the end of this year? What are the tax loss harvesting strategies as we get more advanced multi-year tax planning? It might be bunching for charitable giving.

We know that retirement and the investment strategy is intertwined. In the accumulation phase, which a lot of our clients are in, that simply bucket creation, so having the different buckets. But then, where are we putting different assets? A lot of people don’t think that probably in your Roth, you need your most appreciable assets, which might be small cap or emerging market. Should probably go there. Where do we put tax advantage accounts that are in the brokerage, or is that somewhere else?

Just knowing where to actually put the investments that you’re putting in that bucket is important in the accumulation stage, where a lot of people overlook that. Then in the deaccumulation, or the withdrawal strategy, whether you’re using a foreign strategy, a bucket strategy, a systemic withdrawal strategy. All of these have rules, Tim, that are clearly linked to the traditional portfolio, and how we either refill bucket one with bucket two or refill bucket two with bucket three. Or how we’re going to with inflation and the gains on the portfolio. How are we going to essentially send that paycheck to you in concert with social security in 2024? How do we create the floor? What are the tools that we’re going to use, and then how are we going to supplement from the investment strategy, and give those dollars to you in retirement?

Then, just overall, how do we manage the liquidity needs. There’s lots of things that happen in real-time. Over the course of many years, that if we’re managing through the client by proxy, is a is a challenge. We’ve had instances where clients will be upset because they’re trading their own accounts, and this is related to tax, and they’re generating lots of short-term capital gains. Then they’re upset with us because our projections are off. It’s like, “But we don’t have any visibility or vantage point of what you’re doing in these accounts that we’re not controlling or we’re not overseeing for you.”

It’s one of those things that, this is what we do. We do this for our clients across the board, and we think we do it well. So working in that way, I think, is important for us, and I think for the effectiveness of the overall financial plan.

[0:24:22] TU: Tim, I think for folks that are hearing some of these terms for the first time, when you talk about things like flooring, bucket tragedy, systemic withdrawal. We talked about this on episode 275 of the podcast, where we had a month-long series on retirement planning, and that episode specifically. We talk about how to build a retirement paycheck. I hope folks will check that episode out in more detail. That’s number two. Ensuring that we have an integrated approach. I think you explained that well, Tim. Number three, which is one that maybe our DIYers are going to get a hate, that we’re challenging this. But this is avoiding behavioral mistakes and biases. Tim, I tend to fall under this – I’ve come to appreciate where I need help. But perhaps, I’m over overconfidence, and really understanding the behavioral mistakes and the biases that we may fall victim to.

[0:25:11] TB: Yes, I often say that with investment, you often want to do the exact opposite of what you feel. But the statement that you have to make, even before you make that is that, investment is an emotional activity. It is. A lot of that has to do with our aversion to loss. Sometimes, it can be also chasing a big payoff if we’re doing things like chasing hot stocks. The market volatility, I think, really plays on our emotion. I always joke, like when the market took a downturn during the Corona Virus or during the subprime mortgage crisis. As you’re seeing your portfolio go from X to X minus 30%, 35%, you want to then take your investment ball and go home, Tim. It doesn’t feel good to see your balance get sawed off like that. But it often leads to bad behavior, and that’s typically where we’re doing things like selling low and buying high.

When we sell to avoid that pain, then we wait on the sideline and buy when the market seems like it’s returned to normal. All of that upside. Again, l think people don’t see this in themselves. I would say that, Tim, that this is true for advisors as well. It absolutely is. But I would say that, if you’re, again – I’ve talked about this, related to the any type of salary negotiation. The big disadvantage that you have as an employee of a company when you’re – or a prospective employee of a company is that you might have a dozen times during your life where you’re negotiating on your behalf with an employer. Whereas your counterpart, whether it’s a hiring manager, an HR manager, they might do it a dozen times in that week. You’re at a disadvantage just because of reps. I’m not saying that we as humans or as advisors, we don’t have these. It’s just that I think we’re more aware of it, and we try to mitigate that with the way that we build out our portfolios.

The behavior thing is huge, and that can be again, it can be chasing hot stocks, it can be trading too much, trying to time the market, which we talked about the buying high, and selling low. Ignoring diversification that’s another issue. Sometimes we see portfolios that are overloaded in tech stocks or one particular security or even act on unreasonable expectations. I still frequently we’ll talk to people who are super confident in their prowess as an investor. But they will say things that just are not in line with reality. Like, “Hey, within the next year, I really want to start making passive income off of my portfolio.” I’m like, “That’s not a real thing in any time in the near future.”

We have to be aware of our common biases, and I think a lot of the ones that you mentioned are things like overconfidence. I probably see that the most. Typically, that is more male than female. It’s just the reality of situation. But even things like hindsight bias, like, of course, the market went down, and this is why. Or herd mentality, or overreaction, these are all biases that I think that we don’t see in ourselves that really can affect our ability to grow our portfolios consistently over time.

We always cite Vanguard. Vanguard has done an advisor alpha study. Vanguard doesn’t have advisors. They’re kind of – they don’t necessarily have a horse in the race, but they basically said that an advisor can add 3% per year in return to your assets. Half of that Tim, 1.5%. I think it’s 2.9 or it might be three. But essentially half of that, Tim, is related to behavior. Paul Eichenberg, he talks about – he does manage some cash, or some investments himself. But he basically said, the core of his investments, what he talks about is, there’s a wall between him and his investments. It’s just so he doesn’t do anything foolish or crazy. That’s part of this as well, is sometimes, something – it’s the overreaction, something happens in the market and it’s like, part of our job is to say, “Hey, we’re okay here. Let’s continue to execute to the plan that we have in place.” The behavior and the emotion drives so much of this, and it can either be bad behavior or you can, again, delegate that out to help you with that.

[0:30:19] TU: Yes. I think, Tim, the time we’re in right now with the volatility, we talked about this a little while going in Episode 213 of investing considerations in a volatile market. But we are living at firsthand the ups and downs, the announcements from the Fed, the anticipation, the reaction to that, the inflation numbers. I mean, it’s just June, June, June. More than ever, I think there’s that risk of access to information volatility on top of that. Obviously, there can be some fear that’s layered on top of that, as well. All of a sudden, we’re feeling that edge to make a move, make some decisions, move our investments. Obviously, there’s tax considerations. There’s timing of the market; you talked about those considerations that can have a negative impact as well.

Great explanation there. Number three on the avoiding behavioral mistakes and biases. Number four probably the favorite of our team. Right, Tim? As it relates to clean these up, is avoiding some of the technical mistakes. You’ve talked about this at length on the show as it relates to backdoor Roth and some of the mistakes. I think one of the challenges here, and we even talk about this behind the scenes that we love putting out content and education. We do a lot of it. But as I often say, in presentations, one of my fears is that I’m oversimplifying information to try to explain and to do in a short period of time. And that someone may run, make some decisions, and maybe not have the full understanding. We just saw that, as we talked about some of the changes that are coming to tax laws and different things. We may not understand the whole picture. Talk to us about avoiding technical mistakes and some of the common ones that we see here.

[0:31:54] TB: Yes. I mean, it’s most base. Sometimes it’s just understanding what accounts that you have. I still hear investors that will say, “I have this mutual fund account.” I’m like, “Well, mutual fund isn’t an account, it’s a type of investment.” That’s very extreme. But then, understanding what are inside of those accounts, those investment accounts, which could be a mutual fund, an ETF, a stock. Again, this is not to – this is not to belittle anyone or make anyone feel bad. Again, I always joke that when I first got out of the Army, I was picking the investments for my 401(k). I looked at all 50 investment choices, or whatever, I’m like – Investing for Dummies, and I bought that book, and I read a few pages, and I’m like, “No, thanks,” and I just picked whatever.

This isn’t something that necessarily is – we know this, Tim. It’s not taught in school or anything. It’s not to make anybody feel bad. It’s just that – this is what we do. It could be the types of accounts that you have, what are in those accounts, transfer accounts wrong. Sometimes this happens where accounts are moved between custodians, and they’re not performed accurately, and that can cause a lot of problems. You have the hyper investor, so it can be someone that’s trading in and out of positions that’s triggered in short-term capital gains tax.

Then, we have issues with the tax bill at the end of the year or other things that are going on. I’ve seen portfolios that have 20, 30, 40 positions, and I’m like, “What the heck is going on? What are we doing? What is the goal of this?” Sometimes it’s just overheard a stock, or I heard this, and I just bought it. Yes, overconcentration. That’s a technical mistake. Is there too much cash in the accumulation, too little cash when you’re in the withdrawal stage?

But yes, one of the things that you’re talking about that, I think, is, again, we gloss over is just things related to backdoor Roth. Most of the people that we are working with are in that Roth IRA eligibility phase-out. So even us managing this as a team, it’s a project. It’s something that we have to be on top of. It’s difficult to do when you have to factor in phase-outs, pro rata rules, you have to look at other accounts that you have, the step transaction rule. There’s lots of things that go into that.

On the technical, I always joke like – kind of related, but unrelated, Tim. When I lived in Ohio the first time, there’s no way that I filed my own Ohio taxes correctly. This is impossible. There’s no way that I did it correctly because of the nuance there. Even some of this stuff is kind of in the same breath; it’s like there’s no way that if I had a similar savviness with regard to investments that I did back in the day, that I would be able to do this correctly without mistake.

There could be a mistake with RMDs for retirements, obviously fees and things like that that are less technical but more an awareness thing. So the list is long with regard to this. Again, what often happens is we read a blog or a podcast. Some say, “Hey, that’s really easy,” and then we do it. Then, the reality is that it’s much more nuanced than – it depends on your particular situation in terms of how to execute some of these strategies.

[0:35:31] TU: Tim, we just talked about four reasons that you should have your financial planner manage your investments. What’s not on the list perhaps is something that everyone is thinking about of, “Hey, I’m going to have my planner manage my investment so that I can beat the market. Isn’t that why I’m hiring you after all? Where’s that on the list?”

[0:35:49] TB: Yes. I mean, I think it’s not on there. I think the reason, Tim is that, in order to beat the market, in order to beat the S&P 500 consistently, and there’s still no guarantee of that, is that you have to spend so much time, effort, energy, and money to do that. They say, we look at the most active mutual fund managers out there. By and large, the research and the studies show that, though, that type of active management in an effort to beat the market does not pay off on a consistent basis.

The strategy that we employ that I feel like a lot of fee-only financial planners employ is more of a passive by the market, don’t try to beat the market, and the market will take care of you if you invest in it consistently without bad behavior over long periods of time. It’s more of a singles and doubles approach versus, “I’m going to hit a home run in 2023, and then strike out for the next three or four years, and then maybe the home run in 2026, 27.” It’s kind of the singles and doubles approach to invest in. And over time, I think that’s a good equation for success.

[0:37:13] TU: We’re going to talk more about that. We have an episode plan for the near future on passive versus active investing, so we’re going to dig into that a little bit more detail in the future. Tim Baker, great stuff. For those that are listening to this episode, and would like to talk with us about the financial planning services at YFP planning and what we offer. Obviously, we’ve talked about managing investment, just one part, an important part, but just one part of financial plan. We would love to have that conversation. You can book a free discovery call at yfpplanning.com. Again, that’s yfpplanning.com.

Whether you’re in the early stages of your career, in the middle of your career, nearing retirement, whether you have an advisor, you don’t have an advisor; we’d love to have a conversation to learn more about your situation so you can learn more about us and determine whether or not what we offer is a good fit. Again, book a free discovery call at yfpplanning.com. Tim Baker, great stuff, and looking forward to talking about R&Ds next week.

[0:38:06] TB: Thanks, Tim.

[END OF INTERVIEW]

[0:38:07] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single-family home or townhome for first time homebuyers and has no PMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan, and to get started with the pre-approval process, you can visit yourfinancialpharmacists.com/home-loan. Again, that’s yourfinancialpharmacists.com/home-loan. As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide, and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog post, and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacist unless otherwise noted, and constitute judgments as of the dates publish. Such information may contain forward-looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist podcast. Have a great rest of your week.

[END]

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YFP 312: Secrets About Financial Planners (and How to Feel Confident in Who You Partner With)

Posted on June 15, 2023June 12, 2023 by Tim U

Justin Woods, PharmD, MBA shares takeaways from 350 financial conversations with pharmacists looking to work with a financial planner.

Episode Summary

Navigating the world of financial advice can be a tricky thing. You’re often confronted with baffling jargon, an overwhelming amount of choice, and a lack of transparency, which will typically leave you feeling more confused than when you started. Here to help us unpack these topics today is YFP team member, Justin Woods, PharmD, MBA who has had over 350 financial conversations with pharmacists! We talk with Justin about why pharmacists tend to be skeptical when it comes to hiring a financial planner, the various terms and titles used in the financial services industry, and what outcomes you should expect as part of the financial planning process. Tuning in you’ll learn about key factors that hold people back from pursuing financial advice — like previous negative experiences — as well as an overview of how the financial services industry has changed over the years, and how this impacts clients. We also discuss key terms, like “fiduciary”, and how understanding their implications can help you navigate the industry, before unpacking the four factors of financial decision-making and how planning can help you live a rich and meaningful life.

Key Points From the Episode

We welcome back Justin Woods, PharmD, MBA Director Of Business Development at YFP.
Some of the reasons why pharmacists tend to be skeptical of financial advice.
How past negative experiences can prevent people from getting financial advice.
Why it can be so challenging to navigate the financial advisory market.
The concept of “fiduciary”, what the term means, and why it matters.
How the financial services industry has moved towards tailored advice.
Optimizing for a particular niche and the benefits and value that come with that.
The variety in the types of services on offer (and why it can be overwhelming).
What clients should expect from their financial advisors in terms of scope.
An overview of the four factors of financial decision-making: financial analysis, money scripts, emotions, and overall well-being.
The importance of being comfortable with raising questions with your advisor.
Establishing the ROI you expect from your financial plan.
An overview of the various fee models of financial advisors and what to be aware of.

Episode Highlights

“Most pharmacists I talk to have a difficult time really thinking about one person in their circle who works with a financial advisor.” — @justin_woods [0:05:41]

“[Fiduciary] is just a fancy term, right? But it basically means that it’s a person that you can trust with your life savings that is ethically bound to act in your best interest. So oftentimes, I compare it to taking the oath of a pharmacist that a lot of us did.” — @justin_woods [0:12:56]

“You want a particular outcome, but you may not be as concerned with how it’s done as long as you get there. And there is a lot of complicated financial jargon out there that oftentimes can scare people away or make them feel stupid.” — @justin_woods [0:27:05]

“I feel like pharmacists work so hard for this six-figure income and view it as the ultimate security in life. And what I see from pharmacists that I talk to is that the income alone doesn’t give you the freedom, flexibility, or time that a lot of people are looking for.” — @justin_woods [0:30:49]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] TU: Hey everybody, Tim Ulbrick here, and thank you for listening to The YFP Podcast, where each week, we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome back on to the show, YFP team member Justin Woods. During the show, Justin shares takeaways from over 350 conversations that he has had with pharmacists, looking to hire a financial planner.

Some of my favorite moments from the show include hearing why pharmacists are skeptical when it comes to hiring a financial planner, the various terms and titles used in the financial services industry, why fiduciary and fee-only matter, what outcomes to expect as a part of the financial planning process, and the various ways that financial planners get paid.

Whether or not you decide to work with our team of certified financial planners at YFP Planning. Our hope is this episode will give you the insights and information of what to look for when hiring a financial planner.

If you are interested in joining more than the 280 households in 40-plus states that work with YFP Planning for one-on-one financial planning and wealth management, you can book a free discovery call at yfpplanning.com. Whether you’re just getting started, in the middle of your career, or nearing retirement, our team is ready to help. Again, you can book a free discovery call at yfpplanning.com.

All right, let’s hear it from today’s sponsor, Pyrls and then we’ll jump into my interview with YFP Director of Business Development, Justin Woods.

[SPONSOR MESSAGE]

[0:01:26.6] JW: This is Justin Woods from the YFP team with a quick message before today’s show. If you’re tired of relying on shared passwords or spending hundreds of dollars for drug information, we’ve got great news for you. Today’s podcast sponsor, Pyrls, is changing the game for pharmacy professionals. Pyrls offer us top drug summaries, clinical teaching points, a drug interaction checker, calculators, and guideline reviews all in one user-friendly resource.

They also recently add free weekly quizzes to test your pharmacotherapy knowledge. Whether you’re on your web browser or accessing the mobile app, Pyrls has got you covered. Visit pyrls.com to get access to more than 25 free pharmacotherapy charge to get you started. Upgrade your drug information resources today with Pyrls, don’t miss out on this game-changing resource.

[INTERVIEW]

[0:02:21.8] TU: Justin, welcome back to the show.

[0:02:23.7] JW: Thanks for having me, Tim.

[0:02:24.8] TU: Excited to have you in this discussion that we have today. Also, an exciting time for you Justin, some of our listeners may know, many may not that you and Sarah, you have twins on the way, super exciting phase of life. How’s the preparation coming? I don’t know if you can be fully prepared but how are you feeling?

[0:02:42.4] JW: Yeah, we feel, I guess, mentally prepared, right? As two pharmacists, we want to plan for everything and so we’re just anticipating the arrival. My wife is 33 weeks pregnant right now. So I guess, on average, twins go to 38 weeks. So it could be any time now to be honest.

So yeah, we put the car seats in the minivan this morning, and yeah, exciting stuff around here, a very expensive season of life with daycare and whatnot but yeah, we are excited nonetheless.

[0:03:14.4] TU: You know, it’s funny, I was reflecting back. You know, I’ve talked about this, you know, as Jess and I had our four boys and you know that adjustment from one to two and then you go two to three, everyone says, “Hey, you go from man to man to zone defense.” You’re going right there, right? One to three so.

[0:03:26.6] JW: Yeah, we’re going right there, we’re going right there. So thankfully, our toddler who is two, a little bit over two, already knows that there are two babies on the way. She’s already been trying to be very helpful, so we’re hoping to bring her into the defensive scheme a little bit as well.

[0:03:42.2] TU: Yes, I love that, I love that. Well, it’s been a while since we had you on the podcast on episode 250, we talk about 10 takeaways that you had from 50 financial conversations with pharmacists, colleagues. We’ll link to that episode in the show notes and for today’s episode, we’re going to dig deeper into the now over 350 conversations that you’ve had with pharmacists and what you’ve learned, and why we struggle evaluating professional financial advice.

Why we struggle perhaps in choosing and hiring and evaluating a financial planner. Our goal being, Justin, that we can pull back the curtain on some of the secrets about financial planners so that our listeners can feel confident in who they partner with, whether that’s with us, we hope so, or whether that’s with someone else and certainly, that’s okay. We want them to be informed in that process.

So Justin, let’s start this off. One of the key takeaways that you’ve had, again in now over 350 conversations with pharmacists all across the country at all different phases of their career, which I too noticed early on in my experience building YFP is that pharmacists are skeptical when it comes to hiring a financial planner. That’s not to say a bad thing, right? Tell us more.

[0:04:54.2] JW: Yeah, it’s not a bad thing, right? But when I talk to pharmacists and I survey them to understand how they feel about financial advisory services they shared, we’re just confused about what advisors do, skeptical if they can actually trust them, right? That trust piece is huge or some folks who have actually regretted their decision to work with a particular advisor and oftentimes, when I tell people about the work our team does and the breadth and depth of the topics, the advice that we offer, they share, “Gosh, I didn’t know financial planning covers all of that” right?

And in my opinion, a major factor of that is that people often don’t talk about money with family, with friends or colleagues, and from that standpoint, it’s not talking about money, they’re probably not talking about their financial advisor either. So in most pharmacists I talk to have a difficult time really thinking about one person in their circle, right? Who works with a financial advisor.

In fact, in 2022, only 35% of Americans worked with a financial advisor, and a more interesting stat, is that a study done by AARP found that 45% of people would rather visit the dentist than make an appointment, an initial appointment to talk with a financial advisor and nothing against a dentist, right? Because my mom was actually a dental hygienist for about 35 years but people distrust financial services as an industry.

They don’t know how to choose or vet a good advisor and they don’t even know what an advisor does, right? So the other side too are folks who are in that pre-retirement phase is 74% of Americans have shared that they wish that they could get a financial planning do-over or set up a better financial situation. So there’s really that this gap between what people are afraid of, maybe because they don’t know enough about it, and what they wish they had done about in the first place too.

[0:06:46.4] TU: Yeah, that’s really – I mean, the visit to the dentist is fascinating, right? I think of you know, that process obviously. I love dentists too but not necessarily my favorite place to go and so I’m curious to pull this back a little bit further, Justin. From all these conversations you’ve had with pharmacists, why is this discomfort, this feeling, this, “Hey, I’d rather not do this at all or look at it” do you have a sense that it’s from maybe some that have had a previous experience that left a bad taste?

Is it influence of you know, maybe a parent or family or friends or others? Is it just this topic of personal finances you mentioned is one that especially if I’m maybe not exactly where I want to be that I don’t want necessarily someone, you know, making that worse or me feeling judged by where I’m at with my financial position, what’s the read you get on why the pharmacists you speak with maybe are even though they’ve taken that step, obviously, to meet with you or you wouldn’t have those conversations, still maybe not the most comfortable thing that they want to be doing?

[0:07:47.7] JW: Yeah, because there is a lot of confusion out there about what is a financial advisor and when most people think of financial advisor, they think of just the investment piece and realistically, that is only one piece. If you think about the term “financial advisor” technically, it’s just a generic term with no precise industry definition.

So this title can describe many different types of financial professionals like stock brokers, life insurance agents, tax preparers, investment managers, and financial planners. There are some estate planners and bankers who also may fall under this category as well. The only distinction is that this person has to provide guidance and advice.

If they just press a button and place trades for clients or simply prepare your tax return without providing that advice piece, they would technically not be a financial advisor and according to the Bureau of Labor Statistics, there are more financial advisors than pharmacists.

In fact, the job outlook for financial advisors has a growth of 15 per percent compared to 2% per pharmacist and these numbers alone show that the demand for people seeking professional advice about their situation and the number of options a pharmacist has when it comes to actually hiring a financial advisor.

So that process of vetting an adviser and find out where that best fit is that can feel overwhelming at the same time.

[0:09:15.8] TU: Yeah, I’m so glad you brought up the numerous titles that can be used. One is I often share with folks is you know, the term financial advisor or financial planner or wealth manager, whatever term you may see in and of itself isn’t really going to tell you a whole not about what this person does. We’ll talk about fees and how they charge and scope of services and all that.

Really, the ownership is on the consumer to understand you know, “What does that mean and are they qualified and are we a good fit?” we’ll talk about fiduciary and some of those responsibilities as well and I think because of that variety and because of that confusion, Justin, I suspect that that may be playing into not only the low percentages of folks that are engaging with advisor but also that feeling of like, “Uh, I’d rather just not engage.”

I do still think there’s a piece of, “Hey, maybe I had a bad previous experience that validated some of the concerns that I had” or maybe I have a family member, a parent, a relative, someone that’s saying like, “Hey, don’t work with an advisor” Because they had that experience that maybe was less than ideal, you know, themselves or as we talked about just a little while ago, I do think for some, especially if they’re in a position where they think, “Hey, maybe I should be progressing further than I have thus far.”

That you know, engaging with someone that is going to, you know, reinforce some of the opportunities of where things could be a little bit better could add on to some of those negative feelings and feelings of self-judgment that people may have as well. So lots to consider and unpack there and this reminds me, Justin, when Tim Church and I wrote the book Seven Figure Pharmacist.

We sat down to write this chapter and I kid you not, a chapter on evaluating a financial planner, understanding your financial planner, by far it was the chapter that took us the longest to write and had the most edits and revisions and it’s because of everything that we’re talking about. You know, there’s not a simple understanding of what these terms mean.

I think, more than anything, there’s some good questions that people can be asking to try to figure out more about, “What are the credentials, what does the scope of service look like, what does the fee, is this a good fit for me?” but you know, we’re used to the model of, we know what a PharmD means, right?

There are variances in educational programs but there’s a set of accreditation standards for good reasons when it moves to you know, the public understanding, what is a pharmacist, what does a registered pharmacist mean, what does a PharmD mean, there’s some level of consistency, right?

Same thing with the PGY1 accredited, PGY2 board certification and I think my experience and I suspect for many of our listeners, we adopt that mindset and we try to apply it to the financial services industry and it doesn’t work because there’s so many differences and nuances in this industry, and if we don’t do the homework and understanding a lot of what we’re talking about here today, I think that further validates that feeling of like, “Ugh, this is confusing.”

“I have this skeptical feeling, maybe this is a little bit you know, not ideal for what I’m looking for” or “Hey, I don’t mind paying a fee” is something I hear often but I just want to make sure that it’s transparent and I know that you know, this is a good investment that I’m making. So really good breakdown, Justin, of the titles and some of the concerns that are out there in the confusion of it. What about the concept, Justin, of fiduciary?

This is a common question that I get. I think we’ve made some end roads into this term becoming something that people are looking more for but there’s still a lot of confusion of like, what is a fiduciary, why does this matter and why isn’t everyone a fiduciary? It just seems like common sense.

[0:12:54.6] JW: Yeah, definitely, and it is just a fancy term, right? But it basically means that it’s a person that you can trust with your life savings that is ethically bound to act in your best interest. So oftentimes, I compare it to taking the oath of a pharmacist that a lot of us did, right? But if you partner within an investment broker, technically, they only follow a suitability standards.

So they believe that a recommendation of a transaction involving a stock or bond, right? It’s based on what the customer may disclose in connection with that recommendation. So they’re only looking at a piece of that person’s life or what that person has told them. So in most cases, those who follow suitability, they’re not required to collect as much information, data about you before they tell you what to invest your money in.

It’s kind of like a pharmacist only reviewing half of a patient’s medication list before making a recommendation, right? I actually met with a pharmacist last week who said that she asked her financial advisor if he was fiduciary and he replied with, “I always do what’s best for you” and that may be true, right?

There are a lot of good financial advisors out there but being fiduciary, right? Had taken that oath, demonstrates a level of commitment and transparency that the advisor is held to that standard at that standard at the same time.

[0:14:19.5] TU: Yeah, that’s a good call, Justin, right? Just because someone is not a fiduciary or something we’re biased toward and obviously not a fee-only advisor, meaning that you know, in a fee-only model, you are compensating the advisor for the advice that you – they are giving you, they’re not getting paid by recommendations of insurance products, your investment where they’re essentially getting a kickback.

You know so we use these terms, fee-only and fiduciary but just because someone is not fee-only or fiduciary, it doesn’t mean that they’re incompetent. It doesn’t mean that they’re a bad person. It really means that “Hey, we got to do a little bit more homework to line up.”

Well, why aren’t they a fiduciary, why aren’t they fee only and what implications may that have to me and my financial plan, and is that the best option or not in terms of engaging or working with someone in that area? So I think it is a really important concept, John Oliver, Justin, has a great segment.

[0:15:08.2] JW: He does. Yeah, I’ve watched that a few times, it’s funny.

[0:15:10.4] TU: Great segment on fiduciary and suitability if you want to learn more about this. The example I always give Justin, when I present in this topic is that if I’m going to buy a suit, right? And I got to two different suit shops, one is providing suits under a suitability standard, if we play this out, one is under a fiduciary standard.

I like a nice slim-fit suit, right? That’s appropriate for the width of my shoulders, my arms, my leg, overall physique and so if I go to the fiduciary shop and I say, “Hey, these are my measurements, they’re going to do the work and they’re going to get me a nice fitting to that is the best. It’s the best fit for me and my personal situation” that’s the comparison to the fiduciary standard of the financial plan.

If I go to the suitability standard suit shop, you know maybe they don’t take the right measurements or they don’t have to do all of that analysis. Maybe I’ll leave with a little bit of a baggy suit, right? Too long, doesn’t get tailored. It’s not terrible, maybe it is on some level. You can argue it’s appropriate but it’s not necessarily the best fit, right? Or the best option for me and that comes to play exactly in the financial plan.

Whether you’re working on, you know, retirement planning or other parts of the financial plan, you know we really want to make sure that as you are evaluating, are all parts of the plan that that fiduciary is really looking at what is the best option for you and your personal situation. So a fun example and I think, you know, to draw this to pharmacy.

Like could you imagine walking into some pharmacies, Justin, whether the pharmacist was you know, obligated to do all of these things whereas in some cases, you know and the other that they only have to do half of the DUR. It just doesn’t make sense, right? As we think about drawing lines.

[0:16:45.8] JW: Right, exactly, exactly, and Tim, to tie off your analogy a little bit, imagine if you were to go into that fiduciary suit shop and that suit shop only worked with pharmacists or people of your body type and height and I think that gets to what the financial planning industry has molded it into is this focus on niche or niche. We can debate that term too, but the financial advice industry for a long time was predominantly transaction-based, where the advisers earned a living solely from those commissions that they earn on whatever product that they sold.

So there was really no need to meet with those clients until there was an opportunity to implement a product, say like life insurance for example. So it was essentially for advisors to be as broad in their messaging and marketing as possible, right? To cast a really large net to reach anyone with a pulse who might buy that product but then in the last decade, we’ve really seen a movement to provide tailored advice and it’s a really caught on, where you developed a unique expertise for working with those clients and the problems that they face and that in turn, leads to development of services and scope and a business model that really fits a client for their need.

So for example, obviously I’m biased because I’m a pharmacist but if I was asked to recommend a treatment regimen for like Osteomyelitis in an adult, right? I could spend hours researching that topic and hopefully feel confident in my decision or I could just call a friend, who is a PGI2-trained infectious disease pharmacist who has that experience, who has that knowledge to help me feel confident in the solution for that patient specifically.

So that’s kind of where I feel the benefit or the optimization of that niche comes in. Obviously, that perspective is biased too since our financial planning team, we primarily work with pharmacists like us.

[0:18:52.5] TU: Yeah, it’s a really important point though, Justin. Someone recently was kind of challenging this concept on LinkedIn a few weeks ago and I really started to think more deeply about it. Obviously, it’s the bread and butter of what we do and the more I think about it, the more I even firmly believe in the value of the niche and this individual is really, you know, kind of arguing against like, “Why is there a need to really differentiate financial planning services for healthcare professionals?” or more specifically, in what we do with pharmacists and we see very specific examples of this on a weekly basis.

There is value in repetition here. We have a planning team of five CFPs that work with you know, return on 80 households all across the country and you know some of the things that come up over and over again like, “Hey, I’m working on a student loan forgiveness plan and I’m working with a nonprofit hospital.” “Oh, by the way, we’ve had you know, 15, 20, 30 other people that are navigating this” maybe not that same employer, although we do have some of that overlap with institutions like the VA for example.

But we’ve been down this path, we’ve crossed these T’s, dotted the I’s, we’ve seen where the bumps are along the road or even just more generally in some of the trends that we see of pharmacist in terms of income and barriers and challenges and you know, where they’re at, at certain points of net worth throughout their career. I mean, all of these things compound over time with some of the experience and I do think that there’s a lot of value that can come from the niche.

[0:20:21.4] JW: Yeah.

[0:20:23.0] TU: Variety also comes Justin, in the types of services that are offered. This is one that I think gets overlooked so often. You have these conversations way more than I but it feels like there’s this general assumption that like, “Hey, I’m looking at three financial planners” and not necessarily asking the question to understand, “What does that relationship actually look like? Who are the clients that they work with? Are they like me?”

Do they have experience in these areas? So I’m really referring here to the financial planning process and what a client can or cannot expect in terms of scope of service and there are wide variances here. Tell us more.

[0:21:02.7] JW: Yeah and I first want to start with an example that I had last week, I’ve gotten on a call with a pharmacist from Ohio, and right out of the gate, she kind of asked us about our fees and I was very transparent that if you’re only evaluating based on fees of cost, it’s going to be a raise to the bottom because our financial planning model is not the “cheapest out there” but you really have to advocate for yourself and understand, “Okay, does the scope of the service, does the process that this team or this person offer, does that fit me exactly?” and pharmacists want that structure and the financial planning process provides that too.

So it really starts with collecting all of your data and talking with clients that understand your financial situation. So through that conversation with a planner, they can map out both the short and long-term personal and financial goals. So if you look at my financial plan, it certainly has all the big things like retirement and paying off our student loans that are still there but it’s got other things too like going to Disney every year, right?

My wife and I want to do a trip to Africa for our 10-year anniversary, it’s got our beach home in there. So it is really establishing, okay, a road map of where all your goals fit in and then how do we use your income or money as a tool to reach those outcomes at the same time. So it’s kind of a traditional soap note, where the CFP professional, right? Your financial planner will look at this objective, the objective, then they’ll develop that assessment and plan to maximize the potential, the probability that you will reach those goals and achieve those outcomes.

So they often support you put the plan into motion and then monitoring some financial lab value, so to speak, to really understand that progress and making financial decisions, that can be broken down into the interplay about four factors that often aren’t talked about. So there’s the financial analysis, there’s the money scripts, there’s emotions, and there’s the overall well-being too.

And unfortunately, financial analysis has been viewed for too long as the overriding predominant factor in making a good decision but if we boil every decision down to a cost-benefit analysis without giving it the proper – consider the other factors, then we’re doing a disservice to our clients too. So without understanding the money scripts, you know we can’t really understand the client’s beliefs and values in financial decision-making.

An example of that is, you know, some of our clients have student loans and so often times that may come up in a conversation. I had one pharmacist couple who shared that their partner had been in a life-threatening accident. So that really changed their perspective on what they found meaning on in life and they really didn’t care about the student loans. They didn’t care about the math around interest.

They just want to pay the minimum amount and live their life now too. So it is all about working with somebody who understands what that process is and can really help you balance those personal and financial goals at the same time.

[0:24:17.3] TU: Yeah and Justin, the more I experience, you know, for Justin and I and our family and our financial plan, I feel like with each passing year there is a greater and greater appreciation for less about the math, more about the emotions, more about the goals, more about the behavior and I think part of this might be some overconfidence. You know, I even had that I would say early in my career of like, “I’m good with math, I can punch a bunch of numbers.”

But executing on the financial plan versus just developing one or two very, very different things and I think this is such an important part as you’re evaluating different services. You know I think that many pharmacists, myself included, we’re analytical human beings. We see service, we see price, we compare, those often are not apples to apples as you’re looking because of what we’ve been talking about here throughout the episode.

So you really have to pull back the onion of, “You know, what is the scope of service? What is the fees that are being here? What are they going to cover, what are they not going to cover?” you know? Do they typically work with individuals that are working through the challenges that I have in my financial plan? You know, if I have USD 200,000 student loan debt, you know most firms may not work with individuals that are early on their credit.

Do they even know some of the nuances on student loan repayment? So I think there’s an appreciation that’s happening that to your point, much of the history around the planning relationship is focused on the math on the analytical side I think because of the evolution of FinTech. We’re seeing some of that become more of a commodity and I think that’s going to lead to more of a value of the relationship and really looking holistically at the plan.

The things that you mentioned are what ultimately we hear from people about success and living a rich life, right? The trip to Africa, the beach home, the going to Disney every year, like if you and Sarah wake up and because you had a really good analytical math person doing the planning and you have USD 3.5 million saved but you haven’t lived a rich life, who cares, right?

[0:26:12.5] JW: Right.

[0:26:13.0] TU: So I think that as individuals are looking at option A versus B versus C, what’s the scope, what’s the price, what are the expectations, do they have my best interest in mind, how often are we going to be meeting? These are the types of things that we want to be evaluating.

[0:26:27.8] JW: Yeah, yeah. I think pharmacists, myself include the way that we are trained, the way that we think. We often get focused in on the mechanism action or the process in ensuring that the process itself will help us achieve those outcomes. When we think about it from our profession, so the general public oftentimes does not have an understanding of how the drugs that they take work nor do many of them care, right?

But they have confidence in their doctor and their pharmacist who give them advice, education, recommendations as well. I feel like it’s the same thing when you consider financial advice, right? You want a particular outcome but you may not be as concerned with how it’s done as long as you get there. And there is a lot of complicated financial jargon out there that oftentimes can scare people away or make them feel stupid too.

I was actually speaking with two pharmacists last week from Kansas and they shared how they’re trying to balance their personal and professional life, acknowledge that they are not confident about their financial literacy or what they know. So they shared, they were really looking for somebody who could educate them, help them understand their financial situation to feel more in charge, take control, and just give them peace of mind of where they might end up.

I felt like the husband brought a really good analogy there, he went on to show that as a pharmacist, he doesn’t jump into a conversation with a patient about the Pharma Co. connects of Vanco, right? But I feel like many financial, traditional financial advisors do that exact thing where they show you some fancy charts and graphs to make it just feel confusing, to justify their value over time but if you currently work with an advisor, right?

Are you comfortable telling them you don’t understand something and asking questions because I’ve heard this exact scenario from my sister in fact, where she doesn’t feel comfortable saying she doesn’t know something with her adviser. So as you said, it is a lot about that, that relationship piece.

[0:28:34.1] TU: Yeah and I think that’s a great example. You know, that couple you mentioned, you know just last week, I heard things like peace of mind, I heard making sure that we have our goals defined. I heard comfortable in terms of financial knowledge and literacy, which is interesting because I think those are some of the greatest outcomes that come from the relationship but they also aren’t necessarily the ones that we look at and say, “Hey, we can punch this in a calculator and determine the ROI” right?

[0:28:59.2] JW: Yeah.

[0:28:59.5] TU: So this is where I think you feel as a buyer, as someone who is evaluating financial planner is a common question, Justin, I’m sure you get is like, “What’s the ROI?” right? “I’m going to invest X and what am I going to get?” and I actually think the better we’re doing on the planning relationship, you talk about living the rich life with the Africa trips, the Disney trips, you know what you guys are doing as family experiences, putting a dollar amount to the joy in living a rich life, we know what that feels like.

But to answer the ROI question, that’s not an easy one and perhaps, maybe not even a good fit if that’s the focus.

[0:29:33.8] JW: Right, exactly. I actually spoke with a pharmacist recently who shared that his expectation working with a financial planner was that our team would return a hundred bucks for every dollar that he paid to work with us and I try to think about that if a patient had come to a pharmacist like that. So imagine if a patient has said, “I expect this medication to reduce my A1C by five percentage points” right?

In reality, there’s so many other factors like compliance, adherence, diet, exercise, access for building too that would be impossible to quantify the exact ROI there too. So what the pharmacist asked, “Okay, if we lower your A1C by five percentage points, what would that actually do for you?” right? I think for most patients, it would help them, one, feel a lot better, right? Less fatigue so that they can keep up with their grandkids at the playground.

Maybe more time, right? Maybe you avoid some microvascular complications that don’t derail your ability to drive across the country in an RV, right? Or maybe prevent a major heart event that allowed you to live longer too. So I feel like pharmacists work so hard for this six-figure income and view it as the ultimate security in life and what I see from pharmacists that I talk to is that the income alone doesn’t give you the freedom, flexibility, or time that a lot of people are looking for.

[0:31:05.8] TU: You can see this. You again, do a lot more of these discovery calls, talking with colleagues across the country that are looking for hiring a financial planner. You see this more than I but I recall many of these conversations where you can in real-time see and feel kind of the split-brain feeling of like, “You know emotionally, these are the things that mean, are most important to me” right?

The peace of mind, the security, making sure I’ve got a good plan, perhaps on the same page with the spouse or partner, and we know that those are very difficult to quantify but then are buyer mode goes on. It’s like, “Okay if I am going to spend X, what’s the return and why?” and so I think this is a hard thing to reconcile but it is an important one for obviously someone to feel good about moving forward.

I think for the expectations from a planning relationship, you know we always say that Justin, sometimes we can move forward with us. We don’t want them coming on board and having buyer’s remorse. That’s not a good fit for them, that is not a good fit for us. So the discovery process, the evaluation when done well and I think this is good advice whether someone’s looking to work for us or with someone else is that you want to feel good about that relationship on both sides.

So if someone is expecting a 101 ROI and you know, we kind of navigate that and we move it forward, guess what? In two or three months, we’re probably going to realize this isn’t a good fit and so I think establishing that upfront is really valuable. Fees, Justin, let’s save the best for last, right? So much variety here when it comes to fees and what someone is paying. Often we hear from folks that, “Hey, I am not paying anything.”

We’re like, “Well, not so fast” so sometimes, this is transparent, sometimes it’s not. So what have you learned in terms of the various fee models that are out there and the expectations that clients have for how they’re compensating a planner for their advice?

[0:32:48.3] JW: Yeah and this is the one question that not many people can answer, right? How do advisers get paid? I say that from experience because my first four to five years of working with an adviser, I had very little understanding of the fee structure, how much I paid, and from you know, 350 conversations with pharmacists, they have a very similar perspective as well. I believe it speaks to the industry as a whole, right?

They are not very transparent about fees, which can certainly add to that feeling of distrust and being skeptical too. So if you’re listening to this podcast, you currently work with an adviser and don’t feel you pay anything, right? That should be a red flag, to ask more questions and be an advocate for yourself to make sure it is a worthwhile investment and if you are working with a financial adviser, there is no such thing as free advice.

So financial advisers typically fall into one of three different payment models, right? There’s commission, there is commission and a fee model, typically it’s called fee-based, and then finally, fee only. So both commission and fee-based, they receive compensation based on specific financial products that they sell you. It could be insurance products, annuities, investment options too like mutual funds.

Fee-only though, those financial planners are compensated directly by their clients for advice, planned implementation, and that ongoing management of all of the assets but I feel like oftentimes people just stop there but that’s not all because if you’re not informed and educated, there are other fees that you may not consider and I learned this the hard way. So in a commission-based model, there are fees tied to the sale and ongoing management of a product too.

So it could be life insurance or disability insurance too, there are things like transaction fees, periodic charges, annual operating expenses. When you look at things like mutual funds, there are often sales charges, also known as sales loads, those are commissions you pay when you invest in a mutual fund. So there are also expense ratios too, so when a lot of folks come to me and say, “Hey, I’m paying X amount for my adviser” oftentimes those do not include those additional expenses like the sales loads, the expense ratios as well.

An example that I had, it is a pharmacist who is working with an adviser, asked that adviser, “What are your fees or how can I understand this a little bit better?” and that adviser replied with emailing them a 46-page document talking about –

[0:35:35.5] TU: I’ve seen those, I’ve seen that.

[0:35:37.0] JW: Exactly, exactly and I feel like you know, seeing a document like that is just kind of praying and hoping that your client won’t read that because I often wonder if the adviser themselves can even explain what their fees are.

[0:35:51.9] TU: Yeah, we talked about this Justin, Tim and I in episode 208 of the podcast, we broke down some of the fees on investments, why that’s so important. You talked about a handful of them. I think the transparency piece here is so important not only for understanding but also again what I shared just a few moments ago, you want to feel good about this relationship, and you know we’re not shy about charging fees.

We feel like our planning team provides a ton of value and the return on investment is much more than the fees that are paid by the client and we’re proud that those are transparent and if we get to that point through transparency and we determine, “Hey, it’s not a good fit because of X, Y, or Z” so be it, right? But the transparency is there and again, whether we’re the solution or someone is looking at hiring another adviser, I think feeling good about that decision.

Feeling good that you know and understand the fees and I think the separation piece is a really important one. So you know, if you’re in a planning relationship where we hear this all the time, “Hey, I’m not paying anything for financial planning, it’s free financial planning but I just bought a whole life insurance, I had a commission associated with it” right? So there is a natural inherent bias in the advice that is being given.

It doesn’t mean again, that they’re a bad person, it doesn’t mean that they’re incompetent but where does the incentive lie for them to be spending your time? Not on comprehensive financial planning, not on your student loans, not about setting your life goals and making sure we’re on track with living a rich life both today and tomorrow. It is about spending time where the dollars are going to be earned. And in that model, it’s selling a product.

That’s one of the things I love about the fee-only models that you’re paying the planner for the advice that they are giving and sometimes that means you are working on traditional things, like investments or retirement planning. Sometimes that means you’re getting in the weeds on student plans or budgeting or buying a home or buying an investment property or working through a difficult conversation with a spouse and getting on the same page.

Talking to mom and dad about finances, teaching your kids about it. I mean, all of these things are important parts of the financial plan but they’re not traditionally incentivized where an adviser is going to spend time on those things if they’re going to be compensated through recommending a certain product.

[0:38:04.4] JW: Exactly, exactly, yeah.

[0:38:06.6] TU: Great stuff, Justin, it’s hard to believe it’s been over 350 conversations. That’s pretty wild, right? When you come back to that.

[0:38:12.7] JW: Yeah. Yeah, I had to look at that number before we jumped on but yeah, 353 as of today.

[0:38:20.0] TU: That’s awesome. That’s awesome. So for those that are listening, if you want to learn more about the comprehensive financial planning and wealth management services that we offer through the amazing team at YFP Planning, our five CFPs, and the folks that support them as well, you can book a free discovery call with Justin. We’ll link to that in the show notes, which is the direct link to his calendar.

You can also go to yfpplanning.com and get to that as well. Again, that discovery call process, that conversation is all about understanding what are the goals, what are the things that you are facing in your financial situation right now. More than anything, Justin is going to be asking good questions, listening, sharing more about the services, and trying to identify “Is it a good fit with what we offer or is it not?”

So it truly is meant to be the discovery in nature, there is no obligation through that process, and again, yfpplanning.com or you can book directly to Justin’s calendar. We’ll link to that in the show notes.

[0:39:12.5] JW: And Tim, I would just add one more thing there if there’s time, is that you know through our conversation, we’ve really only scratched the surface on a couple of these topics. So if somebody is still feeling pretty skeptical like confused about this, I do have an on-demand webinar that I recorded with all of my learnings from these conversations, my own experience too that goes into a lot more depth about the various topics like scope and fees and whatnot.

I feel like for a lot of folks, I think there’s been 60 people who have watched that so far. It really helps them understand and feel empowered about evaluating financial advice if it works for them or not. So that’s typically a really good first step if you are still a little bit uncomfortable.

[0:39:58.1] TU: Awesome, we will link to that webinar in the show notes so folks can access that as well. Justin, thanks so much.

[0:40:04.3] JW: Thanks, Tim.

[END OF INTERVIEW]

[0:40:05.6] JW: Hey, this is Justin again from the YFP team. Thanks for tuning in to today’s podcast. If you’re a pharmacy professional, you know how crucial it is to have access to reliable drug information. That’s why we’re excited to tell you about Pyrls, today’s podcast sponsor. Gone are the days spending hundreds of dollars for access to drug information, Pyrls offer top drug summaries, clinical teaching points, a drug interaction check or calculators, and guideline reviews all in a user-friendly resource.

Whether you prefer accessing information to your web browser or Chrome extension or mobile app, Pyrls has got you covered. Plus, for a limited time, you can visit pyrls.com to get access to more than 25 free pharmacotherapy charge to get you started. Upgrade your drug information resource today with Pyrls. Visit pyrls.com, that’s pyrls.com to learn more. Thanks again for listening.

[DISCLAIMER]

[0:40:58.7] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 310: Dusting Off Your Estate Plan

Posted on June 1, 2023May 30, 2023 by Tim U

Tim Baker CFP®, RICP®, RLP® discusses the significance of the estate plan, what it includes, and 3 action steps you can take to button up your estate plan.

Episode Summary

On this week’s episode of the YFP Podcast, we tackle getting your estate plan buttoned up. We’re joined by Tim Baker, CFP®, RICP®, RLP®, Co-Founder of Your Financial Pharmacist, to talk about estate plan preparations. We go through why it’s important to plan your estate, what an estate plan includes, and what happens if you do not have one in place. Tim then shares his thoughts and insights on three action areas; documentation, beneficiaries, and legacy folders.

Key Points From the Episode

Tim shares some statistics related to estate plan documentation and preparations.
Why it’s important to have your estate plan.
Tim defines what exactly an estate plan is and what it includes.
Tim explains what happens if you do not have an estate plan in place.
Who needs an estate plan.
The objectives of having an estate plan.
We dive into three action areas; documentation, beneficiaries, and legacy folders.
Why having things in order makes life and estate planning easier.
How they tackle the estate plan as part of the YFP Planning financial planning process: The First Five.

Episode Highlights

“[The estate plan] it’s one of those things that a lot of people have a blind spot for — [we] don’t like to think about our death or our income or [of] being incapacitated, essentially, which is what the estate plan tries to solve.” — @TimBakerCFP [0:04:48]

“At the end of the day, [an estate plan] is peace of mind in making sure that your loved ones are cared for in a way that is in line with your wishes.” — @TimBakerCFP [0:10:52]

“What the legacy folder is meant to be is that gathering place of all of the things that are important related to this topic. The estate plan documents, life insurance policies, trust documents, and tax returns.” — @TimBakerCFP [0:19:02]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00] TU: Hey, everybody. Tim Ulbrich here. Thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week Tim Baker and I tackle an important and often overlooked part of the financial plan and that’s the estate plan. We get it. It’s not fun to think about end-of-life preparations, so we keep this one short and sweet. Covering what documents you need in place, why it’s important to check your beneficiaries, and why you should create a legacy folder if you don’t already have one.

At YFP planning our team of certified financial planners is ready to help you on your path towards achieving financial freedom. Yes, financial freedom includes ensuring you have your estate plan buttoned up. If you’re interested in joining more than 280 households in 40-plus states that work with YFP planning for one-on-one financial planning and wealth management, you can book a free discovery call at yfpplanning.com.

Whether you’re just getting started in the middle of your career or nearing retirement our team is ready to help. Whether or not YFP Planning’s financial planning services are a good fit for you, you know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom. All right. Let’s hear from today’s sponsor the American Pharmacists Association and then we’ll jump into my interview with YFP Co-Founder and Director of Financial Planning, Tim Baker.

[EPISODE]

[0:01:19] TU: Today’s episode of the Your Financial Pharmacists Podcast is brought to you by the American Pharmacists Association. APHA has partnered with Your Financial Pharmacists to deliver personalized financial education benefits for APHA members. Throughout the year APHA will be hosting a number of exclusive webinars covering topics like student loan debt payoff strategies, home-buying investing, insurance needs, and much more.

Join APHA now to gain premier access to these educational resources and to receive discounts on YFP products and services. You can join APHA at a 25% discount by visiting pharmacists.com/join and using the coupon code YFP. Again, that’s pharmacists.com/join and using the coupon code YFP.

Tim Baker, welcome back to the show.

[0:02:08] TB: Yeah. Good to be here Tim. How’s it going? It is going, I’m excited for today’s discussion which we’re going to keep somewhat brief knowing that the talk around end-of-life planning is admittedly not the most exciting or uplifting topic. We’re going to be talking about exactly that dusting off the estate plan, making sure we take a minute to take stock of where we are at with these important documents.

Tim, perhaps we have some people that are listening where it’s a chance to revisit the work that they’ve already done and to make sure those documents are up to date whereas for others it’s maybe just a point to get started. We’re going to cover some of the basics, obviously, this is not legal advice. We’re not attorneys but it is certainly an important part of the financial plan.

Tim Baker, I think building off of what I just said I would expect that there are some gaps here as it relates to estate planning for some that again similar to insurance, not a really fun topic to think about let alone execute on, but the data really is eye-opening in terms of just how big of a gap this is for many when it comes to their financial plan. Tell us more about that.

[0:03:17] TB: Yeah. There’s a stat out there Caring.com 2023 Wills and Estate Plan Study that said two out of three Americans do not have any type of a state plan document. I would say that with our work with clients, it’s probably more dire than that. I would say that nine out of ten, eight out of ten clients don’t have any type of documents in place. Now typically the further along you are in life, in your career the more dependents that you have or things that major life changes the more that that might force you to take stock, pause a little bit and say, “Hey, this is important,” But it is one of the major overlook components of a financial plan.

It’s important for anyone to have an estate plan, but I think it’s more important if you same thing with life insurance, Tim, if you have a house, a spouse, and mouths to feed. Now those are typically the things that trigger people to start thinking about this, but on the other side of the coin as you’re retiring and moving into that state of your life, it’s important to make sure that it’s there and you have updated information, you might start thinking more about legacy and charitable things that you need to sprinkle into your financial plan, your estate plan that is warranted to dust it off a bit. But yet, it’s just one of those things that a lot of people have a blind spot for, if you don’t like to think about our death or our income or being incapacitated, essentially which is what the estate plan tries to solve.

[0:05:01] TU: Tim, when I present on this topic, I always put a disclaimer out there that, hey, this is not as we’re talking right here, the most exciting part of the financial plan for obvious reasons and the timing of this is really good. I’m actually in the middle of this section of the plan with our lead planner from YFP planning Kelly Reddy-Heffner. I’ve got some outstanding tasks at dragging my feet on to go back and review some of these documents that we established several years ago and update the legacy folder. We’ll talk about that here in today’s session. Unlike other parts when we came off the section on looking at investments and updating our nest egg it’s like, I’m all in. Let’s do those calculations. Let’s get the work done, right? That’s fun. That’s exciting. We’re planning and thinking about the future.

This, not so much. I think, the data certainly shines a light on that, but it’s what we’re going to talk about here today such an important and often overlooked part of the financial plan that we want to make sure that as we’re building other parts of the plan that we’re playing a little bit of defense with the protection part as well. Tim, what exactly is in an estate plan before we get too far into the episode?

[0:06:06] TB: A lot of people when they hear state they think real estate, Tim, right? It’s not that. I mean, real estate could be part of your estate plan, but the estate plan is essentially the process of arranging in life the management disposal of your assets and property at death or even at in capacity. It’s really important. For a lot of people, the people that really value this type of work have either been burned by it themselves or have a family member who’ve been burned by it, but you really want to direct attention to this. It’s also a plan for health and property in the event that you are capacity like I mentioned.

If you are unable to pay your bills or you are unable to care for a child like, what happens? Unfortunately, if you don’t have an estate plan in place, the state in which you live in writes one for you in what’s called the probate process. Oftentimes, more often than not, you don’t want the state, you don’t want the government to basically say, “Hey this is what happens to your property. This is what happens to your kids.” You might have charitable intentions in your brain that are if they’re not written down in a will or something like that, it’s not going to happen. If these are things that are important to you which I think for most humans, making sure that I know who’s going to take care of my kids. We want to make sure that we’re working within a state attorney to do so.

[0:07:34] TU: Next question I have for you, Tim in terms of, who needs one? As folks are listening you mentioned this previously talked about the house, the spouse, the mouths to feed, but generally speaking as our listeners hear this discussion, who really needs to have this front and center part of the plan?

[0:07:50] TB: Yeah. I think if you’re not in that population of people. If I’m a single person and maybe I’m rented or whatever. It doesn’t mean that you don’t need an estate plan. If you want to make sure that you are directing medical decisions and things like that, you need a state plan and you need to go through that. We put the emphasis on this, because again at the end of the day, we don’t want the dependents that are there if you leave us to not have a proper plan, but that doesn’t necessarily diminish any type of healthcare or plan in need if you’re single and you don’t have dependents or things like that.

I would say, everyone. Everyone should have an estate plan. I think working with an attorney I think is the best in class. Obviously, attorneys cost money. There are a lot of solutions out there that are more DIY forms and things like that which are a little bit cringe for me. But yeah, if you’re in the population of you’re a human and you have a heartbeat, it’s just one thing you should at least consider and go down the path to evaluate if it’s for you.

[0:08:53] TU: We think about what we’re trying to address with the specific parts of the estate plan which we’ll get to here in a moment. I think peace of mind this is something that wherever you are in terms of the different phases and areas of life, knowing that you’ve shorted up this part of the plan. I would suspect that is one big part of the objectives of the estate plan, what else would you consider here?

[0:09:15] TB: Yeah. It’s peace of mind. Given a plan for your family for them to execute in terms of like, how you want to be cared for. How you want the property to be handled. All of that stuff. I think it is really an exercise in the efficient transfer of assets. What we’re really trying to do is minimize cost, so that could be things like taxes, probate, all the documents, all that stuff. Make sure that your stuff goes to the right person, so you hear horror stories of like, the life insurance policy goes to an ex, instead of like a current spouse. All that stuff is on the table.

Those are the objectives. Create a plan so than in the event, Tim, that you’re not here that you have a quarterback for someone that can make sure that property and healthcare decisions are taken care of. It doesn’t have to be the same person. These are typically through power attorneys and the kids are taken care of. Could be that you have a testimony trust that’s set up in the event that you and Jess are no longer here, so then the trust would be created for the benefit of the boys. All of that stuff.

It could be, part of the estate plan. It could be directions that you give directly to your doctor. That’s called the Living Will. That says, “Hey if I’m – I don’t want a breathing tube or I don’t want a feeding tube.” Those types of things. Every state’s going to be different. There’s lots of stuff to cover, but the objective, I think at the end of the day I would put at the top of the list is peace of mind. Peace of mind for you. Peace of mind for the family. The cost and all that stuff is important too, especially if you’re looking at larger estates.

[0:10:52] TU: Yeah.

[0:10:52] TB: But at the end of the day, it’s peace of mind in making sure that your loved ones are cared for in a way that is in line with your wishes.

[0:11:01] TU: This is one of those areas too, Tim, I see there can be momentum that comes from not only having this complete but also having the clarity and the peace of mind of the documents in place. It reminds me of some of the discussions we’ve had around, whether it’s doing an estate calculation as we plan for retirement, whether it’s figuring out how we’re going to tackle the student loans. Sometimes those numbers won’t change dramatically in the short term, but if we can have some of the peace of mind and the clarity around knowing that we’ve done some of the calculations, the evaluation. We’ve considered different factors and now we have a plan that we’re working towards. That momentum can be really powerful as we look at the financial plan at large.

I think the same thing here that this is one of those looming things of like, I know I should do it. I don’t really want to do it. There’s a lot to consider here. It’s overwhelming. It’s confusing. It’s not fun to think about. But once we can see through this and again not something that we just complete and put up on the shelf. We want to revisit this as well. Really, I think gives us a space to be able to move forward with other parts of the plan, as well.

[0:12:04] TB: Yeah. I feel like once this gets checked off it’s a little bit of like, all right like, we have more capacity to look at other things and be excited about some other things knowing that this is taking care of. Again, it’s not necessarily that we just throw it on the shelf and we never look at it, but for a lot of people just to get over that hump and having those documents in place is a big boulder to roll up the hill. Yeah, super important to get it in there. Then our job as planners is to dust it off every once in a while and say, “Hey, what does this look like? Are there changes that need to be made etc.?”

[0:12:41] TU: In terms of action items. Let’s talk about three areas that folks can think about. One would be getting the documents in place and we’ll do a quick mention of what those documents are. Again, the work to be done there really with an estate planning – estate planning attorney, ideally in collaboration with your financial planner. The second would be considerations around the beneficiaries. Then the third, we’ll talk about the legacy folder. Tim, as we move into action items here, number one get your documents in place. At a high level, what are the documents that folks should be considering?

[0:13:12] TB: Yeah. I’m just looking at the estate checklist that Shayna and I have in our financial planning portal, so I can just go through these.

[0:13:19] TU: Yeah.

[0:13:20] TB: Imagine a list on the left and then my name and Shay’s name on the top of the column. These are things like a will. Essentially, once you pass away the court in probate will read your will. Then if it’s a valid will, they’ll basically execute to that. Do you have a will in place? Power of attorney. Really, two types of power of attorney. There could be one for property. Basically, someone that’s going to take control of your bank account, your credit cards, your investment accounts. Either in the event that you’re incapacitated or at your death and figure out work with the courts to dispose of those or move those to the beneficiaries in an orderly fashion.

It could be a Living Will. A Living Will is those instructions that are made out to the doctor. Every state has a different term for it, but you would say, “Hey, do not resuscitate.” Any of these conditions. It could be a Living Trust. A Living Trust is essentially, where you are – if she and I had a – in some states, this makes a lot of sense, but if Shay and I decided to set up a Living Trust we would essentially, instead of our house being in our names it would be in the Baker family trust and all of those assets essentially avoid probate. The trustee in that moment would essentially take control of the trust and any assets that are inside of it whether it’s a house, an investment account, or whatever, the trustee is in charge of that.

It could be if you have kids, it could be like a testimony trust for the benefit of a minor, so some of those become in force or they’re created at one’s death. That would be another thing. Is just, there’s a trust, there are lots of different flavors of trust, but that would be another one that I would ask the attorney about to see if it’s in your best interest to create those. Then the last thing, if I didn’t mention this already is a check on beneficiary designations and get to that a little bit more, but those are the main documents.

[0:15:13] TU: Great overview. We also talked about this with two state plan attorneys, in Episode 222 of the YFP Podcast. We’ll link to that in the show note. We had a good conversation with Nathan and Notesong. I love the way they break down and explain these documents in a very easy, to understand way. Even as you’re engaging and working with an estate plan attorney again, I think it’s valuable to feel like you have some background knowledge and exactly what do these terms mean. That’s number one, get your documents in place. Tim, number two. You alluded to which is something that I’ve overlooked in days gone by. It’s really considering the beneficiaries, especially after you have some of these documents in place. What are the areas that we want to consider as it relates to the beneficiaries and why is this important?

[0:15:57] TB: Yeah. Again, looking at Shame and I’s financial planning, software here, we’re looking at the beneficiary rundown. It shows all of our different accounts from check-in, savings, CDs, investment accounts, our life insurance, and that type of thing. It basically, says like this is the account balance and then like, what’s the death benefit? Typically, if it’s like a cash account or investment, it’s the same. For a life insurance policy, it won’t have an account balance, but it’ll have – unless it’s permanent, but it’ll have a death benefit.

Account balance column, death benefit column. Then it has a primary and a contingent beneficiary. Essentially, if I were to pass away all of my stuff would essentially go to Shay. If we were to pass away, then all of our stuff would go to the contingent beneficiary, which might be direct to our kids or in a trust in the name that’s created for the kids’ benefit. Going through this exercise is really, really important, because again, you hear those horror stories of like this – my stuff didn’t go to the right person and that’s causing pain and additional pain and anguish to the surviving heirs.

Having a checklist to go through and make sure that things go to the right people is really, really important. If you haven’t done that in a while, it’s important to do so and a lot of people don’t have a beneficiary set up. If that’s the case, then that goes through probate. If there isn’t a beneficiary that IRA for example goes right to Shay or goes right to the trust and that is good, because it avoids probate and you don’t have to worry about that in court. That’s a really important thing to make sure that you’re on top of.

[0:17:46] TU: Yeah. I think the thing that might get overlooked here, Tim, is maybe someone has a spouse where on an IRA or on a life insurance policy whatever it may be where before they set up some of their state planning documents. It might be the spouse and vice versa that are listed as a beneficiary and depending on how they set up the trust in the estate planning documents, they may need to switch some of that over time.

Again, I think it just speaks to yes, there’s a lift up front of work to be done, but as other parts of the plan evolve this is something we want to be revisiting every, so often. We’ll talk about what this looks like in relation to our planning services and how the planning team is regularly engaged in this activity. That’s number two. Check your beneficiaries. Number three. Tim, again, I think such an important part of this process especially from a peace of mind is around this concept of a legacy folder. Creating one if you don’t have one. Updating one if you already have one. Tell us about what this looks like.

[0:18:43] TB: Yes. If you’re all buttoned up in those other areas of the docks in place and beneficiaries, that’s great. You’re ahead of a lot of people. However, if your loved ones don’t know where to find everything like the documents or passwords like, it makes their life a lot harder. What the legacy folder is really meant to be is that gathering place of all of the things that are important related to this topic. The estate plan documents, life insurance policies, trust documents, and tax returns. You could include something there like a side letter.

Tim, if I pass away, I want my ashes to be sprinkled on a linking financial field that’s not going to be in an estate plan, so things like that, that you want your loved ones to know about, maybe final wishes and even like passwords like, I can’t tell you Tim, how many – we probably have 10,000 passwords each day. Where are those? How do your loved ones access them?

I think if you can create a legacy folder and either put it in a fireproof safe or a safety deposit box or some people do this electronically and you can give that to a loved one along with a death certificate, they’re able to operate and basically manage your estate much, much easier than if they’re trying to look for things and dig through folders and drawers and parts of the house that they don’t necessarily know where to go.

It’s that, hey, this is a folder or a filing system that has all of the things that are important related to this topic that your loved one knows about. Communicate to them where this stuff is. It’s really important, too. This could be important for your own stuff. This also could be important for if you are the executor or the person for say a parent. It’s important to have your house in order, but I think it’s also important that if you are the person that might be taking care of elderly parents that you know that what the plan is for them, as well.

[0:20:52] TU: Yeah. Have a copy of those documents as well on hand. This reminds me, Tim. One of the things you’ve said before on the podcast is for you, I think when the clocks change you use that as a signal to pull your credit, right? Do check in your credit report.

[0:21:04] TB: That’s right.

[0:21:05] TU: I think a similar rhythm here like whatever that is, especially with how quick information can I change whether it’s passwords, whether it’s new accounts, new documents, transfers of accounts like making sure that you’re looking at this on the regular. I love what you said, right? That we can do such a great job in getting all these documents together, but do others and our loved ones know where these are at in the event that something would happen that this is needed.

This reminds me much, Tim of a great conversation I had way back when with Michelle Cooper who wrote a book on the topic of her journey as a widow to Love, Happiness and Financial Independence navigating some of the challenges that can come when you lose a loved one. Not only, obviously, emotionally what’s happening at that moment, but also then being able to navigate through that difficult time, especially if you’re in a situation where maybe one of the people in a household taking over a more active role of the finances, making sure that all parties have a good understanding, but what’s going on and where those documents are located.

This is an area, Tim where I get a lot of peace knowing that. Hey, if my financial planning team has access to these documents or knows where this information is as well, as parents, and in-laws, or whoever is going to be an integral part of the execution. That also helps in understanding that there’s more than one party that’s going to be involved to be able to sort this out and to be able to work through this.

[0:22:33] TB: Yeah. Again, if you put yourself in maybe in the state of a grieving spouse and you’re working with a planner that has visibility on this type of thing like the life insurance companies or whoever you’re dealing with. They’re not coming out of the woodwork to pay a claim. I would be like, “Hey, what about this?” Again, not to be morbid, but I would say, “To Jess. Hey, what about this life insurance policy?” Or this that she might not be thinking of because that’s not where her brain is.

I was talking to a loved one recently. I think it was something like some type of insurance policy. He was the executor for another family member. He was like, trying to find this document. He got lucky like he found like the policy that he was able to put in a claim, but they’re not like, if something happens, they’re not like banging down the door for them to pay you money. If you have everything in order here, it just makes life a lot easier.

[0:23:33] TU: Yeah.

[0:23:33] TB: And from a financial perspective it makes things a lot easier to get the support that you need for the heirs, for the dependents that are left behind.

[0:23:44] TU: Tim, do you see for folks that choose to do the legacy folder electronically, I would assume there’s still somewhat of a hybrid approach, right? I’m thinking about things like social security cards, birth certificates, and other things that they might want to have physically of court, a physical document in a fire safe proof, whereas other things they want to house electronically that makes it for easier updating. Probably, I’m curious from your perspective or either how you and Shay do it. Do you see folks doing more, hey, everything is hard copy in a safe or try to do as much electronic, a hybrid, what do you see?

[0:24:19] TB: Yeah. I mean, I think there’s some services out there that trying to do like an electronic offering. For us it’s like, it’s both. I’m a big Google user, so like we have a folder that has essentially everything in it. We use a password vault. There’s a document that has instructions related to that.

[0:24:42] TU: Yup.

[0:24:43] TB: But then there are some things that the way that I do, it’s “see hard copy” and then there’s a spot that, because I’m like, for me to go back and scan some of these things or like policies like, I don’t know, but we got time for that, Tim. It’s a hybrid approach. I think the ease of use of being able to share some folders electronically using something like Google along with some of the paper stuff is how we’ve pieced it together so to speak, yeah.

[0:25:13] TU: Tim as we wrap up, I want to talk about how we functionally execute on the estate planning part of the financial plan as relates to the financial planning services that our team offers at YFP Planning. I would say to rare that someone comes up to the door interested in our services and saying, “Can’t wait to work with you guys. We’re going to work on the estate planning part.” –

[0:25:32] TB: That’s right, yeah.

[0:25:32] TU: The insurance part of the plan. Usually, it’s, “Hey, we’re focused on saving or investing for the future, retirement planning, perhaps those folks earlier in the journey student loans, home buying, growing family, etc.” But this is one regardless that we’ve got to make sure that we’re looking at whether it’s the first thing on the list or not. What does this look like in terms of the planning team and the service we offer and how we execute on this?

[0:25:55] TB: Yeah. The way that we do this. The way that we tackle the plan and then this part of the plan is we have the first part of our engagement with clients, we call the first five. The first five is really designed to go through the critical pieces of a financial plan. The first one is, get organized. This is where we are going to do a deep dive into your client portal. We’re going to look at your checking, your savings, your investment accounts, your house, your mortgage, your student loans, all of the things with an eye for what’s your net worth? What’s the quantitative starting point?

The second meaning of the first five is we call scripture plan which is all about, now that we know where we’re at from a balance sheet perspective, from a net worth perspective where we’re going, so like, what are the goals? Like what’s important to you? This might where you might say like, “I want to take that trip to Paris. I want to maybe go down to part-time or four days a week. I want to retire in the next five years. I want to start volunteering.” It’s like a roadmap of where we want to go. For us to be able to advise clients we need to know where they’re at balance sheet and where they want to go balance sheet and like the goal stuff.

Then from there, it’s a plan overview. We’re looking at hash positions, savings plan, debt management, student loans for a lot of our clients and making sure that we do have the balance sheet and the goals right, so we’re confirming that. Planning for major purchases that type of thing. The fourth thing is typically what we call wealth building, so that’s the investments retirement planning, making sure that we’re moving accounts over for us to manage, allocating that in a way that’s in line with the risk profile, potentially looking at building retirement paychecks that type of thing, social security stuff.

Then the fifth one, typically, is wealth protection. This is where we really get into things like life insurance, disability insurance, or through the heavy hitters. It could be health insurance, other things, property casualty insurance, but also the other protection is the estate plan. In the absence of an estate plan, we’re going to recommend that they work with an attorney to get the state plan in place or it could be reviewing that and making sure that it’s up to date, it’s in line with what they need. They’re not exposed in any way and that, it’s in line with their wishes.

Then from there, the plan goes into more of a plan review and implementation. It’s the things that drives that agenda and the things that the client wants to talk about, the things that we feel are maybe the bleeding head wounds like, “Hey did you sign your will? Did you sign your state documents yet?” Make sure that those are in force. The things that are — we view as exposure or risks to the plan and then our regularly scheduled program. Hey, it’s been two and a half years, Tim, since we actually like, did a formal beneficiary review. Let’s get into the client portal, go through these accounts, and make sure, oh, you add it. You bought the CD, where is that going to go? Or we added this Roth IRA, can we check the primary condition, and beneficiaries and make sure that we’re sprinkling those types of checks in as we go? It’s been a while since we looked at the credit report. Let’s look at that.

That’s our rhythm. That’s our cadence, so we want to make sure that throughout the course of our relationship with clients that we’re touching all parts of the financial plan not just the parts that are exciting like maybe investments. Unfortunately, the estate plan falls to the bottom of the barrel. We want to make sure that we bring that up from time to time. We want to make sure it’s there, but then also, it’s current and in line with everything that the client wants.

[0:29:41] TU: Its a great overview. I think that’s valuable for our listeners to hear. I think sometimes when folks are looking at financial planning services, we throw that term out there generically and that can and does look wildly different from one firm to another about what they cover, what do they not cover, how often do they meet, as we’ve talked about before variants and fees and charges and scope of services and fiduciary responsibilities or not. All of these things can be different and to get a sneak peek into the first five and what to expect with the planning team obviously estate planning as one part, but a lot of work to be done getting that plan set up to begin with as well as ongoing.

We feel strongly Tim, whether someone’s coming in the door, “Hey, I’m near retirement and I’ve got three, four, five million dollars saved.” Or they’re coming in the door with a net worth of negative three hundred thousand dollars, because of student loans and other liabilities that it’s important that we walk through methodically. Those steps as we’ve seen that – in some cases maybe they’ve done some of that work, but often there’s some opportunities to be able to shore that up and make sure as you point out before we develop the path forward of whatever that plan is, whether that be starting at the beginning of saving or withdrawing some of that as they go into retirement. We got to have a good vision of where we’re going. We got to get organized before we can even do that.

Great stuff, Tim. Dustin off the estate plan quick overview as we mentioned we’ll link to some of the previous episodes that we’ve talked about on this topic. One that will revisit occasionally as well for folks that are looking to learn more about YFP Planning, this comprehensive financial planning services. You can go to yfpplanning.com. We’ll also put a link in the show notes where you can book a free discovery call to learn more. Thanks so much, Tim.

[0:31:21] TB: Yeah. Thanks, Tim.

[OUTRO]

[0:31:22] TU: Before we wrap up today’s episode of the Your Financial Pharmacist Podcast, I want to again thank our sponsor the American Pharmacists Association. APHA is every pharmacist ally advocating on your behalf for better working conditions fair PBM practices and more opportunities for pharmacists to provide care. Make sure to join a bolder APHA to gain premier access to financial educational resources and to receive discounts on YFP products and services. You can join APHA at a 25% discount by visiting pharmacist.com/join and using the coupon code YFP. Again, that’s pharmacist.com/join using the coupon code YFP.

As we conclude this week’s podcast an important reminder that the content on this show has provided you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog, posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless, otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week

[END]

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YFP 309: Top 10 Tax Blunders Pharmacists Make

Posted on May 25, 2023October 5, 2023 by Tim U

Sean Richards, CPA, EA, outlines the ten most common mistakes he saw pharmacists make throughout the most recent tax season. This episode is sponsored by First Horizon.

About Today’s Guest

Sean Richards, CPA, EA, received his undergraduate degree in Corporate Finance and Accounting, as well as his Master of Accountancy, from Bentley University in Waltham, MA. Sean has been a Certified Public Accountant (CPA) since 2015 and received his Enrolled Agent certification earlier this year. Prior to joining the YFP team, Sean was the Senior Treasury Manager at PRA Group, a global debt buyer based in Norfolk, VA. He began his career at American Tower Corporation where, over 10 years, he held several positions in audit, treasury, and accounting. As the Director of YFP Tax, Sean focuses on broadening the company’s existing tax planning and preparation operations, as well as developing and launching new accounting offerings, including bookkeeping, payroll, and fractional CFO services.

Episode Summary

The tax filing deadline is behind us so time to sit back and relax, right?! As YFP Director of Tax, Sean Richards, CPA, EA, tells us today, it’s important we are keeping tax front of mind year-round to avoid common blunders that show up during tax filing season. During this episode, Sean outlines ten of the most common mistakes he saw pharmacists make throughout the tax season including his thoughts on how year-round planning can help mitigate these mistakes.

Key Points From the Episode

Sean gives us his tax-season rundown.
The award for the most difficult state for tax returns!
Sean takes us through ten of the most common tax mistakes made by pharmacists.
The cause of the ‘unwelcome surprises’ and how to avoid them.
Not taking advantage of tax laws: energy credits.
Underestimating the power of the HSA; a grossly underutilized tool of the financial plan.
A good reminder about over-contribution.
Having someone in your court to help you avoid taking nonqualified IRA distributions.
Not saving for taxes when earning additional income.
Also for our side hustlers: not expecting the FICA tax on self-employment income.
Some of the mishaps and mistakes that have to do with employer-dependent care.
Not factoring in PSLF when choosing a filing status.
Reporting implications: overlooking considerations with cryptocurrency.
A bonus mishap: education around extensions.
How year-round strategy planning can help pharmacists optimize their tax situation.

Episode Highlights

“I know, taxes aren’t something that people love to think about and want to be excited about but it’s one of those things where if you sweep it under the rug, it’s not going anywhere, it’s only going to grow under there.” — Sean Richards [0:6:55]

“If you’re making money that’s outside of a W2, whether it’s investment income, capital gains, whether it’s a side hustle, really anything where you’re not seeing that federal income tax withheld line, you better be putting taxes aside or being ready to pay that at the end of the year.” — Sean Richards [0:21:45]

“Crypto is treated like an investment as far as the IRS is concerned. It’s like a stock.” — Sean Richards [0:31:39]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

On today’s episode, I welcome the director of tax, Sean Richards, back onto the show. Now that he has had a chance to take a breath from the last few months, working toward the tax filing deadline, I pick Sean’s brain about some of the most common blunders that he saw pharmacists make throughout the season and how year-round planning can help individuals not only avoid these mistakes but also optimize their tax situation.

If you’re looking to learn more about how YFP’s comprehensive tax planning service can help you and your tax situation, go to yfptax.com. Again, that’s yfptax.com Okay, let’s hear it from today’s sponsor, and then we’ll jump into the show.

[SPONSOR MESSAGE]

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To check out the requirements for First Horizon’s pharmacist home loan, and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[INTERVIEW]

[0:02:00.2] TU: Sean, welcome back to the show.

[0:02:01.8] SR: Thanks for having me. Yeah, it feels like it’s been a while but I think that’s just because tax season tends to you know, slow time down for some of us over here.

[0:02:09.7] TU: You look much more rested than I saw you just a few weeks ago. So here we are on the other side of the tax filing deadline. We’re going to talk all in this episode about some of what you saw this season with the hopes that pharmacists can prevent some of those mishaps as they work throughout the year on their taxes but looks like you’ve been – haven’t had a chance to maybe recharge and refresh on sleep. So how are you feeling post-tax of mine?

[0:02:34.3] SR: Yeah, I’m feeling great. I’ve been catching up on some of the things that have been put on side burners so to speak but definitely getting a little bit of sleep, catching up with the family and stuff. It feels good. I’m well rested, there are still some things to tie up from last year but ready to move forward and look ahead to next year and like you said, try to hopefully get some of these ideas in people’s minds so they can plan now and not have any of this kind of hiccups or roadblocks come up next year.

[0:02:59.5] TU: So give us the rundown. I know there’s still work to be done with some of the individual and business extensions and some of the more complicated returns but how many returns did you and the team do thus far?

[0:03:09.2] SR: We did over 200 federal returns and a similar number on the state side. So I mean, if you think some folks have multiple states, some people are in states that don’t have taxes so you know, you kind of, they work themselves out there but yeah, over 200 federal returns. We did a fair number of extensions, there are some business returns mixed in there, so it’s kind of all over the place but that’s the rough number between the few of us here.

So definitely, it feels like quite an accomplishment here but yup, I mean, definitely have some of those more complex returns that we want to give a little bit more TLC to, those are still hanging out there. So now that we’re past the big push, we can really focus and try to maximize savings for those folks. So excited.

[0:03:48.1] TU: Which state, Sean? Which state wins the award for the most difficult state when it comes to returns?

[0:03:53.3] SR: Boy, I don’t know if I’m going to be getting a misery love company or if I’m going to be jading people because I feel like a lot of our listeners kind of land in this territory where our headquarters are but I had to say, Ohio, probably gets the cake, Pennsylvania right up there, close second but yeah, those two are probably the worst I’d have to say.

So again, hopefully, people aren’t sitting there saying, “I love those states” and if that’s the case, you know, all the power to you but not for me.

[0:04:20.8] TU: Yeah and one of the opportunities, challenges, depending on how you want to look with it, you know, we’ve got tax clients, financial planning clients all across the country, which is a unique opportunity and challenge when you think about all of the nuances that happen, especially in the tax side, right? On a state basis or even here in Ohio, we have the RITA, Regional Income Tax Authority, did I get that right Sean?

[0:04:43.1] SR: Yup, you got it right.

[0:04:43.9] TU: Which provides another wrinkle. So it’s fun to hear you and the team complain about Ohio and PA and you know, some of the other states perhaps are a little bit easier. So let’s jump into the most common mistakes Sean, that you and the tax team so far is just making and we’ve compiled these on our website, yfptax.com. If you want to download these and read a little bit more information on each one, please do that.

So we’re going to go through this one by one and again, the hope of this is that we really want to shift the perspective around taxes that the only time we think about taxes are April, when we’re filing, right? This really needs to be proactive year-round planning. We’ll talk more about that at the end of the show and that’s why we thought, “Hey, here we are in the month of May, tax season is over but this is not a, ‘Put it up on the shelf, worry about it ‘till next year.’”

This is the prime opportunity to really be learning from the season that just was and looking at the opportunities ahead of how can we best optimize the situation before we get back into the filing next year. Again, If you want to download a copy of the guide where we talk about some of these mistakes, you can go to yfptax.com and do that. So number one on our list Sean, perhaps the most common, I would presume, you can tell me if otherwise is folks that got a surprise bill or a surprise refund when they got to filing.

So my question here is, tell us more but what is the usual cause of these unwelcomed surprises?

[0:06:14.7] SR: Yeah, I would say that’s the most common and it’s probably purely because if you take a lot of these other things that we’ll talk about, they all sort of work their way into that at the end of the day. You know, if you’re making a mistake, somewhere along the way, you’re probably going to end up with either a large bill or a large refund, so it kind of encapsulates everything.

Yeah, and just to kind of go back to your point before, this really is the best time to be looking at these things. I mean, any time of the year is good but when you’re coming off tax season, you might be disappointed or looking at things saying, “Oh, that didn’t go the way I hoped it would, I had a bill or I had the refund.” You don’t want to just kind of say, “Oh, finally, I’m done with it, we’re passed the 18th, I’m filed” and sort of shake your hands off and say because what’s going to happen is you’ll be in the same spot next year.

I mean, I know, taxes aren’t something that people love to think about and want to be excited about but it’s one of those things where if you sweep it under the rug, it’s not going anywhere, it’s only going to grow under there. So yeah, the surprise bills and refunds, I mean, that can really be a litany of different things that can cause it. The biggest thing I would say probably by far is really just simply not withholding correctly at your job.

And this one frustrates a lot of folks and I don’t blame people because you know, people will say, “Hey, I’ve been at the same company for a while now” or “You know, my situation’s not that complex, how can they not be withholding properly?” and I have to say as a tax accountant, I don’t love the new W4 that the IRS rolled out a few years ago. If anyone working for the IRS is listening to this and they want to give me their opinion on it, feel free, my line is open because you know, I’m a tax accountant.

[0:07:43.0] TU: I don’t think we have many pharmacists that are IRS agents.

[0:07:44.7] SR: Oh hey, you never know, there’s a little bit of overlap here. You don’t have to be a pharmacist to listen to the pod but no, I mean, with that one, I just, I really wish there was a way as an accountant to be able to say “Hey, withhold 18% from this client, please. Just withhold 20% from this client” but it’s not that simple. I know what they’re trying to do, they want to make it more user-friendly where folks kind of can’t mess that stuff up, or if they don’t know how to come up with that number, it’s supposed to kind of guide you through it.

So I think the biggest thing there is that the W4 is sort of designed to try to pick up everything else that’s going on in your financial life aside from just that one job that you’re working and typically, what will happen is folks will get married and they won’t update their filing status or they’ll get married or maybe not even get married but say, they already were married, their spouse gets another job.

They have a side gig and these are all things that you know if your company – your system doesn’t really know that that’s happening, right? So if you’re making money off to the side, doing another job, you work multiple jobs, your spouse works multiple jobs, you know all those things factor into what your tax bill is going to be at the end of the day and if your company doesn’t know what’s going on then it can’t withhold properly and I say, your company, the payroll company was kind of doing all that stuff behind the scenes.

So that one is tough because there’s not a perfect answer. Really, the best way to do it is to take a look in the middle of the year and say, “Okay, where am I at, where was I at last year?” You know obviously if you had any kind of issues last year, you can submit a new W4 and how to change that but doing a projection midyear, take a look at what you’ve already withheld, what you withheld last year, and try to tweak that now, that’s definitely the best time to do it.

[0:09:19.1] TU: Yeah, and we’re going to come back to that topic Sean, of a mid-year projection, why it’s so important on the tax side as we get into the summer months. So stay tuned for more. Again, we’re going to be talking tax all throughout the year as we think it’s certainly an important part of the financial plan. So that’s number one, would be a surprise bill of refund at filing.

Number two Sean, not taking advantage of tax laws. This makes me think of some of the recent changes that you’ve talked about before on the show surrounding the inflation reduction act, and the electric vehicle credits. I know this seemed to cause a fair amount of confusion and concern this year during tax season, and maybe some surprises as well. So what are you referring to here as it relates to not taking advantage of the tax laws?

[0:10:00.8] SR: Yeah, and with that in particular, I mean, we keep kind of harping on the energy credits but that’s where the tax law tends to be going now. I mean, all these things that are coming out, there are changes sort of across the board but the biggest piece and where the biggest dollar savings are tend to be these renewable energy credits, improvements to your home that are energy efficient, things like that.

And yeah, at the end of last year, the inflation reduction act went in and there was a lot of confusion as to which credits change when those credits change. So some of the electric vehicle stuff happened at the day that the law actually went into effect, whereas some of the other energy credits like home improvements like I mentioned, windows and things like that, didn’t really increase until this year, 2023 going forward.

So there were folks who spent money last year and were expecting a larger credit for their taxes in 2022 and didn’t see that. So it’s really just, you know, it’s difficult to stay on top of the tax law, especially if you’re not a tax accountant or aren’t familiar with those types of things and especially if you want to stay out of politics too but it’s really challenging because it’s one of those things where if you’re not spending the money in the right timeframe, it’s not something you can go back and change after the fact.

You know, if you put windows on your house now that’s a 2023 event. When we’re doing your taxes in 2024, we can’t say “Hey, I wish you had not done your windows because they’re already done.” So it’s something where it’s really important to make sure that if you’re spending money, thinking that you’re going to get a credit or you’re hoping you’re going to get a credit, really understanding when those things go into effect, what the dollar value is, and what the limits are.

That’s another thing that some of these things, they’re increasing their limits but they do still exist. So you know, if you spend, USD 50,000 on an improvement, you’re not necessarily going to get a USD 50,000 credit.

[0:11:42.6] TU: Yeah, and we’ve got some info on this, yfptax.com, we’re going to be updating this throughout the year as well so make sure to check out the information there and Sean, this is just another testament to why the year-round planning is so important, right?

If we’re looking at this in the tax year, so here we are, now in 2023, obviously, next spring, spring 2024, we’ll be filing for 2023. At that point, right? Decisions have been made in terms of what happened during that year.

So are there adjustments that we can be making mid-year or are there tax laws and situations like this that we can make sure we’re up to speed or at least have the right understanding before we make some of these bigger purchases that may or may not have the impact that we’re hoping they’re going to have.

So that’s number two, not taking advantage of the tax laws. Number three, Sean. I have to say this one pained me a little bit because we’ve talked so much about this on the show.

[0:12:34.4] SR: So much.

[0:12:35.1] TU: Which is, underestimating the power of the HSA, the health savings account. You know, we’ve continued to emphasize how this – only has tax advantages but we still see this as an utter underutilized tool in terms of the financial plan. So tell us more about what you’re seeing here.

[0:12:51.8] SR: Yeah, I think with the HSA, it’s one of those things where people think, “Oh, I need to have a lot of medical expenses to take advantage of it. If I’m putting money there and I don’t use it, I’m not going to get the full advantage of it” but really, you need to not have that mindset and really think of it as a secondary retirement vehicle basically where if you do have expenses that you need to take advantage of it, it exists for you.

But if you think of it almost as a second IRA or something like that, then it kind of shifts that mindset of, “Oh, I need to have these health expenses” but yeah, HSAs, I know, ad nauseum we talk about it but they have the triple tax benefit. You get the deduction for your contributions, you get tax-free growth and you get to take it out tax-free. So you rarely see that triple tax benefit. This is one of those ones where there is a little bit more flexibility.

I just mentioned some of those credits and having to get the dollar spent during the year. You have a little bit of flexibility with the HSA where you usually have up until the filing deadline to actually make contributions or on the flip side and we saw a lot of this is people who work multiple jobs or got married in kind of weren’t talking to their spouse and over-contributed. So you want to make sure if you did that, you pull that money out so you avoid any penalties there.

And again, you have a little bit of flexibility after year-end to make those changes but to any extent you can avoid that, obviously, it makes sense but yeah, the limits are going up next year. I think 77.50 for a family plan, you have to be on a high deductible plan but if you are and you’re not taking advantage, you’re really just losing out on that benefit honestly.

[0:14:15.5] TU: Sean, I’m glad you mentioned the over-contribution mishap that might happen here and I think it’s a good reminder. Tim Baker was my ear, you know, anytime we talk about backdoor or Roth IRAs, he’s always beaten the drama of you know, really there’s a lot of nuances to consider and we see on the planning side, our planning team works with a lot of folks that you know, are trying to unwind some of the mistakes related to the backdoor Roth IRA contributions.

And I think it’s a good reminder that as there’s more and more information out there, right? We talk about HSAs, it’s readily available, something you can learn about that yeah, we still have to cross out Ts and dot our Is and I think having someone in your corner, right? Financial planners, tax professionals, perhaps both that can help make sure we’re executing this properly, really, really important.

Number four on the list, Sean, taking nonqualified IRA distributions. We are talking before the show, perhaps maybe even a little bit broader than IRAs, tell us more about this one.

[0:15:09.0] SR: Yeah, IRAs are really just kind of retirement plans in general. I know we just mentioned HSA as they’re a sort of a secondary retirement vehicle but just not taking advantage or properly utilizing IRAs. So we’ll start with the IRA piece, there are a couple of different things there. You can get a deduction for traditional IRA contributions.

Folks typically phase out of that pretty quickly and then the next kind of phase-out level will be your Roth contributions and kind of what you were just alluding to is that folks also kind of pretty quickly phase out of that as well and that’s one of those things where you don’t want to end up at the end of the year saying, “Ah, you made too much money but you already contributed this to your Roth.”

So now you’re going to go back and pull it out and then try to do the backdoor that Tim was talking about. So yeah, to any extent, again, you can have somebody in your corner where you can say, “Hey, this is what I’ve done so far this year, does this make sense? Am I going to over contribute, am I going to be in a good spot? Do I have room to contribute more?” Definitely make sense to do and again, you know the IRA limits are going up next year.

Again, the contribution limit. So taking advantage of that makes a lot of sense and the other piece that you didn’t really mention there but we kind of alluded to is just retirements in general. I mean, 401(k)s at people’s businesses, not taking advantage of those. You know, having extra cash on hand and not maxing out your 401(k) whether it’s a Roth to get the benefits in the future or a traditional to get that tax benefit now.

I mean, either way, we saw a lot of situations where folks had a lot of cushion there and could have contributed more and that’s one where that at 1231, you can’t go back. So can’t turn back time, got to get those in before the year and again, having someone in your court to say, “Hey, you know, you’ve only contributed up to 30% of your 401(k) and we’re already in October, you might want to do some catch ups” is really important.

[0:16:47.8] TU: Sean, did you get a feel, I’m just curious, from folks that, if I heard you correctly, it looked like they’re wise margin there. They could have made those contributions or as cash on hand but didn’t. You know is that just a, “Hey, we overlooked it” or do you have a sense of you know, some of the volatility in the market, inflation, what’s going on in the broader economy, that there’s some hesitancy in the contributions into the retirement vehicles and people wanting to hold on to more of that cash.

[0:17:11.2] SR: It could be a lot of different things. I mean, it could also just be an education thing. I mean, I know, even when I first started out at a corporate job coming out of the school, you get all these different paperwork and everything and they say, “Here’s your 401(k), here’s this, here’s that” and you’re just saying, “Okay, I want to get the company match. Great, I’ll put this amount down and everything” and you don’t really realize that you have a limit that you can hit yourself and kind of capitalize on.

So I think it’s really just a matter of maybe not looking at cash flow, like you were saying, potentially not taking a look at that in the middle of the year. I don’t think there’s a whole lot of hesitancy with the market or anything like that. I think it’s more just a matter of, you kind of set it and forget it and you know, you come to the end of the year and somebody says to you, “Hey, did you know that you could have knocked USD 5,000 off of your taxable income if you’d contributed more to your 401(k)?” and a lot of people just say, “I didn’t know that” so.

[0:17:59.3] TU: Yeah, yup. Seeing the numbers, right? I think in help and hindsight and you know, once you see the impact on the tax situation like, “All right, got it, point made, I’ll make that a correction for next year.” Number five, Sean, I think is one we have not yet talked enough about on this show, which is not employing a bunching strategy for charitable giving.

So here without talking obviously about donations and really looking at how to potentially alternate as you look at the standard deduction and then bunching these and those off year. So tell us more about this one.

[0:18:30.5] SR: Yup. So this one is more of a unique scenario. It’s one that we always take a look at but not everybody’s going to fall into this bucket but if you do, it’s something that if you’re able to take advantage of, it can be very, very powerful. So the idea of bunching is really trying to pull itemized deductions as much as you can into one year and then in the next year, not having as many and taking the standard deduction because it just getting higher and higher nowadays.

I mean, just the number of folks that we see taking the standard deduction, even though they have things like mortgage interest and taxes that they’re paying for still taking advantage of the standard deduction because it’s so much higher.

So yeah, if you’re looking at it and you say, “Hey, you know, I was USD 500 away from the standard reduction” or “I itemized USD 500 more than the standard deduction this year” and you had quite a bit of charitable contributions, if you’re able, again, sort of pull those in and say, “Hey, if I’m going to do a thousand dollars over the next two years, I’m going to do a thousand dollars this year and maybe not anything next year” and you can do it on 1231 so you kind of the same feel for giving to them that the charity.

But, if you’re able to do that and take advantage of it, it can be really powerful, and that way you’re not losing out. That was one thing we got a lot of is, “Hey, I have a house and I paid this mortgage interest but I am taking the standard deduction. So am I losing that benefit?” and it’s not the best way to look at it but you’re not really getting the full benefit if you’re doing it that way.

[0:19:50.1] TU: Yeah, as you mentioned, this really applies, not to say that everyone, depending on the amounts of folks are giving but especially for those individuals that are giving additional dollars to various organizations, churches, nonprofits, communities, et cetera, there could be some real benefits to the bunching strategy and I’m you know, one who is victim to this in terms of just behavior, right?

Where you might have contributions on an automatic monthly payment or you’re planning for it throughout the year and you just don’t take the time to take a step back and say, “Okay, from a strategy standpoint, I’m going to do the standard deduction this year and then we’re going to do the bunching strategy next year.” So again, just some proactive planning to make this happen.

[0:20:31.6] SR: And it doesn’t always work for everybody because I mean, I talk to people who said, “Hey, that doesn’t match my giving strategy” and that’s perfectly fine.

[0:20:37.8] TU: Sure, yup.

[0:20:38.3] SR: It’s really just if you wanted to help out your financial strategy, there are options out there. I’m not saying you should change the way you give to your charities. It just exists, right?

[0:20:48.6] TU: Number six and number seven are specifically for folks out there that are earning some additional income, side hustling, business income. So number six, Sean, not saving for taxes when earning additional income.

It sounds obvious but we see more and more pharmacists that are dabbling in various side hustles, consulting businesses, so I think this is becoming a more prevalent mistake, probably one that maybe you make once and then you don’t make again but talk to us about what you’re saying here.

[0:21:16.4] SR: Yeah. So I mean, it does sound simple on the surface but again, if you’re not used to it or it’s not something that you’ve kind of done before, it’s not second nature, I guess. So right, if you, you know, you work a W2 job, that federal income tax is being taken out, hopefully correctly, although as I mentioned in the first thing here, sometimes it’s not correct but you know, hopefully, your income tax is being taken out at the end of the year.

You sort of do a true-up and maybe owe a little bit, maybe you get a little bit back but that’s that. If you’re making money that’s outside of a W2, whether it’s investment income, capital gains, whether it’s a side hustle, or really anything where you’re not seeing that federal income tax withheld line, you better be putting taxes aside or being ready to pay that at the end of the year and like you said, typically, that’s one where if you make the mistake, you don’t do it again in the future.

But you know, I think some people are just really excited about making money and they want to pour the money back into their business, which is perfectly fine. You know, we want to encourage people to build their businesses and invest back in but just make sure you’re setting aside enough at the end of the year to kind of make sure you have at least a little bit of a cushion there and having somebody to do that calculation for you.

Because you know, just because you’re going to – you think you’re going to net this much at the end of the year, doesn’t mean that that’s what your tax bill will be. I mean, there’s lots of ins and outs there, different things you can do. So having somebody to be able to take a look and say, “Hey, you know, as of right now, you’ve made 50k of non-withheld income so you’re going to want to put 20% of that aside, 25% of that aside, just be ready for it.”

[0:22:45.8] TU: Yeah, and I think there’s here, a couple of pieces you’re highlighting, right? Which are the mechanics of where do I save it, how much should I be saving based on how much I’m earning, and then at what point do I need to be making quarterly estimated payments and I do this, right?

I reached out to you and say, “Hey Sean, we’re coming up on the Q1 estimated payment.” Like based on what we’re seeing in terms of the financial statements like, what’s the plan, and then we’re saving in a tax account along the way to be ready for those payments. So good thing, right? If you’re paying tax, you’re growing the business.

[0:23:15.0] SR: Exactly and I will admit the IRS estimated payment process, it doesn’t really even feel that natural. I mean, you are kind of doing the math yourself, going onto the website and just saying, “All right, here it is” and they just take it and then at the end of the year, it does. It comes into your play, it’s one of the lines where you basically say, “Okay, what did you withhold? What did you pay in? What did you owe?” and we do the math on it.

But it just feels like you’re sort of sending money out into the abyss when you make the payments. So I kind of understand that folks are a little apprehensive and would rather hold off but again, I mean, I’m conservative. I’m a tax accountant but at the end of the day, I’d rather get a little bit more money back than owe a lot of money.

[0:23:55.0] TU: Yeah and Sean, a separate conversation for a separate day. This is a little bit more to the business strategy but one of the things that I like about withholding at least a quarter of it but at least on your own side even on a monthly basis is it forces you to look at the financials of the business a little bit more closely, right?

So I think there can be a tendency if I am not paying tax and then I get either caught off by a surprise bill or I just wait until the end of the year and pay it, you know, you may fall into the trap of assuming your business is more profitable than it actually is and so really looking at what is the service, what’s the product you’re offering and what’s the true financials if you’re considering the tax.

[0:24:31.1] SR: Not to go too far off but another big thing is that a lot of people kind of just assume that cash and profit are the same thing.

[0:24:36.4] TU: Exactly.

[0:24:37.1] SR: That’s not always the situation, right? So you could have a big profit at the end of the day but if you are pouring that cash back in, you might not have any cash on hand. So they don’t always go one for one and if you get away from that it can really end up causing some problems for sure.

[0:24:51.7] TU: Preach it, Sean. We need to come back and do an episode on that, the difference between cash on hand and profit of a business, so that’s a good one.

[0:24:58.3] SR: Yeah, that one, I’ll make a note because that could be like a double episode but yep, I’ll put that one on the back burner for sure.

[0:25:04.7] TU: So that’s number six, not saving for taxes when you’re earning additional income. Number seven, also for our side hustlers and those that are running a business, not expecting the FICA tax on self-employment income. Tell us more about the FICA tax here.

[0:25:17.7] SR: Yep, so that’s kind of similar varied, similar vein as to what we were just talking about really just having to kind of put that money aside but again, something that’s not second nature. It’s not something that you’d really be typically thinking about until you get into this and potentially make a mistake, hopefully not but right. When you have these W2 jobs and the money is being taken out, you’re withholding for yourself and you’re paying social security and Medicare, which we call FICA for yourself.

Your employer is paying half of that for you whether you realize it or not and when you are self-employed, so you have a partnership or your own kind of business and you are getting that money in, you have to pay that portion of FICA yourself. Now, the benefit is that you get that employer portion that the employer typically would be paying for you on a W2. You do get that as a deduction, so it helps a little bit but yeah.

I mean, that what was it? 15.7% or whatever for FICA is coming out of your bill at the end of the day. So on top of the regular income tax you have to set aside, you should really be saving for that as well. That’s where you’ve heard me say before, you know, 20, 25%, maybe up to 30% depending on what your bracket is, you start to add that FICA in on top of it and you could be looking at quite a bit to be setting aside.

[0:26:27.6] TU: Yeah Sean, this was one I would add to this as well. You know, the surprise of the cost of health insurance. This is one as well, you put those together and you go from a W2 job to running your own business is like, “Oh, okay.” So again, right? You’re looking at the financials in a very different way.

[0:26:44.5] SR: Yep, exactly. Things to keep in mind.

[0:26:46.8] TU: Number eight, Sean, has to do with some of the mishaps and mistakes with employer-dependent care. Tell us more about this one.

[0:26:53.3] SR: Yeah. So there is a lot of different things with dependent care benefits that you can add to dependent care FSA. So it’s a little bit different than the HSA but with that, that one really is a little bit more of the, you know, I was saying with the mindset within HSA, “Oh, if I don’t have medical expenses and I don’t use it, you know it’s not going to be worth it for me.” It turns into an investment vehicle if you don’t use it.

Dependent care FSAs, flexible spending accounts, if you have cash in that, that is more of an “if you don’t use it, you lose it” kind of thing. So that is something where if you’re pushing cash aside, they are pre-taxed dollars. You want to make sure you are using that for dependent care expenses during the year and the other thing is that if you are getting benefits from your company, you want to make sure that you are also putting that and actually spending that on dependent care.

When I say that, I mean a nanny or a daycare or even if it’s a family friend but somebody that you’re putting their social security down and saying, “Hey, I paid this person this much money to watch my children” otherwise, that can become a taxable event. So you want to make sure that if you have kids, you’re getting these benefits, that you are utilizing the cash during the year and not kind of ending up with excess in those accounts at the end of the year exactly.

[0:27:58.9] TU: Number nine Sean, an oldie but a goodie, one that I think has lots of attention given the three-year loan pause and that is, not factoring in PSLF when choosing a filing status. Tell us more about this one.

[0:28:11.3] SR: Yeah and this one, I mean, you just eluded to it. It’s been very, very challenging, especially with the client base that we work with having that ambiguity on what’s going on with the loan system and trying to give guidance on this front because it’s really tough when you’re saying, “Hey, we’re not exactly sure if they’re going to turn back on and how all that looks and when we’re going to have to recertify all these things.”

But yeah, what we’re talking about here is that typically when folks get married, if filing joint tends to be the best approach there and we always do a comparison at least on our side to say, “Okay, you know all else equal from an objective tax standpoint, filing jointly will save you X number of dollars versus filing separately” but when you are talking about PSLF and you get into these income-based repayment plans and are looking at AGI, that can really swing very, very rapidly between what your AGI is as merely filing separate individual versus your combined AGI with your spouse when you’re filing joint.

So this is one where it’s a classic like you just mentioned Tim Baker, the old “it depends” really depends on your individual circumstances here. You’re going to want to look and say, “Hey, what do I have on my side? What does my spouse have on their side? If you separate us, what does that look like? What is my income base repayment plan? What numbers are they looking at?” and really like we just said, “When do I have to recertify these things?”

“When am I going to have these payments?” because it’s a matter of you could save $200 by filing jointly this year but if you are saving $50 a month on your payment by filing separately, that adds up very quickly. So it’s something where there’s a lot of moving pieces but it is something where if you are not looking at those pieces, you can very, very quickly end up spending a lot more money than you think.

[0:29:49.3] TU: Yeah and it is so important. You know, we’re talking about PSLF here but the intersection of student loans and the tax strategy is one of many examples where the financial plan and the tax plan need to be jiving, and this example specifically brings us back to the origins of FYP Tax, right? I remember Tim Baker talking about, “Hey, we would develop these beautiful student loan repayment strategies and plans.”

Then they’d be, “Hey, go talk to your accountant” and not all accountants are well-versed in student loans, which is fair, right? Based on how nuanced they are and right now, how rapidly this information is changing. So shoutout to you Sean, the YFP Tax team, you know working with a tax prepare, working with an accountant that understands student loans. Again, this is just one example but really, the intersection of the financial plan and the tax plan is so important that those are jiving in the same direction.

[0:30:39.8] SR: Yeah and like you said, I mean, not all accountants know about it and I know enough to be dangerous with it but you have to have financial planners that know about that too. I mean, that is something where I could be working with you and say, “Hey, I think from a tax standpoint it looks like this” and you could go bring that to your planner, and if they’re not really thinking about these implications, they can really get away from you quickly, you’re right.

[0:30:58.3] TU: Number 10 on our list of ten common mistakes, mishaps that pharmacists were making during the most recent tax season is overlooking considerations with cryptocurrency. I mean, what would be a tax episode if we didn’t talk about crypto in digital assets, so what do we see here?

[0:31:12.4] SR: Well, this one probably is a little bit different than we’ve seen in the past with crypto. It wasn’t so much that we are seeing people with these big gains that they were necessarily expecting. In fact, if anything it might have been the opposite given what kind of happened with the market and everything last year but in that and what I would say with that is you know, if you kind of take the gain-loss implications aside, the biggest thing I would say here is just the reporting aspect of it.

So cryptocurrency again and I feel like I harp on this all the time is crypto is treated like an investment as far as the IRS is concerned. It’s like a stock, so if you go and you’re doing all these microtransactions all the time and you’re using your crypto wallet to buy coffee down the street, that is effectively saying, “Okay, I’m going to sell X number of shares at this price on this day” whatever I bought it for back in the day that same security.

You need to look at what your basis was and do the math, so if you are doing hundreds and thousands of these transactions every year, the reporting implications are significant and that’s not something where you can say and I am not just saying this because I’m an accountant, I’m biased where you can’t just say to your accountant, “Hey, here is my list of a thousand transactions, you know, figure it out for me.”

You need to make sure that whatever system you’re using can spit that out in a digestible manner whether it is actually getting a form from the IRS or kind of getting a summary and one thing that we have seen is in a lot of these companies and I don’t blame them necessarily but a lot of them will kind of rope you in and say, “Hey, you know it is going to cost you five dollars a month for the basic crypto wallet” and everything like that.

Then you get to the end of the year and all the tax forms that you need will be kind of an extra charge and you are not thinking about it and folks will say, “Well, I have an accountant, they can kind of do that for me” but I mean, again, and I am not just saying that because I don’t want to do it. It really is a matter of an accountant simply can’t take thousands of transactions and stick them onto a form.

It is not a practical thing that can happen. So you want to make sure that whatever you’re doing and again, if you want to do all those transactions, hey, power to you but keep in mind it’s like you’re selling shares. You need to make sure you are getting something out of your system that an accountant can then use and file your taxes with because it’s not like spending money. It’s like selling stocks.

[0:33:19.6] TU: Yeah, I am hopeful Sean, this is another one you know, where you can make this mistake once and you maybe approach it differently in the future, right? I think this is an education where your explanation is spot on. If we look at this in the eyes of the IRS, which is that we’re making a transaction in terms of like we were selling stock and especially if we’re using it to purchase things on a daily basis, right?

A store, a cup of coffee, groceries, whatever like we don’t think about our stocks like that typically and so I think that — not to say people may not transact crypto for purchases just like you would dollars out of a brokerage account but maybe not on the frequency that it’s happening if you are able to think of it in that way and understand the reporting and the tax implications there, so great explanation.

[0:34:04.6] SR: Exactly. I think like I said, that the basis is really the biggest thing and I, you know, people, if you talk to me you’ll hear me say it all the time and you’re probably sick of it but it is really being able to trace back and say again, like it’s like a stock, right? So if I sell XYZ NFT today, I need to make sure I know what I purchase XYZ NFT for in the future, and when you are doing all these things and you’re day trading so to speak, and saying, “All right, I am going to flip this one here and I’m going to go buy crypto with this one” and kind of moving, each one of those things has to be kind of traced back to the origin.

If you don’t have that information, you could end up paying more, honestly. You know, if you don’t have the basis information and you are just going to end up sell, reporting it on your sale price and not have the basis in there, you can end up either paying more or again, reporting incorrectly. Both of those are not what we’re hoping for in our side at least.

[0:34:55.9] TU: So if anyone heard Sean correctly as I heard him, all of your handwritten crypto transactions, your reports, your chicken scratch, you can email those to [email protected]. He will gladly – just kidding.

[0:35:07.8] SR: Yep, I will go through all of it in all of my free time now. Absolutely, I will break it all down for you, please.

[0:35:14.0] TU: Awesome. So that’s our ten common mistakes that you saw pharmacists making throughout the tax season. Can I add one more? We’re going to do a bonus round here for a moment and –

[0:35:22.5] SR: Yeah, go for it.

[0:35:23.2] TU: I think we need to do some education around extensions, right? I think this is an area where I know firsthand the first time I extended several years ago and I have gotten used to that practice now. It can feel uncomfortable, am I doing something wrong, does that mean I’m delinquent? But as you eluded to at the beginning of the show, there are some extensions that are happening with the more complex returns.

We want to make sure that we have the time that we need. The misperception I think, I could be wrong, that’s out there is extension means bad or extension means delinquent but that’s not the case, right? So tell us more about the use of extensions and why they may be appropriate.

[0:36:01.9] SR: Yeah, glad you’re giving me the bonus round. I would have had this as 1-A on my list if I would have thought that you would have actually allowed me to record this podcast if I did that. I thought that I came over the top of that one, we might be deferring this recording out to a future date but no, extensions, yeah. So it is actually kind of twofold. I would say that from who I’ve talked to and this could be clients.

I mean, even family members that I was talking to during the tax season, checking up on how things are kind of going, I would say with the negative connotation, it’s one of two camps. It’s either, “Hey, the extension means bad and delinquent” or extension means, “Hey, I’m this crazy tax guy who has offshore accounts and you know, I make five million dollars and I need to have my accountant spend the extra time to do all of this stuff.”

Those are really the two mindsets that I got a lot of. I mean, like I said, I talk to people that I know, I’ve known for a long period of time who I consider to be financially sound individuals and they said, “Oh extensions, those must be for your big ticket clients, right?” and the answer is not really. I mean, extensions simply give us, your accountant, and you more time to get your things together to allow us to dedicate the time to find you tax savings, get your things right, and not rush them.

I mean, I know Paul, my team who I’m sure you’ve heard talk on this pod before but he’ll always say, I mean, if you have a surgeon who needs to do a thousand surgeries in a year, would you rather him do them all in three months or her do them all in three months or have them do it throughout the course of the year, you know, with X number during each month. So you got me all fired up because you know, extensions are near and dear to me.

But I mean, really what it comes down to is we’re trying to do a lot of different returns and a lot of people have very complex situations but we want to make sure we get it right. We talked about states and local, moving states, and making sure states don’t talk nice to each other even ones that border each other are not – don’t always agree with how things are picked up and everything, and just getting all that information together, making sure we can parse through it, maximize your tax savings and everything, extensions just give you the time to do it.

Now, the one thing I will say is it does not extend your due date to pay. That’s the biggest thing. So what you want to do is get an estimate, and make your payment if you think you are going to owe or in April or even beforehand but after that’s done, it really is a one-click kind of thing. It’s an automatic extension, once you do it, it’s six months. You get until October and that’s that. It really is not for delinquents.

It is not for folks who didn’t get their stuff in on time or like I said, are using offshore accounts to do X, Y, and Z. It’s just simply to give your accountant more time to get it right.

[0:38:41.5] TU: Well, thanks for allowing me to throw some kindling on the fire, so I appreciate that.

[0:38:45.3] SR: Thank you, I appreciate that.

[0:38:45.8] TU: You know, I think it is a good reminder not only in the perception of it but also you know, some folks may hear this and say, “Well, you know there is an opportunity cost that if I am getting a refund” and we don’t file that for three months, four months, five months later, whatever that those dollars could have been used elsewhere. True but my counterpoint to that would have been, one, if we are planning correctly throughout the year, we shouldn’t be expecting a massive refund.

Second to that would be is that most often, extension doesn’t mean we’re buttoned up against the October deadline. It means that maybe instead of April 18th, it’s May 1st or 15th or even the end of April or into later in May or early June, whatever. So you know, it allows kind of that stretching out of the season to make sure that we’re doing the job that needs to be done, be done well, we are optimizing the situation.

I think that certainly for folks that have more complicated returns, I think what we’re seeing in the industry in my perception even with an accountant we used to work with before building our own practice internally was, “Hey, you’re a small business owner. Hey, you own a bunch of real estate” hey, whatever like you’re automatically extended. You know, that’s just kind of the process of what they do to make sure that they have the time to do those returns well.

[0:39:55.5] SR: Right and like you said, the idea of year-round tax planning is you’re working with your accountant throughout the course of the year. You are getting the information, you have rentals, you’re getting them, “Hey, I sold this place in November” and you are giving them the information in November so your accountant can already have that stuff ready to go and it’s not a situation of you’re in March and you say, “Hey, I forgot” or “FYI, sold my house back in January of last year. Here’s the 5,000 documents for it. Can we get this filed next week?”

The answer is, I mean, we probably can but you know if we are thinking about these things ahead of time, we can spend the time that we think it deserves to get everything right, and if you are doing that planning throughout the course of the year, you can get 90, 95% of a tax return effectively done through the conversations that you’re having with your account throughout the year. So yep, absolutely.

[0:40:40.4] TU: So Sean, let’s wrap up by talking through how the year-round planning can help pharmacists not only prevent these mistakes but again, better yet optimize your tax situation. That really is the focus of what you and the team are doing through the comprehensive tax planning, what we refer to as CTP. Again, not just that transactional return month of April, got to get it done but really that year-round strategy and planning.

So you know, what is comprehensive tax planning? What do we offer? Why is it needed and who is it for and perhaps, not for as well?

[0:41:11.3] SR: Yeah. So comprehensive tax planning is designed to really attack everything on this list, right? So it’s where you’re doing proactive planning and thinking about your tax situation now and not at the end or not in the beginning of next year looking back on this year and again saying, “I wish I could have done this” or “How could I have done this differently?” It’s getting ahead of those things now so you don’t have to worry about that.

So things like mid-year projections, “Hey, let me grab your paystub, let me talk about some of those side gigs you’re doing, give me an updated PNL” or even if we’re doing your books for you, I’ll pull down the updated PNL and we’ll take a look. “Hey, you know you’ve withheld this much money so far, your side gig is going to make this much money we think so far. Have you put that money aside yet? Did you make an estimated payment?”

“I think you should make a payment of this much” checking in on those things or being able to have the conversations of you know, “Hey, I just bought a rental property. Tell me about the short-term rental loophole” or “Tell me about what it’s going to take for me to be considered a real estate professional and be able to offset some of my active income with this passive income” or “Hey, I just bought the rental and hearing all about all these tax credits.”

“How does that work? How do those tax credits affect my personal return and then how does it affect my rental property? Are those going to be different? Can I maximize them?” These are the conversations that we’ve been having with folks over the past few months looking back on last year but proactive tax planning is you’re having these conversations now. You are having them in May, June, and July and getting ahead of these things.

So when we talk about March and April that big push, it is really a matter of, “Hey, did we do what we say we’re going to do? Excellent, great. Okay, what are your tax bills? Zero. As expected. Awesome, file? Done. Food to go.” Just really having that phone-a-friend CPA to ask questions for, “Hey, you mentioned bunching when we looked at my return last year. You said I was close to the itemizing. How can I actually employ that now?”

Or “Hey, this is what I’ve contributed in my 401(k) so far this year, do I have room to add more?” things like that. Just getting ahead of it now while there’s room to make changes and not looking back and saying, “Ah, I really wish I did that.”

[0:43:19.9] TU: Great stuff. So you know it’s again, not only that finally and it’s the mid-year projection, it is having an accountant in your corner to make sure you are executing throughout the year, answering those questions as they come up. So folks can learn more at ypftax.com. You can read more about that service, you can book a free discovery call to see whether or not it’s a good fit for your personal situation.

And again, whether you came off the season and you’re like, “Hey, I did that myself and I never want to do that again” or you were surprised by a refund or a bill or perhaps you have a situation that’s changing, right? It could be moving, a new job, dependents, acquiring real estate, or building a small business, all are these I think there’s a few examples of things that we want to be thinking about in planning throughout the year.

So again ypftax.com, you can learn more and book a free discovery call to see whether or not that’s a good fit. Sean, thanks so much for taking the time. I appreciate you coming on the post-tax season and looking forward to having you on throughout the year.

[0:44:15.6] SR: Yeah, thanks, Tim. Glad to be back and hopefully next time, we’ll be able to talk more about some of these backburner items. So I am looking forward to it.

[0:44:22.1] TU: Awesome. Thanks, Sean.

[0:44:23.1] SR: Thanks. See you.

[END OF INTERVIEW]

[0:44:25.3] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% down payment for a single-family home or townhome for first-time home buyers and has no PMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the preapproval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[DISCLAIMER]

[0:45:10.4] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and it is not intended to provide and should not be relied on for investment or any other advice. Information on the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 308: YFP Planning Case Study #6: Balancing Retirement Savings With a Major Purchase & Education Planning

Posted on May 18, 2023May 17, 2023 by Tim U

The team at YFP Planning discusses a case study that includes balancing retirement savings with a major purchase and education planning.

Episode Summary

If we don’t earmark our cash for specific items, we’re very likely to spend it. In this YFP Planning Case Study, Tim Baker, CFP®, RLP®, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Angel Melgoza, MS CFP® use a hypothetical couple (Joe and Jane Script) to discuss balancing retirement savings with a major purchase and education planning. After being provided with an overview of the couple’s finances and their goals for the future, Kelly and Angel pick apart their investment approach and offer advice for how they could make it more sound. From the importance of saving with the intention of avoiding getting hit with a surprise tax bill, this episode will make you think more deeply about the way you approach your financial plan!

Key Points From the Episode

Setting the scene for the Joe and Jane case study.
Joe and Jane’s net worth and their assets and liabilities.
Goals that Jane and Joe have for the future.
Kelly and Angel share their thoughts on the first steps Joe and Jane should take to optimize their financial situation.
How Angel recommends Jane and Joe deal with the funding of their children’s college education.
The importance of being open to making adjustments to your financial plan.
Working out which elements of your financial plan to prioritize.
Why many people end up saving less money than they could.
How to avoid getting hit with a surprise tax bill.
Angel’s approach to insurance.
Documents that you should have in place to protect your family in case of your death or disability.

Episode Highlights

“When I talk to clients and I look at their balance sheet, the first thing I want to make sure is that you have a sound emergency fund.” — Angel Melgoza [0:08:15]

“We can’t do everything. We have to prioritize and decide what makes the most sense to overall have the best plan for the future.” — Kelly Reddy-Heffner [0:13:16]

“We tend to save, but we also tend to spend anything that is not earmarked.” — Kelly Reddy-Heffner [0:19:05]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00] TB: What is up, everyone? Welcome to our sixth edition of YFP Planning case study. Really excited to get into this one today. We’re going to talk about Joe and Jane Script. It’s a really creative name that we have here. We’re going to do something a little bit different for this particular case study. We’re going to basically set the client up in our planning tool, which is RightCapital. We’re going to stay, not necessarily so much in a spreadsheet, but in the planning tool and outline the details of Joe and Jane Script and their family and what they’re looking for. I am once again joined by our lead planners, Kelly Reddy-Heffner and Angel Melgoza.

[INTERVIEW]

[0:00:36] TB: Really excited for you guys to be here to chat about the scripts. What’s going on? Kelly, first to you, what’s going on in life?

[0:00:43] KRH: Not too much. End of tax season, doing quarterly meetings and hoping that it stops raining in Pittsburgh at some point.

[0:00:53] TB: Yeah. Crazy weather. When you guys were out here after tax season it was like spring-esque. Now it’s really cold again. It’s super weird. I put a vote for warmer weather here too. Angel, you’re probably accustomed to some warmer weather. How’s it going where you are?

[0:01:12] AM: Very warm. Hot and humid actually. We’re preheating to our summer already. Yeah.

[0:01:18] TB: Awesome. Let’s get into it guys. I’m going to share my screen, so apologies for those listening on the podcast, because this will be very visual. We’re going to talk through some concepts, but if you’re interested, check out the YouTube channel, we will have our beautiful smiling faces on the YouTube with a screen share of what we’re working through with the client. I’m going to work through this. What we’re looking at here is a snapshot and what this tells us at a very high level just what is going on with the client. I’m going to dig into some of the juicy details about Joe and Jane; the job, the balance sheet, some of the goals.

The first thing I’m going to look at for Joe and Jane is just like where are they at? What are they doing? What’s the family look like? Joe recently accepted a new MSL job based out of Louisville, Kentucky. They’re both Louisville, Kentucky, University of Kentucky grads. That’s where they went to pharmacy school. Joe is an MSL. Jane is an oncology staff utilization pharmacist. They have twins Addison and Sean, age 11. Their home is in Louisville. They filed their taxes jointly, but they’re actually from the Boston area. They have a lot of family in the Boston area.

The balance sheet really looks like this. I’m going to click into the balance sheet. Their balance sheet at present, their net worth is about, we’ll call it $894,000. They have about $1.3 million in assets with about $386,000 in liability. The assets break out a good amount in cash accounts, so they’re joint checking, they have $35,000, they have 80,000 in joint savings, so that’s 115,000, that’s liquid. Then they have a non-qualified or a joint taxable account that has about 15,000 in it.

Then most of their investments are in qualified assets. Joe has an old 401k that he’s rolling over to YFP planning for us to manage that has about $196,000 in it. He’s currently contributing to his new 401k with his new MSL job that has 5500. Jane, her 401k is currently at 236,000. Joe has a Roth, it has about 85,000. He also has an HSA that has about 15. Then the kids, they both have 529s that are identical, about 19,000 that they’re currently contributing to. They own their home in Louisville. The property’s worth about 575,000 with a mortgage that has about 281,000 left.

The other liabilities they have is a joint credit card that has about 15,000 that they normally pay off. They have a HELOC for home improvement that’s hanging out there that has about 19. Jane has a car note at 28. Then Joe still has some lingering student debt that’s about 12,500. One of the surprises that they had when they went to file, we were talking about tax season earlier guys, is they found out that about $30,000 tax bill and those are some surprises that are not fun to get, but they basically have to figure out how to pay off this $30,000 tax bill to the IRS.

Overall net worth about 893. Now, to pivot to some of the goals that they have, they very much want to make sure they get back to Boston to see family. They want to make sure that they’re supporting the twins’ activities in sports. Between the two of them have more frequent date nights. From a career lifestyle, they want to make sure that in the future, they have the ability to work less if they can. They’d love to be able to purchase a vacation home, maybe pivot into a retirement home in Florida. They’d love to take a domestic, annual big trip with the family.

One of the big goals that they have is to take the whole family to Australia before the kids go off to college in the next seven-ish years. Then they have some legacy goals where they want to be able to pay 100% of the twins’ college, at least for the four years of undergrad. They want to be able to give back to the University of Kentucky and also some other charities. That’s the picture of where they’re at. I know we have some topics of discussion listed here, but Kelly, what would you say jumps out at them. We didn’t get really too much into some of the insurance stuff, which we can dip into. Obviously, they have some debt that they have to work through, but what are some of the big things that you would tackle first with Joe and Jane?

[0:05:30] KRH: At first glance, definitely a bit of a large cash position, so trying to figure out what is their spending to see like what the emergency fund should or could be and then seeing if they have some resources left to take care of some of the debt. The little student loan out there would probably be top of mind, making sure the credit card really is paid off each month. Those would be really important things to tackle early on, I would say.

[0:06:05] TB: Yeah. I think one of the cool things that the tool has shown us is just a liquidity analysis. How much should you keep in that emergency fund? The target that we have here, if you assume current monthly expenses, which I think we should confirm, right? That’s one of the things that sometimes you can put in a box like what we spend, but when we actually connect actual spend accounts, it’s more than that. But their target for their emergency fund is about 40,000 and their actual liquidity between their checking and their savings is about 115.

There’s probably a scenario that we could peel off some of those extra dollars and potentially pay off the credit card to your point, Kelly, to make sure that that is completely paid off, which the balance is 15,000 at this point. You also have a 19,000-hour home equity, which was one of your highest interest rates. If we look at the interest rates, and again, we didn’t necessarily go through this from the jump, but the mortgage is not bad, 281,000, three and a quarter percent. Home equity, line of credit, 6% which is a little bit higher.

Jane’s car, which is about 28,000, 4%. Joe’s student loan, three and a half percent, so not terrible. The IRS would have to figure out what the payment plan is for that. I just put in a placeholder of three percent. Then the joint credit card, obviously 24%. Making sure we tackle this first. I agree. I think something along the lines of like right sizing in the cash position to either clear out debt or the conversation that we could have is does it make sense to put dollars towards things like an education goal or retirement?

Again, I wouldn’t necessarily be sleeping very soundly at night if I knew that I owed the IRS money or if I had a credit card balance hanging over my head. I think a good analysis to go through with the two of them, just to see how do we deploy these extra resources, so to speak? Angel, how about you? When you look at their scenario at a high level, what jumps off the page for you?

[0:08:12] AM: I have to echo Kelly’s thoughts here. Really, when I talk to clients and I look at their balance sheet, the first thing I want to make sure, because of course you have two little ones, is that you have a sound emergency fund. If you have an excess cash position, I think the second thing I’d like to look at is, of course, any debt that’s over. My rule of thumb is usually 6%. I think credit cards fall within that. Paying down that is just as good as investing. It goes back to the old saying of paying, saved as a penny earned.

[0:08:43] TB: Yup. Yeah. I think that’s one of the things is like, if you can guarantee a 6% investment, that’s not terrible. That’s where the S&P is, once you account for inflation over long periods of time. Definitely, looking at the debt would probably be first on the list. How about Angel, when you look at one of the big things that they have that I think is probably not one that we get a lot of in terms of, “Hey, this is my education plan for my kids,” it’s more of, “I’m not really sure how I want to approach the education.”

A lot of pharmacists, again, they feel the pain and the sting of student loans. They would rather not replicate that for the kids, but when you look at, “Hey, we want to send both of them 100% for four years in the next seven years or so,” how would you break that down for them in terms of the feasibility of it?

[0:09:36] AM: I mean, twins are 11 years old right now. They’re not too far behind on the saving aspect of it, but of course, we want to make sure that we try to meet our clients’ goals as much as possible within the confines of keeping things realistic. When I say realistic, of course there’s so many ways to fund college from student loans to savings and cash flow. But there’s really only one way to fund your own retirement. When I get clients that are adamant and that’s just the number one most important thing to them, I just like to just go back and say, “Okay, well, what happens if you have to work a little longer to do this. Four or five, six more years? Are you okay with that?”

One of the things that I love about RightCapital that it shows us, is there going to be a shortfall? If there’s a shortfall, how do we right that ship? But from a rule of thumb perspective, I mean, kids are still 11 years old. We don’t know if they’re going to get scholarships. We don’t know if they’re even going to be one to go to college. I would say a good starting point is maybe funding a third of the college tuition.

[0:10:40] TB: Yeah. If we look at the analysis on the tool and we messed around with the twins. We basically said, “Hey, both Joe and Jane are University of Kentucky grads so maybe one of their kids will go to Kentucky.” We picked Sean as the recipient of that. When we looked at that and we looked at Sean’s college goal and we basically looked up University of Kentucky, one of the interesting things is we can actually click in and we can choose either in-state or out-of-state. If we assume that we’re going to be in-state, the total cost for in-state tuition is about 35,600 per year.

If we compare that to Addison’s college goal, it’s actually more. Addison’s college goal, if we use a goal to fund a public four-year in-state, it’s actually a little bit less at 28,000. But the interesting thing is right now what they’re saving, they’re saving about 200 bucks per month. $2,400 per year into the twins’ 529. $400 total, but separate 529s. If you look at the analysis, Sean, if we assume he’s going to the University of Kentucky, they’re not at 100%. They actually have a funding shortfall of about $157,000. That’s about 23% to the goal.

Now Addison should be a little bit ahead, because if we use the four-year average versus University of Kentucky, she’s at 30%. The funding shortfall is about 112,000. This is probably an exercise, Kelly, in saying, “Hey, this is the reality of where we’re at today.” We know the goal is 100%. We’re pretty well below that. We’re not far from that one third rule that we always talk about. How would you approach it? I mean, Angel talked about affecting retirement, but maybe there are some levers that we can pull today to get closer to that, but how would you approach that with this particular client in terms of looking at the numbers?

[0:12:47] KRH: Well, I think once you talk through some of those goals, I do think that Angel is right, like that conversation of how it directly impacts other goals. Most people do wish to retire at some reasonable point in time. I think that the next step is to show how retirement’s looking and how on track the household is for that. Often, we can’t do everything. We have to prioritize and decide what makes the most sense to overall have the best plan for the future. This already looks, like you said, Tim, in the range. We’re at 30% for Addison, a little bit lower for Sean with decisions. I would look at retirement and I’d also start laying the groundwork for having conversations with their children as well about what is going to be available and how to make good choices. Yeah, I guess I would look at the retirement numbers next to see, do those look like they’re in great shape? How are investments flowing for that?

[0:14:00] TB: Yeah. I think that’s a great segue. I do want to come back to the tax bill, because I know we’ve had some discussion about that off-camera and what that looks like. Let’s look at the retirement analysis. Angel, can you set the tone here in terms of what we’re looking at? Right now, what they’re showing is a 54 probability of success, which doesn’t look that great. To Kelly’s point it might be where we’re looking at things like the vacation home that we haven’t yet talked about, sending the kids 100% through college, working longer in retirement and maybe rank order in those things in terms of what’s most important. How would you approach, you know, this is more of a dire outlook in terms of how the probability of success is looking here?

[0:14:48] AM: One of the things I like to go over with clients is the 30,000 square foot view of it all before we really dive into the details and just let them know, “If we keep on going at the pace you’re going. If we keep your goals the same, that 54% or as I like to say, five out of 10 times you’re going to have to make adjustments. When adjustments need to be made, that’s what we’re here for to help you out with, of course.” That’s what this probability really says. I mean, the software in and of itself runs thousands of simulations of probabilities. Of course, because the clients are a little younger, there’s more than that. But it lays a good foundation to say there needs to be a change done and that’s what we’re here to help you with.

[0:15:30] TB: Yeah. I think one of the things that we haven’t even talked about is just even like the way that they are invested might be a little bit more conservative compared to maybe what they need to be. I think looking in terms of other levers to pull might be where you don’t necessarily have to save any harder, but they have to maybe take a little bit more risk with their investments. That might be something to look at.

Yeah. I think one of the things that can be lost here is that if you look at it, it’s like half the time you’re going to fail, half the time you’re going to succeed. It’s not really about that. It’s really, to your point, it’s like, we’re going to make adjustments on the fly meaning like, if we don’t do these things, the idea is that at the end of the rainbow when the plan is over is typically at Joe and Jane’s death, there’s still money there. If there’s not, then that’s what they would say is a failure, so to speak.

Let’s talk about the Florida home. One of the big things that we were looking at when we were talking about their goals and some of the cash flow, we’re looking at a blueprint of, “Hey, we’re going to take it in annual vacation every year.” I use this nerdy lifestyle cargo, some new vehicle every seven years. Q7Y, so nerdy script shorthand. We have an Australia trip baked in here. What I basically did was just added it to the 10,000 that we’re saving, plus the 15. We’re saying like 25,000 for a family of four to go to Australia. No idea what that costs, so that would be something that we’d have to adjust as we approach that.

Then the big outflows that really occur at Sean and Addison’s college in 2030 when Joe is 50 and Jane is 46, and really for the next four years. Then what he’s saying, or what they’re saying is that, “Once the kids are out of college, we’d like to be able to move on a vacation home.” I think what we’re seeing is that if we assume a vacation home is half a million and we put 20% down, we just see the plan be a bit exasperated. It’s like, “Hey, we don’t have enough cash money to put towards this.” It’s starting to pull from things like retirement accounts, which we would say probably don’t want to do that, correct?

[0:17:43] AM: That’s right.

[0:17:45] KRH: Yes.

[0:17:46] TB: Then what’s the process here? As again, it goes back to what’s most important? How would you – Kelly, how would you break this down in terms of just prioritizing the goals for the client?

[0:17:56] KRH: I definitely think part of it is conversation and talking through what is most important, like when you start to see data align that everything may not be possible. This is quite a bit of stress on a budget to have the four years of college for two children at the same time. Then the vacation home to be on the backside of that. The college timing is unlikely to change, but like the vacation home, if it’s done at a different time interval, does that make a difference? But looking at the numbers, the stressor is pretty significant. It pulls quite a bit from the retirement accounts.

Then it’s looking at savings capacity. If you’re having the conversation that these items are all very important, you’d like to do as many as possible, then it’s looking to see, is there room each year now where you could be saving more if this is really what’s most important? We tend to save, but we also tend to spend anything that is not earmarked. We talk a lot about smart goals like, if college is a goal, if the Florida home is a goal. Really looking at how much you need to be putting into each account and do you have that like, some of the cash flows when we had looked off screen, look like there’s years where there could be some additional resources. Like, can we start there and say, “If you really get a little bit more intentional with saving, like those unsaved cash flows and the second to last, can you take some from there and help better meet the goals?” But we do tend to spend what we make. We tend to spend the extra almost before we’re going into goals a lot of times.

[0:19:59] TB: Yeah. I think to your point, Kelly, if you look at their cash position, again, they have some debt, but there’s probably per their plan, they’re running a surplus of unsaved cash flows that if you say, “Hey, double your education or double the amount of money.” Right now, they’re putting 200 bucks into a taxable account, which we’re earmarking for a vacation home, 200 bucks to Addison’s 529 per month, 200 bucks to Sean’s 529. If you double that, maybe these numbers are closer to zero, maybe there is more of a shortage, but those are the things I think that, it goes back to one of the things we talk about all the time on the podcast is just like investing or saving with intention.

I think it’s easier to do that than to put it in a dark hole, which is like a savings account. Now it’s good to have that when you do have a tax bill and things like that, but those would be the things that I would be pressing on. It’s like, can we do more from the aspect of dollars going into those three accounts? Even Joe’s 401k. He’s putting in 10% and he gets a decent match. Jane’s maxing that out. Can we get to 11, 12? What’s the road to get them to max out so we’re not seeing so much of a surplus of cash or basically on spend cash, but we’re directing them more intentionally towards the goals, if that makes sense?

Can we pivot and talk about the surprise tax bill? Like, this does happen, right? How does this happen? What are the ways to get in front of this? Cause this is never fun to go and file your taxes and say, “Hey, congratulations.” It’s better if you have $30,000 back, although we know that having that $30,000 in hand throughout the course of the year is important. When you’re on the other side of that, not many people are just putting money aside to pay the tax man. Why does this happen? Angel, how can we get in front of this? What are your thoughts with regard to the tax bill?

[0:21:57] AM: One way it happens is that you don’t pay enough taxes during the year. Typically, what we do here is we do tax projections with tax professionals’ mid-year to see, are you on pace to paying your fair share of taxes? If you’re not, of course, we have to adjust that through your employer. Of course, that’s how to get in front of it, just to see, are you on pace to pay your fair share from this year’s taxes?

[0:22:24] TB: Yeah. Probably what happened, because Joe’s employment is new, he left his old employer, is that the withholding was never set up correctly. Kelly, we know the tax bills, there are things that you can do to reduce that, but at the end of the day, you can’t circumvent that, right? Part of the problem that maybe why they’ve amassed more cash recently if we make that assumption is because we weren’t withholding enough to pay the IRS as we were earning those paychecks.

[0:22:56] KRH: It’s an excellent first red flag like, “Oh, there’s more in my paycheck than I expected.” That’s probably the first place I would go is withholding. I do think working with the tax professional can be very helpful. I think the purpose of a projection is to minimize that huge surprise like, there’s going to be things that change. Over the course of a year, an average client household might change a job, which we have here, additional family member, the kids going to college, contributing to the 529 accounts can have an impact on the state tax.

Doing a Roth conversion, at first, I was like, oh, maybe that bill was somebody decided to move a pretax into a taxable account and didn’t have professional advice on what might happen. Lots of things happen over the course of the year. A projection is not going to get to the penny, but it could help eliminate a big unpleasant surprise that would give a couple of months to change the withholding to look at the retirement contributions and get prepared.

[0:24:09] TB: Yeah. Shout out to Sean Richards at YFP Tax. These are some of the things that he’s going to be doing with clients, a projection to get in front of some of those surprises. The tool that we have here gives a rough number based on last year of like, “Hey, at the end of this, Joe and Jane, we think that you’re going to have to pay about $42,000 in taxes. If we’re halfway through the year and you’ve paid around 20, 21,000, we’re good.” Again, very much broad strokes, but definitely would want to work with a tax professional to make sure that those types of surprises are mitigated because even things can happen at the very end of the year. It could be that Jane got a bonus that was higher than she thought and we have to make sure that the right amount is withheld.

The other thing that we see for some of these tax surprises is like, if you do have side hustles, you’re making 1099 income and you’re not paying tax on top of that, it might make sense to withhold more from your W2 paycheck just to soften the blow a little bit. That would be one thing that hopefully we’re not going to replicate in the future and get in front of. The last area guys I want to just focus on is the insurance piece.

We’re not going to get into disability, because I don’t think we have a whole lot of detail on that. But when you look at the life insurance right now, they’re really just showing a life insurance policy through Joe’s employer that’s about 50,000. Jane has 162,000 through her group policy. Obviously, I think with college on the docket, a mortgage, young kids, this is probably insufficient where we probably need to look at policies. Angel, how would you purchase with the client?

[0:25:49] AM: There are a couple of ways, but I mean, I like to use rules of thumb to begin with. I mean, typically I like to look at our clients’ income, make sure they have either 10 times or 15 times insured, but there’s a formula that we use where it’s very need-based. We look at final expenses, the nationwide average. We look at liabilities that are happening, things like mortgages, things like student loans or other liabilities included in that. Definitely, because you have children, we like to throw in maybe about $100,000 up front if something does happen, if somebody predeceases the other, to make sure that your kids go to college and get educated. Then after that, we just throw in a couple of years of income to make sure that there’s a readjustment period and that any savings that you would have made while you were alive go into an account or your spouse can not take a dip in lifestyle.

[0:26:46] TB: Yeah. I think you can definitely use the rules of thumb. I would probably sleep more comfortably at night if they had probably a million dollars each at a minimum between the two of them on top of their group policies. I think you can very much break it down by liabilities, adjustment period, all that stuff. I think some work to be done definitely with that. How about Kelly, if we look at the other part of wealth protection, believe it or not, they’re pretty decent. I think when the twins were born, they went through a lot of the state documents. Anything that you would call out here, maybe outside of just updating documents and just making sure that they’re good, that you would want them to work on from a state plan perspective?

[0:27:26] KRH: I’m excited that they have any documents in place, so that was a huge check mark. I don’t know if it’s just our discomfort with this conversation, it slightly surpasses the life insurance in terms of discomfort, but these documents are very important, especially with two young children, but even with a two-person household like, it just makes things so much easier. I’m amazed at the number of stories, I don’t know if it should relate to us, even though it’s famous people that are in the news, just how difficult it is to get through. I feel like there was just a recent article about another famous person in the news who passed away suddenly unexpectedly and his wife has been navigating for months, even though the state laws are friendly for the spouse.

Always making sure that they’re up to date. Certainly, the guardian is big with having younger children. In this case, they don’t have a trust. That is a conversation with an attorney to see if – oh, actually living trust would be good to add to that. Sorry, I did not see those were not checked off. Yeah, that would probably be the one thing on the list just to make sure if anything is needed there. We are not attorneys at YFP, so we would default to legal expertise, but we can help provide guidance on looking into resources, documents needed, how to have those conversations with each other and with a professional.

[0:29:07] TB: Yeah. I think this is a phased process, right, Kelly? It’s education of, “Here. These are the things you probably need.” Then bugging clients to get them in place. Then probably the last phase is, I think next level is make sure that you have a legacy folder. It’s all in one spot. The people that know that the people, the guardian, the executor know where to find this stuff. But to your point, it’s a tough one for us to really execute, because unless you have some experience with this, because again, not many of us want to think about our premature death or disability. Definitely the will, the power of attorneys for property, for health, the living will, even a basic beneficiary check, just to make sure that all of the things are where they should be. This tool actually has, I think a pretty good list of the different accounts out there and who’s the beneficiary and who’s the contingent beneficiary.

Going through that every couple of years, I think is a good, good practice. Probably, just some little bit of touch up to do much more work on the life insurance side from a wealth protection perspective, but pretty okay from the estate plan. We just need to brush it up and make sure it’s current and well-rounded. We’ll leave it there. Kelly, Angel, thank you so much for joining me for this sixth installment of the case study. Hopefully we changed up a little bit. Hopefully this will be meaningful for our listeners out there and really looking forward to doing the next one with you.

[0:30:37] AM: Thanks for having us.

[END OF INTERVIEW]

[0:30:40] As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information of the podcast and corresponding material should not be construed as a solicitation or offered to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archive, newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists, unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward-looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacists Podcast. Have a great rest of your week.

[END]

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YFP 305: Understanding Annuities: A Primer for Pharmacists

Posted on April 27, 2023April 26, 2023 by Tim U

In over 300 episodes of Your Financial Pharmacist, we haven’t covered much about annuities and today, Tim Baker, CFP®, RICP®, RLP® joins Tim Ulbrich, PharmD to do just that. On this episode, sponsored by First Horizon, you’ll hear all about what annuities are, the main types and how they differ, common misunderstandings, fees associated with annuities, and how they can assist with building a retirement paycheck through the flooring strategy.

Episode Summary

This week on the YFP Podcast, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, RICP®, to discuss annuities.

Tim Baker explains what an annuity is, the main types of annuities, key terms and concepts to understand when evaluating annuity options, fees associated with annuities, and how annuities fit into the broader retirement income planning strategy.

During the second half of the episode, Tim and Tim discuss how annuities may fit into the flooring strategy of retirement income planning.

Key Points From the Episode

How common annuities are and Tim Baker’s high-level thoughts around them.
The importance of viewing annuities from the lens of building a retirement paycheck.
Tim Baker explains longevity risk and how annuities address it.
What exactly an annuity is and the two phases of an annuity.
Tim Baker delves into the main types of annuities and how they differ in structure and features.
How the appeal for annuities has increased due to human psychology.
Including annuities as part of retirement income strategy, the four ‘Ls’, and the flooring approach.
Why the psychological aspect of annuities is underrated.
The biggest con of annuities: fees.
How the tax treatment of annuities differs depending on the type of annuity and how it’s funded.

Episode Highlights

“We kind of shy away from [annuities] as a tool to be used in retirement.” — @TimBakerCFP [0:05:34]

“An annuity refers to an insurance contract where you give the insurance company money, typically in the form of a premium, and they invest the funds – with the idea of paying you back an income stream in the future.” — @TimBakerCFP [0:09:16]

“I’m less worried about legacy and I’m more worried about can my money sustain me?” — @TimBakerCFP [0:29:19]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here. And thank you for listening to the YFP podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, YFP co-founder and Director of Financial Planning, Tim Baker, joins me to talk about annuities. During the show, we discuss what an annuity is. The main types of products available. Key terms and concepts to understand when evaluating annuity options. How the fees are associated with these products? And how annuities may fit into the broader retirement income strategy?

Before we jump into today’s topic of annuities, I recognize that many listeners may not be aware of what our team of certified financial planners do working one-on-one with more than 280 households in 40+ plus states.

Our team offers fee-only high-touch financial planning that is customized to the pharmacy professional. Whether you’re a new practitioner, in the middle of your career, or nearing retirement, we have you covered. To learn more about how our financial planning services can help you live a rich life today while planning for the future, book a free discovery call at yfpplanning.com.

Whether or not YFP planning, financial planning services, are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

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To check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approved process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

[EPISODE]

[00:02:30] TU: Tim Baker, welcome back. What’s the good news?

[00:02:33] TB: Not much, Tim. Just kind of hopefully whining tax season down here shortly. The team is frantically at work crunching through tax returns. That’s really the theme of the next few weeks here. Excited for the deadline to be here and gone.

[00:02:49] TU: Yeah, shout out to the tax team. As you mentioned, Tim, hard at work. This season is intense. And we’re really looking forward to doing more year-round tax planning with these individuals. And if they’re listening, which I suspect the tax team is not, since they’re in the weeds right now, but grateful for all their contributions and the value they’re providing to clients and others in the YFP community. So, huge shout out to them.

Tim, annuities. It’s hard to believe in 300+ episodes now the podcasts that we’ve done that we’ve really covered very little around annuities. I think we had an Ask a YFP CPF a while back that we touched on it briefly.

And I’ll be honest, Tim, this is an area of the plan that I underestimated just how big it can be both in the volume of people that are purchasing annuities, the questions that are around the annuities, and how they can build under the retirement plan.

One report from LIMRA was at over $310 billion dollars’ worth of annuities that were sold in 2022. And that was a 22% increase from 2021. Just a big area of the plan. I’m curious to hear at a high level your thoughts around annuities and how common they are as you hear those statistics. And maybe just as surprised as I am that we haven’t dabbled into this more yet.

[00:04:07] TB: I think it depends who you talk to. I talk to some advisors that use them as part of their practice. I talk to a lot of advisors that I trust and that have looked on them that don’t necessarily use it as part of their practice. I think it’s going to be dependent on kind of the market and where we’re at.

Annuities, kind of like long-term care insurance, Tim, kind of get a little bit of a bad rap. And rightfully so, in some instances. And we’ll kind of talk through that. But I think a lot of people, at the end of the day, it’s an insurance product at heart. But you can intertwine in investment products. That’s typically what a variable annuity is or like an index annuity is with this.

But just like insurance, any other type of insurance, we don’t really like to give up our money in the form of a premium for coverage that we may or may not need. I think annuity is a little bit of a different breed. But there seems to be, again, some negative connotations around annuities mainly because like I got to give up my money for something that’s kind of nebulous in exchange.

And I think for those reasons, it’s kind of more psychological that people are like, “Hmm, I’m going to stick to I have a million. It’s a 4% withdrawal rate. It’s $40,000 a year. Couple that with social security. I’m good.”

And for a lot of reasons, maybe not so much. That 4% rule, I think a lot of people are looking at that and saying, “Hmm, going forward, I don’t know. That’s not necessarily the best rule of thumb to be using.”

I think for all of those reasons and probably others that I didn’t mention, that we kind of shy away from this as a tool to be used in retirement. And again, I think that – I think everything should be on the table more or less. And biases aside to see, okay, what are the goals of the client? What’s the balance sheet look like? And then move from there.

[00:05:51] TU: Yeah. And Tim, before we even jump into what is an annuity at a high level, what are the types of products that are out there? Advantages? Disadvantages. We’re going to get into that in more detail. But I think it’s important to take a step back and view this from the lens of building a retirement paycheque, right?

We talked about that previously on the podcast. We’ll link to that episode in the show notes. But here, what we’re talking about is a sliver, apart, perhaps an important part, annuities, that are a broader part of how we’re going to build a retirement income stream. How we’re going to replace what was our paycheque and build that retirement income? I think it’s important that we lay that framework as we get into the weeds on the annuities.

[00:06:34] TB: Yeah. I mean, I think, at the end of the day, when we are thinking about a financial plan, a lot of roads point to, “Can I accumulate enough assets to then not have to rely on a pay cheque and can kind of live my life?” And this topic is – a lot of us, we focus more so just on the accumulation phase and like save and invest, save and invest. But then when we get to the end of it, it’s like, “All right, how do we actually turn this into a sustainable paycheque for the rest of our lives with that timeline being unknown?” And that’s one of the things that annuities address. Because it’s unknown, the payment for a lot of these annuities can go out to the rest of your life. It addresses some longevity risk.

It’s a crucial part of this discussion. And that’s why we’ve been big proponents of Social Security claiming strategy. It’s one of the most important decisions that you make in retirement. And this type of discussion around annuities and longevity risk is right there.

I think it’s something that we should definitely bring to the top of the fold and make sure that we are situating this in a way that it goes back to kind of that retirement paycheck. And how does this all fit together?

[00:07:49] TB: Yeah. And speaking of longevity risk, I pitched a question out there on LinkedIn to say, “Hey, Tim and I are going to be talking about annuities on the podcast. What questions do you have? Would love to hear from the community.” And one of the things that Bryce on LinkedIn said, to your point about longevity risk, is frame it as like the opposite of life insurance. You’re ensuring the risk of living longer than expected instead of shorter than expected. Tim, what are your thoughts on that viewpoint? And I guess, as a part of that, just what is an annuity and how does it work?

[00:08:17] TU: I think it’s dead on. I think what Bryce said is when you think about longevity risk, that’s the risk that people are living longer than they expect, right? I can go on to socialsecurity.gov, put in my gender and my birthday, and says, “Okay, based on all of the data that they’ve collected since the beginning of time or for as long social security has been around, you’re going to live to 88.6-years-old.”

But, Tim, I’m not going out like that. I’m going to be here until 95, 105. I’m going to be here for a while. That means that I potentially have 10, 15, maybe 20 years that, according to my plan – again, we as planners, we go out a little bit further to kind of model that. But think about having a decade worth of expenses. Probably a lot of medical expenses that aren’t accounted for. That’s what longevity risk is. That, to me, is one of the things that an annuity addresses.

An annuity refers to an insurance contract where you give the insurance company money, typically in the form of a premium, and they invest the funds either very, very conservatively or could be more aggressively with the idea of paying you back an income stream in the future. That could be a fixed income stream. That could be a variable income stream. There’re so many different flavors of ice cream when it comes to annuities, Tim. That’s the basic concept.

Typically, you really have two phases in annuity. You have what’s called the accumulation phase, where this is the annuities being funded. And it’s before the payouts begin. Any money in the annuity kind of grows on a tax-deferred basis during this stage. And then the second phase is the annuitization phase, where you say, “Hey, either I have the option or per the contract that I set up five years ago. It was a deferred annuity for five years.” Now these payments start and they are X based on the underlying performance of the investments or just what you agreed to five years ago. Again, there’re lots of different types of variation here. But essentially, that’s it.

It’s kind of like Social Security, but not Social Security. The big difference is that Social Security, even with all the negative headlines, it’s still backed by the US government. There’re lots of fears there that benefits will be changed in the future. I think they will be to kind of keep it solvent. It’ll still be there. This is kind of like private Social Security in a sense where you say, “Hey, not US government.” But, “Hey, insurance company, here’s money either all at once or over whatever premium schedule that you set up. And then give me that money back in the form of an income stream.”

What you’re doing is you’re increasing guaranteed income. Really, the only guaranteed income that most people will have, because pensions have really kind of gone away, is social security. What you’re trying to do is increase guaranteed income. And again, one of the things you have to look at is how is the insurance company rated? Are they rated well or not? Because there is risk of failure there and we’ve seen some bank failures that have, I think, shocked some people. That’s one of the things that you have to make sure that you are in tune with. But that’s essentially the broad strokes of an annuity.

[00:11:36] TU: And, Tim, great point about the comparison to Social Security. It obviously operates very different. But we’ll come back here in a little bit about the concept of a flooring strategy. But essentially, if we think about, again, replacing our paycheck with a retirement income stream. For most folks, even with the negative press around on Social Security, it may be that, hey, from Social Security, and then plus or minus an annuity, we’re going to have some type of – let’s call it base income, right? Oversimplifying a little bit because of how those can fluctuate and be variable in the different products. But drawing on some type of base. And then we can talk about how to make up the rest of the paycheck from there.

Types of annuities. Tim, I know this is a lot to cover in a short episode where we’re really focusing on some of the basics and we’re going to come back to this topic more in the future. But what are the main types of annuities. And how do they differ in terms of the structure and features?

[00:12:28] TB: I’m going to rattle off a bunch of different types of annuities. You have the immediate annuities, immediate fixed annuities, immediate variable annuities, deferred annuities, deferred income annuities, fixed deferred annuities, indexed annuities, variable deferred annuities. There’s –

[00:12:41] TU: Really easy to shop for, right? Is what you’re saying?

[00:12:44] TB: Yeah. Yeah. Super straightforward. We’ll put these in two kind of macro categories. You have kind of immediate versus is deferred. An immediate annuity is just that let’s say you’re retiring and you have a $2 portfolio. And you say, “Hey, I want to take some money off the table in terms of like my traditional portfolio. The market is blah-blah-blah. The volatility. I’m going to put a quarter million dollars into an immediate annuity.”

That means that I give the insurance company $250,000. And then within, I think, 13 months is what is considered an immediate annuity, you start receiving payments. A deferred annuity, the only difference is, is that you give that money today. And then 13-plus months later you get – there’s some growth there. Straight up, like if you do an immediate annuity today and you get that payment next month, the payment might be a little bit less. Versus if you wait 14 months, it might be a little bit more. That’s really the big difference.

One of the big products that’s out there that’s an immediate annuity is called a single premium immediate income annuity, a SPIA. These are contracts. Generally, start in providing income before 13 months after the date of deposit. They’re typically bought as a period certain.

One of the strategies that you could use – we just talked about social security and how powerful that could be. You could say, “Hey, I’m retiring at 65. I want to defer and get as many deferral credits for social security as possible. I’m going to buy a period certain of five years to get me to 70 so I can then claim Social Security.” That might be a way to kind of bridge the gap between that.

And I think that’s a viable strategy, Tim, which people don’t think of. They might say, ” I’m just going to draw down my traditional portfolio.” You can buy it for a single life. So, just me. Or you and a spouse. A joint life.

Obviously, the more people – typically, if it’s single life, and you are a guy, you are going to get paid higher. Versus a single life and you are female. Because females typically live longer. Single life versus joint life, if there’s two people, typically that payout is going to be less than a single life. Because there’s two basically occurrences for that annuity to kind of go away.

The SPIAs are typically lifetime income vehicles. You must be paid at least 12 months substantially in equal payments. But it can be not just monthly. It can be quarterly, semi-annual, or even annual payments.

Many SPIAs can accommodate a death benefit, which means that after you die, a lot of people – this is one of the misconceptions. A lot of people say, “All right if I give quarter million dollars to your insurance contract and I get one payment and then I keel over and die, I lose all that money.” And there are lots of ways to structure that to protect. It could be return of premium. It could be to pay it out for five or ten years. These are all kind of riders that you put on the annuity.

And then you have a deferred annuity, which is basically the same thing again. But it’s like 13-plus months later. The other macro category, Tim, that I would talk to is the fixed versus variable annuity. Fixed annuities provide regular periodic payments to the annuity. They’re fixed. They’re the same. Just like a mortgage. You pay the same, I guess if your taxes go up a little bit. But you pay the same thing month after month.

The variable annuity is based on the underlining performance of the funds that you kind of select. This is where the investment part comes in. You typically get a higher payment if the market does well and a lower payment if they don’t.

The big problem that I have with variable annuities is the commissions and fees associated with it. I’d almost – just like we talk about, buy term life insurance, invest the difference. Anytime you mix these products and there’s complexity upon complexity, typically means that the fees are going to go up.

But I would say the main types, immediate versus deferred, which is more about time-in. Fixed versus variable, which is more about the amount of payment that you’re going to receive connect it to whatever underlying investment that’s there.

Now if you do a fixed, the insurance company is going to invest it. They’re just going to invest it very safely and typically not necessarily tied to market. Maybe treasuries or bonds, things like that.

[00:17:04] TU: Tim, perhaps an oversimplification, but I would assume. I’m just thinking about this from why do these products exist. Obviously, they have to have viability from the person selling the policy, right? Just like a life insurance policy. And it feels like, while different based on variable or fix, that obviously they may be taking a larger lump sum of money investing and growing that at a greater return. Depending on the type of product and what you’re putting that money into. And then whatever they’re paying you out, in theory, their goal is to pay you out less so that they can make some money on the upside of that.

And that’s not a bad thing, right? I mean, in terms of if we want some stability – and we’ll talk about the flooring here in a moment. That’s what we’re willing to potentially give up is some of that higher upside. And obviously, we’re putting floor on some of the downside as well depending on the type of product. But is that generally how these products work from the institution standpoint of how they’re making money off of them?

[00:17:58] TB: Yeah. You know, no free lunch, right? In exchange for guaranteed income, I’m going to pull my money with other annuitants. And essentially, they’re playing the game of what do the morbidity table say? And can we still turn a profit?

But I think of it as I put in a quarter million, Tim. You put in a quarter million. Joe Schmo puts in a quarter million. And we’re all drawing on those funds. But Joe Schmo might die at age 75. You might live to age 105 and I might be somewhere in the middle.

But at the end of the day, you take a lot of maybe stress or some other things that are more soft, like more the human element, off the table. Because those checks are rolling in. I don’t have to worry about the markets as much. I mean, you still do. Because unless – we’ll talk about the flooring strategy.

But like one of the things that I think can stretch out retirees, especially in markets like this where it’s really volatile, they’re up and down, they’ll be kind of trending down over the last couple years, is that, “Hey, I started with a million bucks. I’m four years into retirement and I have $750,000. Or I have –” That’s because of what I’ve taken out. Because of losses. The annuity kind of addresses some of those things where it’s like, yeah, you might take a haircut at the start. But for that haircut, you’re getting $1,000, $1,500 on top of that Social Security that you have kind of rolling in.

[00:19:24] TU: And the emotional side.

[00:19:25] TB: Yeah.

[00:19:26] TU: Yeah. I mean, we haven’t talked a lot about that. Obviously, there’s a risk tolerance question here. But there’s also a peace of mind aspect to this as well in terms of building some of that base.

And I think Tim, what you just shared there in terms of the market changes are probably why we have seen such a strong uptick in the purchase. I shared those stats early on in the episode, right?

I mean, prior to that, we really were on this – what, 12, 14-year run of markets constantly going up. And obviously, we’ve had more volatility. And it would feel, like in a greater volatility or down market, the interests and annuities goes up. I mean, I think that would be human psychology, right?

[00:20:02] TB: You’re looking for more safety. And I would say that annuities typically are going to be – I think of myself as having more of an appetite for risk. But when I think about myself when I’m making these decisions in retirement, I feel like there’s a lot of appeal for this.

It’s like, “Okay, can I peel off a percentage of my traditional portfolio to turn that into an income stream that’s matched with my social security?” That like, at the end of the day, like everything could fall apart. But I still have enough to pay for my living expenses. Like all that kind of stuff. And I think that’s a big deal.

[00:20:41] TU: Tim, I have this visual of like you and I in our 80s like sitting on our rockers, like drawing on the annuities. And like I’m still waiting for the Bills to win a Super Bowl. You’re still waiting for the Sixers process to work out that’s taken forever.

[00:20:54] TB: Yeah. Yeah.

[00:20:55] TU: We’ll see where that goes.

[00:20:55] TB: Yeah, it’s going to happen. I think that the Sixers are good for a run.

[00:20:58] TU: This is the year. This is the year.

[00:21:00] TB: This is the year.

[00:21:01] TU: We’ll see yeah so let’s talk about how annuities fit into the broader income strategy. We’ve danced around this a couple times now with the flooring strategy. We’ve talked about that previously on an episode that we covered Social Security. We’ll link to that in the show notes. But talk to us about annuities as part of the retirement income strategy and creating that floor.

[00:21:19] TB: Yes. Again, I think when we’re looking at this, essentially, we’re trying to address kind of the four ‘Ls’ of retirement. It would be longevity. Do we have enough money to sustain us throughout lifestyle? Are we living the lifestyle that we want to live? Or do we have to adapt that because we didn’t plan enough, or we didn’t save enough, or whatever that looks like? Legacy. What do we leave behind to heirs? Or what are the things that are important to us that we want to make sure that we’re focusing on? And finally, liquidity. Do we have enough money that we can you know pull for those discretionary things?

To me, we’re kind of looking at – with an annuity, we’re trying to address I would say like three major – actually, probably four major risks in retirement. One is the longevity risk, which we’ve talked about. One is excess withdrawal risk, which means that if we’re trying to build a paycheck, there is a risk that we’re going to be pulling too much, especially in the early years. Maybe we’re pulling 5%, 6%, 7% early on. And then later on, we have to pull a lot less because we just pulled too much early on. Or the market is wonky, which is probably the third risk, which is market risk. We want to, with annuity, try to eliminate the volatility.

And probably the other one that’s maybe not necessarily talked about is like early loss of spouse. If you have social security, you and a spouse potentially could be pulling in two checks. But then when that spouse dies, now you have one. Annuity can help that as well, where you still have the dollars coming in.

When we look at it from a flooring approach, the flooring approach is probably the most conservative approach to building a retirement paycheck. The flooring approach calls for special products to be used, a la annuities, to set the floor. What we essentially are trying to do is establish what are the essential spending amounts that we need? And then what are the discretionary amounts that we need? The basic needs would be food, shelter, clothing, transportation, insurance premiums, and health expenses.

The main tools to kind of basically set that floor is going to be social security. Pensions, if you got them. Could be things like a bond ladder or TIPS and I bonds. And probably the last one is the annuity with fixed terms that have fixed terms or fixed payments. Or typically lifetime income streams.

To kind of walk through an example here, is that I might sit down with a client and say, “All right. We have between house and food, gas, utilities, maybe some debt still, medical insurance, that’s going to be $5,400 a month.” And then if we add up all the discretionary between travel, gifts, dining out, entertainment, hobbies, maybe that’s another 2,000. I’m really going to look at that as two separate buckets. We’ll say 5,400 for essential and 2000 for discretionary.

When I try to line up those income streams of like how are we going to cover the essential expenses? I know that this particular client, their benefit from Social Security is going to be $3,000 per month. I know that I have about a 2,400 gap. We’ll round it up to 2,500. About a 2,500 gap for those essential expenses.

What most people do is that that’s when they typically say, “Hey, 4% rule. Draw down the portfolio.” What the flooring strategy says is, “Okay, we have 3,000. We want to get to, say, 5,500 for the essentials. Let’s go out and peel off part of the traditional portfolio and have an annuity fill in that 2,400, 2,500 per month gap.”

So now, we go out, we say, “Okay, we’re going to take X from the traditional portfolio and we’re going to have a $3,000 check coming in for Social Security and then a $2,500 check coming in for the annuity.” That $5,500 meets the floor of those basic essential expenses. And then the remainder of the traditional portfolio, the 401K, the IRA, the simple IRA, the TSP, for those $2,000 for discretionary, we’re going to pull from the retirement portfolio. It could also be for part-time work, consultant work, or whatever.

But that’s the idea, is that create the floor with – if the wheels come off, we have to pay these no matter what. And then the rest, kind of the fund money, comes from the traditional portfolio.

For a lot of people, it’s just too conservative because they’re like, “I don’t want to give up X amount of my traditional portfolio for that $2,500 payment.” I was messing around with the immediate annuities.com. And you can put in a lot of different information to get a quote.

Just give you an example, Tim. I put in my information as if I was 65 and Shea was 60. And I said, “All right, I’m going to put in $250,000.” Let’s pretend I have a $2 million portfolio. I’m going to basically spend that down essentially to 1.75. That $250,000, if I were to basically buy an immediate life annuity, this would cover my life and her life. Would basically pay me out $1,308 for the rest of my life.”

[00:26:38] TU: Per month.

[00:26:38] TB: Per month.

[00:26:39] TU: Yeah.

[00:26:40] TB: If you do life plus 10 years certain. This would be – if I buy this annuity at 65, and then I die at 67 and she dies at – she’s five years younger, 65 herself. It would pay out to the beneficiaries 10 years. There’s also one. That would go down a little bit. That’s 1,299.

[00:27:00] TU: Which makes sense, because you’re getting that additional benefit. Yeah.

[00:27:04] TB: If it’s life with a cash refund – this is like the whole, “Hey if I give the insurance money and I get two payments, do I not get my money back?” Life with a cash refund. Basically, what’s left there, that payment goes down to 1,267.

And then it shows like five-year period certain. This was that whole idea of like, “Hey, if I want to extend Social Security or wait to do that,” if I do $250,000 for five years, you get 4,584 for those five years. 10-year period certain, 2,528. There are so many different variations of this in terms of how you purchase.

[00:27:39] TU: I’m curious. Like 250k, let’s just look at that more simple kind of straight option. 250k that you’re giving up of a nest egg of whatever, $2 million, $3 million, that you’re going to get about $1,300 per month and that was going to cover you and Shea. What are your thoughts on that, right? Because I hear that, I kind of feel the emotional tug in my brain, right? There’s the safety security side that’s like, “Oh, man. I know a check’s coming in every month for 1,300 a month.”

Assuming that I’ve saved enough for that 250k, isn’t going to be a massive percentage of the nest egg? I like that security. And then the other side, I’m like, “Geez! That’s only – what? 13,000, 14,000 a year.

When you look at kind of floor income, I too think of myself as being a little bit more aggressive. And what could that 250 be worth if it grows? You start to get into risk tolerance and some of the analytical side. What’s your gut reaction when you hear 250k to 1,300?

[00:28:35] TB: I don’t know. I mean, again, I think about in the context of like $2 million portfolio, peel off a quarter million. Basically, a quarter million turns into 1,300. For whatever reason, I don’t hate that. I think that like, again, our strategy probably is going to be for us to defer Social Security and wait as long as possible. That payment is going to be pretty substantial.

And then if you pepper in what you can get to at least reach that floor, I think that like just like any time you get like an insurance policy or your estate plan is set, I think there’s a could be like a feeling of like maybe you give up some upside. But like – I don’t know. I mean, I think like if I look at the worries that I would have in retirement, I’m less worried about legacy and I’m more worried about can my money sustain me?

[00:29:24] TU: Which is interesting part of the plan, right? And that to me speaks to the value of, like we say all the time, not looking at this in a silo. Even what you just raise, where does someone sit in terms of their feelings around legacy and maybe leaving money to family or leaving big philanthropic gifts? Or is there risk or concern on the longevity side? Those bigger questions have to be discussed and answered before we can determine what’s the pathway that we’re going to take in purchasing annuity.

[00:29:55] TB: If you look at it from the insurance perspective. If I’m 65 and I live to 95, that’s 30 years of $1,300 payments per month. When you multiply that out, that’s like $471,000. That I’m giving 250, I’m getting 2 – is there a risk that I die before that? Yeah. But you can also put those writers in that say, “Okay, you can get your premium back or a period certain.”

What would that 250 do outside of it? To me, it’s like when you get – I think my approach to this is like I want to be as aggressive and pedal to the metal. But then when I get to like decision time right as I’m setting up my paycheck, I want – and that’s why we talk about like Social Security. I want as much guaranteed income as I can get with reason, right?

I don’t know. Is it a quarter million? Is that half a million? Is it a hundred thousand? And again, like a quarter million out of a $1 million portfolio is a lot different animal. I want to make sure that I don’t have a $2 million portfolio. I have a $4 million, $5 million, $6 million portfolio that I can then look at this.

It’s an exercise in kind of a little bit of the what-ifs. But like what do you value? For me, again, if we put ourselves back on the beach and I’m complaining about the six years and you’re complaining about the bills, the checks are rolling in. Social Security, the annuity check. I guess what I would argue is I’m less concerned about the markets, which my dad, every time I talk to him, maybe because I’m a financial planner. He’s like, “Oh, the market. Blah-blah-blah. My socks.” And I’m like, “Cool.”

[00:31:29] TU: What?

[00:31:30] TB: Yeah. Like, how are those word searches going? But like I think the other argument that you can make is that you can afford more risk in a portfolio. Now the regulars might disagree with this. But this is something that the RICP was saying, is like, “If you can show in the grand scheme of things that you have two clients. One client that is straight, systemic withdrawal, 4% rule, blah-blah-blah.” Like, as you go through the eye of the storm, which is plus or minus five or ten years before and after retirement, you have to be super conservative. But if I can make the case that this client has what they need, then I don’t necessarily have to be as conservative. And I can still let the market do what it does over long periods of time, which is return 10%, 7% as we adjust down for inflation.

[00:32:17] TU: That was my thought. As a piece of this we haven’t talked about, what you’re alluding to right now, is for those folks that have a sizable nest egg. Let’s say that the math shows they need three, but they’ve saved five or six. That’s a very different conversation than someone that maybe, “Hey, I needed two and I’m at 1.2.”

Because it opens up. Again, depending on someone’s goal of risk tolerance, all the factors we need to discuss. If someone has a nest egg of five and the math says they needed three, if there’re other things they want to take more risk with, whether it’s in a traditional portfolio, whether, “Hey, I want to start a business. I want to start a foundation. I want to do X, Y, or Z.” This, to me, is very intriguing that you can write a check for an annuity that doesn’t have as big of an impact on percentage of the overall nest egg. And gives you some of that freedom and capacity not only mathematically, but mentally, to take some of that other risk.

[00:33:11] TB: Yeah. And I think that’s one of the things I think is underrated and all this. It’s just the mental, the psychological aspect of it. Because, again, many retirees, they have social security. But a lot of their paycheck is based on their portfolio. You’re spending that down. Whereas I would make the argument, you have a big chunk that comes out with like the flooring strategy. But then you’re spending that down a lot less comparison.

It’s a little bit of – for me personally if you check most of the boxes, I’m like risky, risky, risky. But then like I’m thinking about this in the context of like, me personally, I’m like, “I don’t know. That sounds pretty good.” If I can convert some chunk of my traditional portfolio to a lifetime income payment and not have to worry as much about a lot of these external factors that we have no control over.

[00:33:58] TU: Which, let me get on the soapbox here for a minute, Tim. This, to me, is such a great example of why having a partner, a planner, a coach in your corner is so valuable. We talk about this at length on the show. But especially in products like this. The same can be said for a long-term disability policy. The same could be said for purchasing a home. Because of how these are marketed, it takes us down a pathway of making a decision on a singular part of the plan, right?

And this is such a great example where we’re really talking about much broader issues, which is, “Hey, an annuity is one part of the retirement income strategy,” which we got to know what else is going on in the rest of the financial plan to be able to know where are we at in terms of building that retirement paycheck, which that information is needed to then determine what we may or may not need in an annuity. And then, obviously, the nuances within the annuity options.

But behind all of that is what’s the point? What’s the purpose? What do I want to accomplish? What’s the risk? What’s the goals? And this is the behavioral part of the plan that I know, Tim, I fall victim to. Like I’m punching numbers in the calculator. And I’m on the website you’re on and I’m like, “Ah. I love it. I don’t love it.” And I quickly lose sight of, “All right. Step back. What’s the purpose? What’s the plan? What are we trying to accomplish? What are we trying to achieve?” And where does this one important but very small part fit within the context of everything else we’re trying to do?

[00:35:24] TB: A lot of these things all fit together. Another thing that we’ve never talked about, which I think has a pretty nasty reputation, is even like things like reverse mortgages. And like how does that fit with this? Yeah, it’s multi-factor – like there’re just so many things to consider.

And I think a lot of people, one, they want to know, are they okay? Are they crazy? And I think pharmacists in particular, they want to know that like the math kind of supports that.

The cool thing about like what we can do is we can model all of these things out and say like, “Okay, this is how it affects you.” You know, the bottom line at the end of the day. And I think that this is another vote in the annuity corner, is I feel like sometimes, in retirement, people, they get so preoccupied with their money and with what the market is doing.

And part of it is like you’re not – your day-to-day, especially early in retirement, there’s this kind of like, “All right, I reached the finish line. My identity has been I’m a pharmacist.” Like a lot of that’s tied up. And like, you know you try to fill. And a lot of it goes to things like finances and the markets and things like that.

But when you look at your goals, like it’s typically not what you really want to do or enjoy doing. Some people do. But I think if you can take some of that stress out and really focus on what matters most, which might be volunteering, or traveling and things like that, and not have to worry about that. I mean, I think that’s a huge benefit.

One of the things we haven’t talked about, there are lots of cons to annuities as well. There’re pros. But there’re cons as well that you have to be kind of aware of and before you make that decision. Because it’s a decision that you can’t really reverse.

[00:37:05] TU: Let’s jump into one of those cons, Tim, which I often hear about. And before I started to dive more into this topic, I certainly had that talking point, which was fees, fees, fees, right? Annuities equals fees. And we probably underestimate the impact of those fees on the overall value of the product. Talk to us more objectively about the fees. How they work on these products? And what we should be considering?

[00:37:27] TB: Yeah. When you think about the costs, the fees, related fees, obviously, you have the premiums. That’s what you give the insurance company for that income stream. But I remember when I got into financial planning, Tim, when I worked in the broker-dealer world, one of the things that I heard was like sell variable annuities. And I’m like, “Why?” And like because they pay 6% to 8% commission. And it was like just talked about like that.

[00:37:53] TU: Do the math on that, right? A couple hundred thousand dollars.

[00:37:56] TB: Yeah. And I’m like, “Okay, the ones that have the higher commissions are – they have the longer surrender period.” Their surrender period, or their surrender charge, is where annuitants cannot make withdrawals during like a period of time or they get penalized. They pay a surrender charge or a fee. And these typically can last five, six, seven eight years. That’s involved.

There are annuities that will work with like the fee-only community like us, where they’re commission-free. But they still have to make money somewhere. It could be where they have admin fees. I wouldn’t make money as an advisor because I get paid differently. But there are still admin fees. Could be a mortality expense. This is the compensation that the insurance company basically earns for taking a risk of like you outliving that amount of money that you give them.

It could be if it is investment, like a variable annuity or an index annuity that there’s the expense ratio that you pay for those investments. And then all those riders. You know, you can have a rider for long-term care insurance that you can access your policy for long-term care. I should say, it could be a rider for return a premium. Or there’s lots of different writers that you can kind of tack on.

That’s one of the things that, regardless of the annuity that you elect to purchase, you’ll likely have to pay at least administrative and mortality expenses. Again, some will not have surrender. Some will not have commissions. And the ones that I typically like, which are typically like the SPIA. Keep it simple stupid. Those are going to be the cheapest for that.

But again, if I pay 1% or 2% to get a lifetime income, I’m willing to have that conversation. Versus I don’t know if I’m going to have that conversation at 6%, 7%, 8%.

[00:39:47] TU: Yeah. Tim, I’m not ashamed about the bias I’m going to have here and saying what I say because we’re proud of the value of fee-only fiduciary advice. This is an example where separating the advice from the purchasing of the policy is really valuable, right?

[00:40:02] TB: Totally.

[00:40:02] TU: If I’m totally in an annuity and I’m trying to understand the nuances. What do I need? What do I not need? Not only does a good-fee only planner able to see the rest of the plan and help us advise it. But when we’re in that purchase decision, which is true with any other insurance policy as well. And that insurance policy is tied to a commission, separating the advice from the commission of the policy can be really valuable.

We’re looking at two, three, four options. Understanding what we do or don’t need. Doesn’t mean people that are selling annuities are bad. But just understanding where the conflicts may arise. And then how do we mitigate those so we can ensure we get what we do need and don’t get what we don’t want?

[00:40:40] TB: Yeah. Tim, variable annuities, and non-traded REITs. Back in the day, those were like sell those. And it was because of those commissions were just ridiculously high. And again, I think most people are inherently good and they want to do right by the client.

But also, if you’re in that system, like you don’t really bat an eye at that. Where I’m like, “Geez.” I was new. I was like that doesn’t seem like something that we should just – I don’t want to say flaunt. But it didn’t sit well with me.

[00:41:11] TU: Tim, last question I want to ask you before we wrap up here. Refers to the pre-tax, after-tax component. My understanding is that annuities can be purchased with both pre-tax and after-tax dollars. And so, how does the tax treatment of annuities differ depending on the type of annuity and how it’s funded?

[00:41:27] TB: Yeah. I think the tax treatment, I think the best way to understand it is that think of it as very similar to a pre-tax and an after-tax IRA. If you purchase – say, we use that example. Let’s say I have my $2 million portfolio but a million of that is from a traditional – a pre-tax IRA. And I’m going to peal the $250,000 for my SPIA out of my pre-tax IRA.

Essentially, the funding source is pre-tax. That annuity will be qualified. It’ll be funded with pre-tax money. Essentially, that means that when those payments start to come out, they are taxed as ordinary income just like it would be if I just withdrew it from the IRA.

[00:42:15] TU: To move down to Florida?

[00:42:17] TB: Yeah, exactly. Right. Exactly. I can void state Yeah. If I say, “Hey, on second thought, I want to fund my annuity with after-tax dollars.” Let’s say I use a Roth or it could be even let’s say a brokerage account. Those are post-tax dollars. You only pay taxes on the earnings or interest portion of the distribution but not the principal.

They look at the bulk of that payment come back as like a return in principle. think of it very similarly to how you would just distribute a traditional 401k or a Roth 401k. One of the things to call out is that annuities still have that 10%. If you do this before 59 and a half, you still have a 10 penalty on those qualified annuities.

I think there is – and don’t quote me on this. But I think if you say I’m 57, so I’m before 59 and a half, and I buy a SPIA and I knew – that means I basically annuitized that within 13 months. I think that circumvents that role because you’re basically drawing it out immediately. I think there are a little bit of like variations to the tax and the penalties. But pretty much I would say think of it as how you would distribute a pre-tax or an after-tax account.

[00:43:32] TU: Tim, great stuff. We’ve covered a lot. But we’re just dabbling into the topic of annuities. One that we’re going to be talking more about along with other topics, especially to those pharmacists that are in that mid-career, pre-retiree, retiree. Things that we know are top of mind as they evaluate that transition maybe soon or a little bit later into retirement.

And I really want to call out, as we wrap up here, our financial planning services offered by our five certified financial planners at YFP Planning. We work with pharmacists at all stages of their career. Whether you’re nearing retirement and you’re thinking about this decision on annuity. Whether you’re in the middle of your career. Or whether you’re a new practitioner, we have one-on-one comprehensive financial planning that is ready to meet your needs based on your goals and your stage of career.

For those that are new practitioners, we’ve got a foundational financial planning offering. For those that are more in the middle to later in their careers, we have a wealth management service. And I will link to in the show notes a link where you can book a free discovery call with Justin, pharmacist from our team, to learn more about those services and whether or not they’re a good fit for what you’re looking for.

Tim, thanks so much, as always. And looking forward to get back to it in the future.

[00:44:41] TB: You got it.

[OUTRO]

[00:44:43] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacist podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home.

A lot of pharmacists and the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% down payment for a single-family home or townhome for first-time home buyers and has no PMI on a 30-year fixed-rate mortgage.

To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the pre-approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists unless otherwise noted, and constitute judgments as of the date published. Such information may contain forward-looking statements are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacists.com/disclaimer.

Thank you again for your support of the Your Financial Pharmacists podcast. Have a great rest of your week.

[END]

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YFP 300: Celebrating 300 Episodes of the YFP Podcast!

Posted on March 23, 2023March 23, 2023 by Rose

On this episode, sponsored by APhA, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, and YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, RICP®, celebrate the 300th episode of the Your Financial Pharmacist Podcast! From student loan repayment strategies and investment planning to wealth protection and entrepreneurship, this podcast has strived to provide valuable insights and practical advice to help pharmacists achieve their financial goals each week. Tim and Tim reflect on some of the most memorable moments and guests from the past 299 episodes.

Episode Summary

YFP Co-Founder & CEO, Tim Ulbrich, PharmD, is joined by YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, RICP®, for a special episode of the Your Financial Pharmacist podcast. This week, Tim and Tim are celebrating the 300th episode of the podcast! After taking a moment to express their gratitude for the YFP team, the YFP community, guests, and listeners, they take some time to reflect on the first 299 episodes and just how far the Your Financial Pharmacist podcast has come in the last six years.

Tim and Tim share some of their favorite moments from the show, illustrating the range and breadth of personal finance topics covered along the way and how each relates to the personal finance journey and financial planning for pharmacists. From student loan repayment strategies to wealth protection and entrepreneurship, the podcast has covered it all! Highlights include a snippet from the very first episode of the podcast, how YFP has fostered a community by sharing pharmacist debt-free stories, and stories of pharmacists working towards and achieving financial independence. Listeners will hear Tim and Tim examine common threads throughout the years, including the importance of balancing future financial needs with living a rich life today, entrepreneurship as it relates to personal finance, the emotional and behavioral side of the financial plan, and the importance of philanthropy and giving as part of the financial plan. Tim and Tim close with another sharing of gratitude and hint at plans for the future of the Your Financial Pharmacist Podcast.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TU: Welcome to a special episode of the Your Financial Pharmacist Podcast. We are thrilled to be celebrating our 300th episode today, and we couldn’t have done it without you, our listeners, and supporters. Over the years, we’ve covered a wide range of personal finance topics tailored specifically to pharmacy professionals. From student loan repayment strategies and investment planning to wealth protection and entrepreneurship, we’ve strived to provide valuable insights and practical advice to help you achieve your financial goals.

To mark this milestone, we have a special episode lined up for you today. Tim and I will be reflecting on some of our most memorable moments and guests from the past 299 episodes. So sit back, relax, and join us as we celebrate 300 episodes of the Your Financial Pharmacist Podcast.

[EPISODE]

[00:00:51] TU: Today’s episode of Your Financial Pharmacist Podcast is brought to by the American Pharmacists Association. APhA has partnered with Your Financial Pharmacist to deliver personalized financial education benefits for APhA members. Throughout the year, APhA will be hosting a number of exclusive webinars covering topics like student loan debt payoff strategies, home buying, investing, insurance needs, and much more. Join APhA now to gain premier access to these educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacist.com/join and using the coupon code YFP. Again, that’s pharmacist.com/join and using the coupon code YFP.

Tim, episode number 300. Can you believe it?

[00:01:41] TB: I can’t believe it, Tim. It’s kind of surreal, to be honest. I thought when we started this thing way back in the day, that this would be a great project to dedicate some time to, to kind of lend our voices to the topic. But fast forward to today and where the podcast has gone and some of the things that we’ve covered and some of the guests we’ve had on, it’s kind of crazy. What are your thoughts?

[00:02:05] TU: It’s been an amazing journey. We’ll talk about some of the backstory. We’re going to feature some of our favorite moments from the show over the last, what now, six and a half plus years of doing this. Excited to revisit some of those exciting moments and some of the themes of the show. I don’t think you or I would have ever predicted where this would have gone, over a million and a half downloads of the show. But I think more than anything, that number I think certainly is an achievement.

But what gets you and I most excited is what we hear from individuals of the impact that the show is having. Hey, I listened to this episode and I took this action or it ignited a conversation between my spouse and I or connected me with another pharmacist or got me thinking in a different way. That’s the piece that gets me fired up, and I think the reason we started it in the first place and the reason we’re continuing to do it today.

[00:03:02] TB: Yes. I mean, it is such a – we’ve said this before. It’s such a great medium to get out there and kind of have listeners see a certain side of you and be able to educate, but also to share and be vulnerable. One of the surrealist things, and I don’t do them anymore, Justin Woods does, our Director of Business Development, but I used to get on calls with prospective clients that were looking for help on their financial plan. They would say things like, “Hey, Tim. I feel like I know you because I’ve been listening to the podcast for the last two years,” or whatever it looks like. After I – the red kind of drains out of my face. It is kind of quite flattering, and you kind of sit in front of this mic and this camera. You don’t really think that when you hit record that it really has an impact.

But I do think that what YFP has done, and I think the major tool in which it has done this is through the podcast, is really moving the needle for financial education, financial literacy, hopefully, wellness in the pharmacy profession. I still think that we have a lot of work to do. I’d be interested to ask you what you think is next maybe at the end of the podcast and where we’re taking this thing. But, yes, I’m just super excited. I’m super grateful. I think I’m kind of like – I guess I’m technically listed as the cohost, but I kind of just show up, Tim, to be honest. I do my research on what I need to do.

But I know you and Caitlin and Rose, so I want to give them flowers, just do such a great job of prepping. There’s so much work that goes into this that is kind of behind the scenes. Really, without you guys, we’re not at episode 300 in it. From my perspective, it seems seamless, although I know it is not. So I just want to make sure that I express my gratitude to you and Caitlin and Rose over the years because I think it’s been a team effort. As a fan of the show, as a cohost of the show, so to speak, I don’t take that lightly.

[00:05:01] TU: Yes. I’m glad you mentioned that here, Tim. I had wanted to say some thank yous at the end. But this is a great place to do it. Because when we started the show July 2017, we had talked about what would be the frequency, right? It’s going to be weekly? It’s going to be monthly. It’s going to be every other week. We had several folks tell us like, “Man, don’t do weekly. That is a huge commitment.”

I think in the only style that Tim Baker does, it’s like, “Hey, let’s jump in the deep end and figure it out.” We were doing A to Z, right? Editing, content planning, topics. But that would not be possible. We would not have been able to sustain that rhythm of weekly episodes here now at episode 300 without Caitlin’s help, without Rose’s help, without the team’s help, without your engagement, without the guests that have come on the show, the people that continue to listen, the folks that ask questions. So it really has been a community effort, and it’s been an incredible honor to be able to sit in the seat.

One of my favorite parts of the show, we’ll talk more about this throughout the episode, is I hadn’t really thought about like, hey, 300 episodes means 300 conversations that we get to be a part of, right? Sometimes, that’s a sneak peek into a story, a journey of financial wins. Sometimes, that’s media, another pharmacy entrepreneur, or an investor, or an expert on a topic. I get incredible benefit out of just sitting in the seat and learning from the guests that we bring onto the show each and every week. So I also want to give a shout-out to the many, many guests that we’ve had on the show. That’s something that we’re certainly looking to do in the future as well.

Tim, I want to bring back a little bit of humor as we get started here. But I was going back through some email in prep for this episode and found a string of emails from you and I back and forth, fall 2016. This would be before we officially partnered on the business or even making the decision on the podcast. We were talking about what are some name ideas. What are some taglines? What are some topic lines or topic ideas as it relates to the show? Some of the ones we threw out there are Pills and Bills Radio with Tim and Tim, Scripting Financial Freedom, Tim and Tim and the money, Your Financial Script.

Then all of a sudden, I remember this vividly, I was on vacation with my family in Hilton Head. You and I were talking on the phone, and you said, “Why don’t we call it the Your Financial Pharmacist Podcast?” As simple as it sounds, like that was a very pivotal moment in the journey.

[00:07:26] TB: I think – I don’t know this for sure. But like we both kind of had two separate brands. We were doing very similar types of things. Obviously, you with education and the blog, and me with kind of working more one-on-one with pharmacists on their financial plan. But I think a lot of the underlying beliefs and kind of vision and direction was there. You’ve never said this, but maybe it was more obvious to you because like I think you had –

[00:07:54] TU: It wasn’t. Yeah. It wasn’t.

[00:07:56] TB: Yes. I don’t know. For me, like I love Script. I love Script Financial. That was the original name of my firm when I launched. It’s funny how much time you spend on kind of trivial things like logo and colors and things like that, which are they’re important. But you kind of overweight that. It’s kind of the same thing with this when I’m like, “Tim’s done a really good job of like developing a following in a very short time, and I don’t think I have much of an ego.” I’m like, “Why don’t we just use your banner and use kind of the goodwill that you’ve created?”

I kind of think you’ll remember because you were at, yes, Hilton Head. I think – I don’t know. Was it a phone call that I – because I kind of remember you sitting on like a back step or a front step, and I was having this conversation.

[00:08:41] TU: Yes.

[00:08:45] TB: It was kind of like that aha of like, “Duh, why didn’t we think of this 40 emails ago?” Yes, it is kind of funny. Sometimes, it’s like Occam’s razor, right? It’s simplest thing that’s in front of your face, so yes. But some of those names. I think we were kind of trying to trade a little bit on like the Mike and Mike, the ESPN tandem that they’re not together anymore. But I think using the YFP brand just made the most sense in every facet of what we’re trying to achieve.

[00:09:18] TU: So as we celebrate episode 300, as I mentioned, we’re going to go back to some of the most memorable moments from the show and highlight the various themes that we’ve covered over the past six-plus years. It all started with episode one back in July of 2017. Let’s take a listen where we talk about the origins of the show.

Hey, everybody. Welcome to the very first episode of Your Financial Pharmacist Podcast. We are so excited to be here. It’s been a long time in the making, and we can’t wait to get started on this journey. In this very first episode, we’re going to discuss the origins of this podcast coming to life, our individual journeys to the world of personal finance, why we care about this topic so much, and what we have coming up and planned for future episodes.

So to the Your Financial Pharmacist community, I know there’s lots of you out there that have been following the blog over the past few years. So I am super excited to be bringing on Tim Baker to this journey. Tim is a certified financial planner, and he’s doing this business of personal finance and advising the right way. He’s a fee-only advisor, and he has a passion for working with pharmacists. He’s going to add tremendous value to this podcast and to the Your Financial Pharmacist community as a whole. So I can’t wait for you to get to meet him and know more about him.

So, Tim, you remember that time we met at Bob Evans off of I-71 in Mansfield, Ohio. How random was that?

[00:10:43] TB: Yes. It was great. It was a magical breakfast. I think we sat down. Back up a little bit, we met each other actually via Twitter. That’s his thing. I think we realized that we were doing a lot of the same things, and we had a lot of the same passion. So, yes, that breakfast then in Bob Evans was great for me. I think it kind of was the first step in this direction of kind of partnering up and really bringing great content under the Your Financial Pharmacist brand and really build out the community. So I am super excited, Tim. I’m really ready to kind of begin this journey with you and get this podcast off the ground.

[00:11:30] TU: Tim, I got to admit. That’s a little bit uncomfortable to listen to. I can hear the nerves and excitement in our voices. We had no idea where things were going to go at that point, as we’ve already mentioned. But we knew that the podcast was a good next step after we had that first meeting. We had this shared passion of personal finance and pharmacy. But that takes you back, right, hearing that?

[00:11:50] TB: It does and it was left out of that. I actually turned on the first episode, and you hear like the intro. It’s so different now. It’s a lot better now. But like, yes, I definitely do not go back and listen to those. But at the time, I’m like, “Hey, this is pretty good.” I’m sure, and given everything, like it’s not bad. But it goes back to that point of, and you’ve been posting this lately on LinkedIn, you just got to start. The more that you get paralyzed in your brain, the less you’re going to learn.

Obviously, 300 episodes in, I don’t know if I’m any more articulate or stutter any differently than I did then. But it was just so unknown. I think 300 repetitions later, I wouldn’t say it’s polished because – I will admit this. I edited, I think, the first 50 episodes of the podcast. I would take way too much time, Tim, to kind of take out like my ums and some of the imperfections. If you go through, like you’ll hear that probably episodes like 10 through 40 or something like that. But it’s just not genuine. It wasn’t really genuine. This is how I talk. I say lots of ums. I don’t say my geez.

So I think that it was kind of a lesson for me. It’s like don’t try to be something that you’re not. In a world where I think everybody can kind of give you praise or give you like criticism, you kind of have to like filter that out. I think sometimes, like we’ll hear something of like, “Hey, you suck.” That sits well like more with you than like some of the other things that we hear that are positive. That’s kind of been part of the journey too, just being authentic. But it’s just kind of crazy to hear that, which I don’t know if I’ve ever listened to that since that episode, outside of doing the editing. I feel like we’ve come a long way.

[00:13:41] TU: Tim, one of the things we focused on very early on in the show, and we’ve continued, is sharing pharmacist stories. We really wanted to do this for a couple reasons. One, the topic of personal finance can be pretty dry. Two, we really wanted to foster and create a community where pharmacists were empowering and motivating one another. It’s one thing for us to teach and preach, and we certainly do that sometimes. It’s another thing to teach concepts and principles through stories. I think it really helps foster that sense of this isn’t just you or I delivering material. This is us as a collective community of pharmacy professionals coming together to help empower one another on the path towards achieving financial freedom.

That was a really intentional decision, and I think we have seen the fruit of that throughout. Let’s listen into one of the many debt-free stories that we have featured. This is episode 31 with Adam and Brittany Patterson, starting with Adam talking about making the mental transition from student to new practitioner.

[00:14:49] AP: I would say throughout pharmacy school, I tried to mentally prepare myself going towards graduation. Listen to everybody tell me, “Hey, you’ll be making six figures. Don’t worry about it.” What a lot of people don’t consider at the time was that we actually don’t bring home six figures at the end of the day. They don’t factor in all the taxes and everything that cuts out of your paycheck.

I didn’t really have a plan at how I was going to tackle the debt but knew that I had a grace period, six months, to figure it out before I started making payments. My wife and I always joked about how much it would take us or how long it would take us to pay off our loans. But it wasn’t until close to the end of the grace period that it all started to settle in. I think once we actually sat down and started to think about how much money we would owe in the long run, looking at the debt, looking at how much interest would build up, that we really started to focus on attacking that debt. So at first, I would say at graduation, it really doesn’t set in until that first payment is due.

[00:15:53] TU: Tim, you know the Pattersons well. This journey that was featured on episode 31 was when Adam and Brittany had paid off $211,000 of debt in 26 months. This really was a catalyst for their family and for their financial plan, right?

[00:16:08] TB: Yes. Shout out to Adam and Brittany. I hear Adam’s voice, and I’m like, “Man, I like that guy.” I haven’t talked to him in a while, and I need to reach out and see how they’re doing. They’re the face of our website. So you see their face when you go to yourfinancialpharmacist.com.

Yes, I mean, they were really at the jumping-off point in terms of like, “Hey, what’s next? And how do we transition?” They’re just a great example of some of the behavioral finance that we’ll talk about some more in this episode. But just great – I was more thinking of it of like, as I’m listening to Adam, just some of the great people that I’ve got to work with, got to converse with, got to break bread with. They visited me and my daughter when they came through Baltimore, so just great people.

But, yes, they’re just another great example of, I think, how they’ve approached, again, this mountain of debt and then how they’ve, I think, done a great job of transitioning from that. The big thing from them I think when they started working with me, they were renting a house. Then they bought a beautiful home there outside of Atlanta and Georgia. It’s just kind of awesome to see, to be honest, like the progress. I’m kind of more stuck not necessarily on the numbers but on like the people and the relationships that you develop.

So, yes, I definitely jotted down a note that I got to reach out to Adam and Brittany and see how they’re doing. Hopefully, we can meet up with them soon. But just another great conversation and another great example of just being intentional with your financial plan, which I know is a common theme that we try to hit on.

[00:17:47] TU: Yes. That’s what I really remember from their journey. I’m so glad you’ve mentioned the personal relationship side of it, right? Because, I mean, the numbers on the debt repayment or the savings and investing, we love seeing that progress. But it’s about what does that mean for them and their family and living a rich life. It’s been fun to watch with the Pattersons. We’re going to come back and talk about that through the episode.

Tim, one thing Adam said that really hit me was when he said, “I didn’t really have a plan for how to tackle the debt.” This is something that we hear on the regular. Maybe this is a little bit of a pat on our own back, but it feels like the conversation in pharmacy around student loans has become more nuanced in a good way, right? Pharmacists today in 2023 are asking us questions about student loans that demonstrates a level of baseline knowledge that we weren’t hearing back in 2017.

[00:18:38] TB: There’s a couple of shifts that are going on there. One, back in the day in 2017, 2018, 2019, there was a lot of pain around student loans and a lot of pain coupled with where the heck do I even start? Like, “How do I even take a proper inventory?” Then I think as the years went on, it was a pain. But I have a good baseline knowledge of what I have and what I need to pay back. But like how do I – what are the Xs and Os to do that?

Now, since the pandemic, obviously, one of the things that’s happened since we launched the podcast, among other changes that have happened, the long pause that we’ve had, I think it shifted. We don’t hear a lot of pain around student loans because they kind of been out of sight, out of mind. I think that will shift back when the loans come back online and people are paying. But it’s kind of just been like this hibernating bear. But I would agree with you, Tim. I think I’d like to, hopefully, take some credit of why that shifted a little bit in terms of definitely a more nuanced, a more thoughtful approach to inventory or even like talking about different repayment plans, which were just non-existent before and, be honest, non-existent even in the financial planning world because a lot of this was just so new.

So, yes, I mean, a lot of this is, obviously, Xs and Os. But I think when it comes down to what we’re trying to do is soothe the pain that a lot of our listeners had at the time and I still think will have once the pause basically is over. But, yes, it’s kind of been interesting to see that transition over time to where we’re at today. Then, again, in a couple of months, what that will look like when the payments start coming back on.

[00:20:28] TU: Again, shout out to the Pattersons. Grateful for their contribution, sharing that story. That is one of many debt-free stories that we’ve shared on the podcasts. We’ve covered student loans A to Z. So if anyone’s looking for either content, knowledge around student loans, or debt-free stories and journeys, go to some of the throwback episodes that we’ve had throughout the show.

So student loans we’ve covered in detail on the show, a big part of the early days of YFP. But we’ve also focused heavily on stories of pharmacists that are working towards financial independence and living a rich life today, while taking care of their future selves. Let’s take a listen to one financial independence journey that of Cory and Cassie Jenks that we featured on episode 134.

[00:21:15] CJ: Yes. So you’ve had a couple of great guests talk about their FIRE journey, but it’s essentially financially independent, retire early. So you save enough, and the number that is commonly used is you save enough till you have 25 times your annual expenses. Then theoretically, you can withdraw that indefinitely at a four percent rate. To get there, basically, you’re going to have to really bust it for 10 to 20 years, depending on what your savings rate is, depending on what your own spending rate is.

As Mister Money Mustache and hundreds of other bloggers and people have shown, it’s a very viable path. I think that if we had found that in our mid-20s, before kids, like, okay, we could have sucked it up and both worked full-time hardcore to get there. But then we had a kid and realized we want to have time with him, as much as he can be a little pain. So I came across this idea of CoastFI, and so the FI being financially independent. This says that if you saved enough at a high rate for a short period of time early on in your life and career, you’re going to have the time and compound interest to have it grow to what you need it to be by the time you retire. So that if you hit this CoastFI number, you can scale back the work you’re doing. You can take a job that has a little bit more risk, knowing that you don’t need to continue to contribute to your retirement in order to hit that number.

Now, I love how you like to personalize this idea of personal finance because traditional FIRE people would get angry at you for not just going all the way through. Maybe CoastFI people will get angry at us because our version of it is to try to get to a number. But then still work some in order to save some. I don’t think we want to hit a number and then stop. So our version is to like get to the number we want and then have the freedom to contribute a little bit less as our lifestyle changes with our family.

[00:23:20] TU: Tim, one of the reasons I want to bring back this story is I’ve stayed in touch with Cory and Cassie. Great people, shout out to them. This was really a key pivotal moment for them and their family, this journey that they run towards financial independence and being intentional with the financial plan, just like we’ve talked about with the Pattersons. Since that point, because of the groundwork they had laid, Cory has been able to pursue his entrepreneurial efforts as an author, comedian, speaker. Cassie has been able to shift jobs to be more in alignment with what she was looking to do, which has really given them a lot of the flexibility that they were looking for with a young family, to be able to have that time together but also to be pursuing the things that they wanted to be doing professionally.

So I think that that is such a great example of the combination of the financial plan and what we’re ultimately trying to achieve. One example of many, Tim, of something you often say, which is, hey, we’ve got to find this balance between living a rich life today and taking care of our future selves. Why is this such a central theme for you, personally, as well as for our planning team that works with our pharmacist households all across the country?

[00:24:35] TB: That’s a great question, Tim. So why is that important? I think like before I answer that question, when I was listening to Cory, I was just thinking like it was a little bit of the same conversation we had when we were on a recent road trip because you kind of had mentioned planning for your boy’s college and kind of going all the way to one end of like, “Hey, I had this experience of having a lot of debt, so I don’t want them to experience that.” For me, the thing that was screaming, as I was listening to Cory speak and then kind of relating that to our conversation in the car, was planning is greater than the plan. What I mean by that is like it’s kind of the Mike Tyson quote. It’s like you have a plan until someone punches you in the face, or life happens, or you have a kid, which those are things. Having a kid, those are things that have happened since like we started the podcast, for me at least. I know you’ve added a couple to your crew.

So it’s more about planning and less about the plan because the plan is going to change because change is an inevitable part of our life. I think the better that we can cope with change and plan around that, the better we will be. But the answer to your question about live a rich life today, live a rich life tomorrow, I think that a lot of the – and you’re starting to see it swing back the other way. A lot of the mantra is like save, save, save. Have enough for retirement and make sure you’re doing all these things for like the 30-year older version of yourself.

But then there’s a lot more content and stuff out there. What was the book that you’ve recently read? Die with Zero or whatever. That’s kind of shifted that back. I think like the dangerous thing is that if you follow those kind of rules of thumb, you get to the end of the rainbow and you retire. Say you retire with five million. But if you would have taken that trip or those trips throughout the course of the year, or if you would have taken that one day a week to kind of work on a side hustle or spend time with your family, maybe you retire with two or three.

To me, like the question I would ask the client would be like, “Well, what’s the point? What are we really trying to achieve? Is it to amass a bunch of ones and zeros in a bank account? Or is it to really live a rich life as you age through your 20s, 30s, 40s, hopefully, to your 100s?” I think that because we get so busy, we’re on to the next thing. Pharmacists are very type A. It’s, “Okay, I’ve done this. What’s next? Okay, I’ve done this. What’s next?” But I think what planning really does or I think if it’s done well, it really allows space for a conversation of is this what we really want. Is this a wealthy life?

I think we can – this was me completely. I was raised, and I love my parents. But I was raised that the key to success or happiness, if you want to intertwine those two, is, Tim, you have to get the best grades that you can get to get into the best college that you can get into, to then graduate with the highest GPA, to get the best job, to make the most money. I realized in my first probably 30 years of life that like that didn’t necessarily add up to me, that I was often happiest when things were simpler, when I wasn’t making a lot of money. I had a lot more control of my time. I think it really forced me to kind of question and to evaluate what were the important things in my life.

Unfortunately, especially if you kind of get into that trap of, man, I’m working 40, 50, 60 hours, there’s no capacity to really question am I on the right track or not. Sometimes, like it takes you to do that. Sometimes, it’s you and a partner. Sometimes, it’s a third party, an objective person like a therapist, like a financial planner, maybe a priest or a minister or whatever to kind of ask those pointed questions and to challenge the paradigm in which you are in.

I’m happy to see that a lot more of the content or some of the discussion around this is not to – again, I kind of think about corporate America. Right or wrong, but corporate America is running a marathon at a sprinter’s pace, and it’s really not a sustainable thing. So whether that’s your profession, whether that’s the way that you’re spending money, the way that you’re spending your time, I really think that question of are we living a wealthy life today or are we living a wealthy life tomorrow. I think having balanced between those is such an important question to ask yourself, as you are kind of proceeding through life.

Because I know, for me, like there’s been parts of my life where I’m like – it’s kind of like, all right, when you’re little, you kick your soccer ball into the sticker bushes, and you just stick your head down. You’re running and you get out as quickly as you can. Then you take some lumps. But sometimes, we just get stuck in those thorny bushes. You wake up and you’re 40 years old, 50 years old, 60 year olds. You’re like, “What the heck am I doing?” So I think being self-reflective, it’s really about that more than anything.

[00:30:02] TU: Yeah. Tim, you’ve role-modeled this firsthand. Let’s take a listen back to episode 227, where we discuss this further, right? How much is enough, the importance of balancing experiences today with the future. This included your decision to buy your motorhome. Let’s take a listen.

[00:30:19] TB: One of the things I say to prospective clients, we might go through the wealth-building stage of the financial plan, and we’ll do a nest egg calculation that says, “Hey, Tim. You need five million dollars to retire.” That’s typically where they look at us like we have five million heads, right? Because it’s a big number that’s in the future that doesn’t really mean anything to me. So we go through the process of kind of discounting that back to a number that says, “Okay, if you’re putting this into your TSP or this into your IRA or this into your 401(k) a month, you’re on track, or you’re off track, right?” So we can kind of break that down into more of a digestible number to see if we’re trending to that goal, given a handful of assumptions.

But the point of this story is if we do work together for the next 30 years, and you don’t have five million, you have 7 million, 8 million, 10 million, whatever that is, that’s great. Those numbers are bigger than five million. But if you’re miserable because you look back at that list of all the things that you wanted to do over 30 years, 20 years, 10 years, whatever that is, and you haven’t done anything, and you’re miserable because of it or you’re disappointed, the question I would ask you is what’s the freaking point?

[00:31:31] TU: That’s right.

[00:31:33] TB: Why get this education? Why earn this money? Why pay down this debt? Why invest or whatever if we’re not going to intentionally direct it to the things that matter to you most? I don’t think that I’m going to be on my deathbed. I’m going to say I wish I would not have bought that RV. I just don’t think that in my heart of hearts because I just think about the reaction that my daughter and my niece has had, just when we pulled that up. Even the two camping trips that I had, I think I snapped a few pictures and texted them to you, Tim, even in our first camping trips. It’s going to be an adventure.

To extrapolate that out, like that’s our lives, our lives, our adventures. But we have to be willing to take it and seize it. I think that’s what life planning really tries to get to the surface is what is that adventure and taking that road and not necessarily adapt to a paradigm that’s not yours.

[00:32:29] TU: Tim, that was great stuff. It has been a memory maker for your family.

[00:32:33] TB: Yes. I was getting a little teary-eyed listening to that because it’s also like a good reminder for me to be completely honest. Sometimes, Shane and I will look at it. I’m like, “Man, is this worth it because they say it’s just a money suck?” But then when you look at it in totality, like just the things that in the short time that we’ve had it, it’s been a game changer. I don’t know, it’s – listen to that. The two things that were kind of evident to me is when I repeat myself a lot. So I say a lot of the same things over and over again, which I don’t think this is necessarily a bad thing. It’s just kind of like part of my messaging.

But also, like it’s a reminder. Because sometimes, like – and again like we’ve asked the question, even since we got it. Man, is this worth it? It’s a lot of money. Gas prices have gone up and all that kind of stuff. But it is. I mean, we recently changed where we store it, and I’m driving it from one to the other, and I’m just getting so jacked up. My son will see it parked out front. He’s like, “Oh, are we going camping?” He just lights up. He’s like, “I want to go camping.” I’m like, “No, buddy. We’re not going to go camping until it’s a little bit warmer.” He’s like genuinely upset.

So, yes, we have a lot of plans for it. Obviously, we have to make sure that we budget and we have our plan built around it. But I would reiterate the same thing that I had said is like I don’t think that I’m going to be on my deathbed saying like, “I wish I wouldn’t have done that.” I think it’d be the opposite. I wish I would have done it sooner. I wish I would have done it longer or did more trips. So, yes, I think it’s just so important too.

That’s the thing that I really enjoy about the work that we do after the podcasts turns off, and people say, “Hey, I want to work with you guys.” I think our planners do a really good job of like bringing forward, yes, we got to do the Xs and Os and the technical stuff. But bringing forward like that trip that you want to take or this goal that is not necessarily – it’s money-adjacent, right? Because a lot of the things we have to like plan the dollars for, but it’s not necessarily like traditional investing or an insurance policy.

I think those things are just as important. I don’t know if a lot of planners feel that way. But to me, if you have that trip to Paris or the Pacific Northwest out there, I’m like, “Where’s the money for that? Let’s get this going. Let’s do this, and let’s cross it off the list and then move on to the next one.”

[00:34:57] TU: Great stuff. One of the things I mentioned earlier, Tim, is the joy that it’s been to get to know some of the guests that we’ve had on the show. Many of which have led to some awesome friendships and collaborations and just a ton of fruit that has come from that. Most of our guests have been pharmacists. But we’ve had the opportunity to interview several New York Times bestselling authors, gurus in personal finance. This has been an honor. I mean, it’s been a ton of fun just to learn from these folks. I’ve been amazed at how gracious people can be with their time.

Let’s take a listen back to my interview, one of these with Rachel Cruze, episode 215, where she discusses the emotional and behavioral side of the financial plan, including how we can write our own financial story.

[00:35:42] RC: When there’s so much hope, and I think even the money piece of my message that I communicate with people, it’s like no matter what mistakes you’ve made, yes, maybe you do have a ton of debt. So on a more logistical side, yes, you have a deeper hole to dig out of than the person next to you. But no matter what, you get to make decisions to say, “No, I actually want to change how I view something or the habits around money.”

The same is true with your classroom. Some people – a lot of people, I would say, grew up in a hard environment when it came to money with their parents. But, yes, but you don’t have to just mirror that story, right? You can take charge of your life to say, “You know what? I’m not going to sit here and bash my parents, but I’m also not going to defend them. I’m going to just tell the truth and what happens. Here’s the truth. Okay, there’s some good stuff, and there’s some bad stuff. The bad stuff I can forgive, and I’m going to move forward, though, to choose something different for my life and my family.”

I think it’s powerful, and I think we have to do that in all our parenting. I’m not a parenting expert, by any means. But I’m like, my husband and I have said, “Okay, this is our family. What are we going to choose to do in this? So the money piece is part of that.

[00:36:44] TU: Tim, I felt like this episode was oozing with wisdom, and I loved her authenticity. But one of the things she really hit on, we spent most of the conversation talking about, is really the behavioral side of the financial plan, the emotional side of the financial plan. She was alluding there to the money classroom that we grew up in, the money scripts that we hear growing up, and how much of an influence, whether we realize it or not, that that has on how we approach our finances today.

So, Tim, from your perspective, either individually or also what you see with clients, like how important is that money classroom, is that money script in understanding what perspective you’re bringing into the financial plan to ultimately achieve the goals that you want to achieve?

[00:37:28] TB: Yes. I mean, we all have these money scripts. It could be money is the root of all evil, or money solves all your problems, or there’s – don’t trust people with money. There could be a lot of different things that based on your parents, their upbringing, and how they imprint that on you. It’s a big factor. I always kind of point to the Advisor’s Alpha Vanguard study, and that highlights if you work with a financial advisor. They’re supposedly returning three percent per year on your assets. Half of that is really attributed to not technical or any type of special analysis. It’s really like the behavioral coaching.

That’s significant. I think that whether we want to believe it or not, like we all have these scripts, this baggage. It could be a positive thing. It could also be something that’s a limiting factor for us to really kind of achieve the goals that we have. I think that I’m dabbling more into it. I don’t think I’ve even told you this, Tim. But I’m dabbling more into like stoicism, so reading some books on stoicism and Marcus Aurelius. One of the big things that I’m pulling out of that is like you can really only control what you can control. A lot of our thoughts and a lot of the things that preoccupy us are things that are completely out of our control.

It’s kind of what she was saying. You can think about your upbringing and how you were taught, and you can hold on to that and not let that go but probably to your detriment. It’s really about what are you doing today. What are the intentional actions that you’re doing today to better yourselves? That could be financially related. It could be something completely outside of that, just general wellness.

I think that part of, again, working with a therapist, an advisor, whoever that is, is to kind of pull back some of that façade. Ask good question. Ask pointed questions. Challenge you to say again, are we really where we want to be. Or when you said this, let’s dissect that. Where’s that coming from? What is this? How is this serving you or not serving you? What are the limiting factors?

We see this, I think, more often with people that are wading into spaces that they’re completely unfamiliar. So I’m thinking about like a business, and we hear things like impostor syndrome or – but it is true for that individual that is working a shift at a hospital or like a farm. All of that is there. So to me, again, it’s about reflecting on these behaviors and then questioning, does this serve me today. If it doesn’t, let it go, and then move on. I think building that as part of the plan is important.

I was talking with one of our lead planners who’s doing a certification on financial like kind of psychology counseling. A lot of that is to kind of, again, uncover some of the things that she sees in clients to be able to better serve them or challenge them, when they utter X or Y in terms of how they approach their finances. So it’s really, really important the behavioral aspect of it. I think having the pulse on your own, which is very hard, is, I think, part of the building blocks of creating a plan that serves you and not others. So great episode.

[00:40:49] TU: Tim, as we’ve evolved in our own journey as entrepreneurs and have had the opportunity to connect with various pharmacists that are falling in a similar pathway, we quickly came to the realization that finance is a threat across so many not only individual stories but so many business stories. Whether it’s people that are dreaming about their idea, those that are in the thick of launching something or those that are looking to scale, it’s really hard to separate out our personal financial plan and goals from the business.

That’s in part why we started featuring more and more of the show, I would say, over the last 100 episodes or so on pharmacy entrepreneurs, knowing that personal finance is a common thread to pharmacy entrepreneurship to that community. But also, given our personal passion for entrepreneurship, we wanted to give some examples and on some level inspire others with the many different ways that a pharmacist degree and license can be valuable.

Let’s take a listen back to one of these pharmacy entrepreneurs’ interviews that we featured in 2022. That was Kun Yang, the Co-Founder and CEO of Pricklee Cactus Water, and he was featured along with his co-founder on Shark Tank.

[00:42:02] KY: I think there were a lot of moments. When I look back, it wasn’t like I think one specific – I mean, I do have a specific moment that I’ll share. But I think there were a lot of feelings that I think that felt familiar to me, even in that moment that I can kind of trace back and say, “Okay, this kind of makes a lot of sense.” So the moment really was walking into – I just finished our fellowship and program, and had started a new company. It was a spin-off of our existing fellowship business. I kind of just walked in and had really, really fallen in pretty deep appreciation for the opportunity and the people that I was working with.

But I think one of the days I kind of walked in, and I looked around, and this was still pretty early on in our journey. But something hit me that I had always thought that through all the different career changes and exploration of getting to that point, that going this “non-traditional” path would have led me to move away from this feeling of “impostor syndrome” or feeling like everything that I was doing was actually getting more and more specific. It was because it was leading me to a point of clarity, right?

Really, over time, I realized that impostor syndrome and point of clarity had a lot to do with an understanding of who I wasn’t, as opposed to understanding of who I was. I think that’s something that probably a lot of us can relate to is growing up in your 20s and even maybe sometimes early 30s, you have a lot of ideas of maybe what you don’t like to do, right? Or what are some of the things that don’t excite you? What are some of the general things that do excite you? But you may not really understand specifically why or what you’re really good at to allow you to succeed in those roles.

Again, all those feelings led to that one moment I walked in. I looked around in this open office setting, and I was kind of like, “Man, there’s a lot of incredibly talented and smart individuals around me. If I work really, really hard here for another 15, 20 years, I can really be like one of them.” These were at the time, again, all my heroes I looked up to that kind of forged the pathway for us before.

I guess it hit me in that moment that there wasn’t a specific role that I could look at and say like that is exactly in specific what I wanted to do. I think that that was my – I call it a quarter-life crisis moment of all that impostor syndrome bubbling and kind of blowing up all at once, realizing that, “Wait a second. How could I have done all this and pursued all this specificity, only to feel this still in this moment?” There’s not much more specificity I could pursue. That was when it really kind of became an introspective question of like, “Is there something outside of pharmacy that I can apply my skills to still within the health and wellness space that we’re really passionate about, that I could find truth and clarity?”

[00:44:37] TU: Tim, that was one of my favorite episodes of 2022 and just the opportunity to cross paths with Kun. We would later find out we’ve worked at the fellowship program. Shout out to the MCPHS fellowship program, Amee Mistry, who’s been our collaborator now five-plus years and some really incredible graduates that have come out of that program. One of which is being Kun. But just to hear his reflection on that episode of his quarter-life crisis of coming to this moment of, hey, my pharmacy degree and the experiences I’ve had are valuable. But that doesn’t necessarily mean I have to be identified by that or be identified by a traditional career path. I suspect maybe that connects a little bit with you as well on your own journey.

[00:45:21] TB: Yes. I think going back to Cory, like I think early on, Cory Jenks, like we definitely wanted to give a voice, more of a non-traditional path. I mean, you yourself, Tim, since we started the podcast, again, what’s changed? You’re no longer full-time in academia. You’re full-time with YFP, so more of a non-traditional. So I’ll preface this by saying like being an entrepreneur is not for everyone. I think that that’s important to say out loud because there’s a lot that goes into that. It’s not necessarily for every personality type.

But I do think that, for me, personally, being an entrepreneur, I get a lot of juice and a lot of just energy listening to other entrepreneurs kind of share their story. This one in particular, obviously, we had them on the podcast and watched their Shark Tank episode. It’s very inspiring. I do think that one of the common things that comes out with a lot of these sources is the financial piece. That is a financial thread, whether it’s before, during, or even after the whole journey of being an entrepreneur.

So I think, selfishly, we highlight some of the stories because like it’s part of the things that you and I are both interested in. I can hear my own story when I listen to Kun in this episode, and I’m sure a lot of other pharmacists that are going down this path. But I think that it’s another thing that for us to kind of give voices or to highlight. You don’t have to necessarily color within these lines. There’s a life outside of this. For some people, that clicks. For some, it doesn’t. These particular types of episodes, for me, personally, being a fan of the show, are just super inspiring. Again, I can hear my own story in a lot of them, so.

[00:47:13] TU: Yes. Tim, one of the things that comes to mind here is when we started doing more of these interviews, I’ve often shared with folks. I grew up in small business. We’ve had a family business. My dad’s been in business, advise businesses. I think that probably has stayed with me over time. But I just can’t get enough of talking with other entrepreneurs. What are you building? Why are you building it? What’s working? What’s not working? What are you learning about yourself and the journey? It’s incredible to have those conversations.

One of my goals with these conversations was, hey, I’m not necessary expecting that any listener is going to listen to Kun’s story. Or I think about Allyson Brennan, the Founder of Emogene & Co. or Karine Wong, who founded My Guiltless Treats we had on the show, Victoria Reinhatz with Mobile Health Consultants, and the many stories we featured, Kelley Carlstrom and the awesome work that she’s doing. Not that a listener is going to say, “I’m going to go do exactly what Kelley’s doing.” But rather, it’s going to give them a different way of thinking, perhaps a source of inspiration or motivation of like, “I had no idea, like a pharmacist went that same traditional path that I went at one point or I am currently in.”

If students are listening, and they went and did something that was non-traditional, they colored it outside of the lines. Again, we’re not suggesting that path is for everyone. But we want to give a voice to that, and I think we’re in a really exciting/disruptive time in our profession. Depending on how you look at disruption, it can be scary. That’s fair. But it also can be exciting. It means there’s opportunity for new ideas, new innovations to come to – and we’re seeing that out in the pharmacy entrepreneurship community. It’s really exciting.

[00:48:55] TB: Yes. I mean and I think the writing’s on the wall. I would love to have maybe when I answer the question of like, “What’s next, Tim?” I actually have more long-form discussions about this, like the profession of pharmacy. I know there’s some other podcasts that, obviously, are strictly focused on that. But, yes, I mean, I think the writing’s on the wall for a lot of the things that we’ve been talking about with AI and Amazon and different legislative things that are out there that I think it is ripe for disruption. You can be on, “Hey, you embrace that,” or you could be on the, “I’m going to dig my heels in.”

Yes, I think that when I look back at my journey before even meeting you, it was a podcast that I listened to over and over again. It was about financial planners that had a very similar story to me that were kind of leaving the traditional big siloed firm and doing it themselves. I’m like I remember having that like aha moment of, “I’m a pretty smart guy. I feel like I can figure this out.” I just took that leap.

For me, and you see this in a lot of entrepreneurs, because unlike you, I didn’t grow up in that environment. I grew up in the environment of kind of what I was saying like, “Get the best job, i.e. the safest job.” Why would you ever like leave a steady paycheck to go start from zero? That’s a completely foreign concept in my family. I think for me is like once I made that switch, I kind of want to say like the chemistry of my brain change because, again, like I always talk, I said this on a recent post that you had, I was definitely that. A lot of pharmacists can relate to this. Every decision that I made, it was I’m going to dot all the Is. I’m going to cross all the Ts. I’m going to analyze every angle of this decision. Time will go by and I’ll be paralyzed by what should I do.

Now, since becoming an entrepreneur, it’s really like I’m going to cannonball in and figure it out. I might swallow some water, but then I’m going to iterate, right? So I’m going to figure out what works or what doesn’t work. I’m going to save a lot of time doing that, and I’m still going to do a general analysis. But I think that mindset for me, I almost kind of equate it to like the chemistry in my brain. It’s like changed because and, again, I think you talk about entrepreneurship comes in a lot of forms. But it could be a side hustle. But it could be where you’re leaving your job in academia, and you’re doing this full-time. You’re uncapping your income potential.

There’s just a lot of things that are attractive about it to me. Again, as a fan of the show and highlighting the stories, one, part of it is like I’m interested to see like what are people doing with our PharmD that’s related or even unrelated to the profession of pharmacy. What are some creative things that people are doing, and how is the profession going to pivot? Because I think to your point, it is ripe for disruption.

So, yes, just super grateful to have, like I said, the individuals that you mentioned come on and share their story. I’m hoping to do much, much more of these in the future because they’re inspiring in the least, so.

[00:52:14] TU: Yes. It’s so fun to give a voice to the stories here, the passion that comes through. One of the things I think I’ve shared with you, Tim, before, when I think about the traditional pie chart of the profession of pharmacy, right? You’ve got half or so that are in community practice. Maybe 20% or so that are in hospital practice, a smaller segment that’s an industry, smaller segment that’s in academia and research. Then that final five percent or so is very splintered between all these different opportunities.

I think, if I had to put a crystal ball in the future of the profession, we’re going to see that splintered part of the pie chart become bigger and bigger with pharmacists pursuing more and more non-traditional options, which is exciting. The role of the pharmacist is an important one in our healthcare system. I think we’ve got some really cool ideas of things that our people are doing, and I have a feeling we’re going to reflect upon this period as one that was really disruptive in a good way for the profession.

[00:53:07] TB: Absolutely.

[00:53:09] TU: So the last clip I want to share centers around the giving part of the financial plan. Let’s hear from pharmacist educator and Rising Suns Pharmacy Founder, Sarah Adkins, who came on episode 276 to talk about her why for giving, including the journey of starting a nonprofit pharmacy in Southeastern Ohio. Let’s hear from Sarah Adkins.

[00:53:30] SA: I was raised in the church. I think regardless of the spiritual realm in which you’re raised, a lot of my upbringing was about giving and making sure that those who were not as fortunate, that I gave to those people who were not as fortunate. I was taught that, I mean, since a young age. I think that, for me, that is – I don’t have a lot of money right in my – I never have needed that or wanted that. But I have time. Do I have time? That’s the question.

[00:54:05] TU: That is the question.

[00:54:07] SA: I think I don’t have time. But I definitely give wholeheartedly of my time is what I give. So I have given – it makes me feel good, truly. When I am at the free pharmacy, it is a lot like community pharmacy, right? It’s a lot. You’re on your feet. You’re taking phone calls. You’re answering questions. You’re trying to figure out cost of medications, spending a lot of time on the phone, asking patients about their insurance coverage or why are you not eligible and how much is your copay for this.

I have a couple people, just because it’s come to my head. I have a woman who has an $8,000 deductible on her plan, $8,000. That always comes to my head about people with their deductibles. So why giving? Because I can, because I can. I’m bright. I have a good job. I have a lot of support from my family and my community. I can and I’m able, so why not? It makes me feel good. I feel like I’ve done something to make myself proud and to make my community proud and my family proud.

[00:55:14] TU: Because I can. All the fields there from Sarah, someone I have a great amount of admiration and respect for. Tim, her passion and mindset around giving of time and money is contagious. I know one of the things you and I are both excited about is as we work with thousands of pharmacists across the country and have the impact I think that we hope to have on improving the financial wellness, pharmacists working through paying off their own debt, getting a solid financial foundation in place, I think that, naturally, the next question for many pharmacists is how can I help. How can I help in whatever capacity means most to me?

That might be something that’s more traditional in giving; nonprofits, churches, organizations. It might be family members, friends that are in need, other types of areas. But we really see this when we talk about the evolution of YFP and kind of the next phase of the podcast and other things we’re doing. I think the giving part of the financial plan is going to be a really important one.

[00:56:16] TB: I think sometimes there’s a little bit of guilt around this, especially kind of going back to the money scripts. I think this is a good money script to have is to give back. But sometimes, you got to put your own oxygen mask on before you can do that. So, yes, I think that this is one that I think naturally as people, again, kind of continue on their journey. They’re going to be looking for ways that they can kind of give back because a lot of people have been helped along the way as well. It’s something that you and I, again, have talked about in terms of like where does YFP fit in in this whole realm of giving. I think there’s going to be some things that we’re going to announce here in the future around that, which I’m really excited about.

But, yes, it is one of those things that I’m hoping that we can shine more of a light on of stories like Sarah’s because I think it is so important, and it goes back to like what’s the point, right? She mentioned it, how it makes her feel. I think if you can incorporate that into your own financial plan or kind of the vision of what you’re trying to achieve, I think kind of all boats rise. So love the stories as well. I definitely want to make sure that we highlight more stories like this in the next 300 episodes.

So, I guess, Tim, I guess, I’ll ask the question as like what do you think? What’s going to – what do the next 300 episodes have in store for us?

[00:57:45] TU: Well, this is the last – No, I’m just kidding. I think that there’s so much opportunity here. One of the things we’ve talked about is bringing this community together, right? Pharmacists empowering one another. This is not something that just Tim and I are leading or even our team at large. We really feel this vision and work around financial wellness for the profession of pharmacy is ongoing. The work needs to be done. That’s only going to happen at the level it needs to happen with the impact that it has the potential to have, if we can bring that community together to help one another empower one another share stories. So more stories are definitely on the horizon.

Another thing that I have as a vision for the future is more voices on the show. I love doing this. But I recognize that there’s a ton of value and other perspectives, both internally and externally. So we’re going to have folks externally that are really passionate about certain topics. We’re working on this year with Corrie Sanders, Founder of Huna Health, leading our new pharmacy innovators series, featuring pharmacy entrepreneurs but also internally with the team, having more of the expertise of our certified financial planners, our tax professionals, other members of the YFP team to bring some other voices to the show.

Then I think from a content standpoint, Tim, we’ve already started to make this transition that we want to make sure we’re representing the gamut of the pharmacy professional, right? From student pharmacist, new practitioner or mid-career, pre-retiree, retiree, we really feel like this topic of financial wellness in the profession of pharmacy is not narrowed into any one of those groups. It really spans the entirety because those topics are changing naturally as our phase of life evolves. So that will be done in content that we’re bringing to specifically more on that mid-career, pre-retire, retiree, as well as stories in those phases of life about that transition into retirement.

I was just having a conversation yesterday with a pharmacist who’s mid-career. Kids are starting to get to the point of getting out of the house, was taking care of elderly parents. Totally different challenges and opportunities in different parts of the financial plan and wanting to make sure we’re bringing a voice to that as well. So that’s the future I see. We’ve been doing this long enough to know that you can only plan so much, right? There will be some pivot points that will naturally happen and, hopefully, some opportunities that come as well.

Then we don’t have specifics on this yet, Tim, but both you and I share the vision of some more long-form content, bringing some more video in. We’d love to deck out YFP HQ with the studio and do some more video as well. So stay tuned. We might crack that down here in 2023. But what are your thoughts on that, other ideas you have for the vision as well?

[01:00:30] TB: Yes. I mean, I think we kind of follow the – At the time, when we launched the podcast, it was like keep it to like a commute, so like 30 minutes. We’re seeing a lot of successful podcasts go where – you just kind of turn the mic on and you’re just talking about a subject. A lot of the podcasts I listened to are an hour, an hour-plus. So I’m not necessarily advocating for us to kind of drone on about HSAs or things like that. But I would like to be talking more about – when I was looking at some of the statistics, some of our most listened to episodes are more or less about money and more about the broader profession and things like overall wellness. I think that is really important for us to discuss.

I’m fortunate enough to be able to sit in our conference room here with you, Tim, and just kind of talk about broader issues. I think that some of those discussions, if we actually record it and put those out to the masses, would be valuable. Kind of getting your perspective, obviously, my perspective and kind of how I’ve worked with pharmacists over the years and even an outsider. So I think if you’re listening to this, we’re definitely open to feedback, whether that’s more long-form, broaden our scope a little bit.

Are there people out there that are like, “Hey, I’ve been waiting for you to interview X, Y, or Z.”? Nominate yourself. We’d love to get more voices on the podcast and really make the next 300 episodes better than the first 300. Like I said, I want to do more. We talked about more shift in mid-career and retirees. I want to do more for my own kind of education on like money and kids and how we should approach that and what are some of the things that we should be teaching our kids. So we don’t kind of imprint some of these money scripts on them.

There’s lots of things that I think we still are – we need to dust off and really work through. There’s probably a lot of guests that we need to have back on and get updates. So all of that is on the table. But, yes, I’m just super bullish about the work that we’ve done on the podcast, but also the work that’s yet to be done. Excited about the conversation and excited about the journey and continuing to learn on my end. Like I said, I’m a huge fan of the show myself. Yes, just excited for the next 300 in store.

[01:02:53] TU: I am too. It’s going to be a fun journey. It has been a fun journey. As we wrap up, I just want to, again, say thank you to the listeners. Tim, a thank you to you for the many hours you have put into the show, to the planning team, as we’ve had folks from there come on to the show, the many guests, just a few that we featured today. Again, a huge shout-out to Caitlin and Rose from the YFP team that are really the engine behind us putting out this content each and every week and being able to make the show go on. So big thank you to them.

As Tim mentioned, and I’ll reiterate again, if you have an idea for the show, topic, guests, format of the show, we would love to hear that. You can email us, [email protected]. Last but certainly not least, if you’ve been a listener and you’ve liked the show, do us a favor. Leave us a rating and review on Apple Podcasts. That will help others find the show as well.

Tim, great stuff. Looking forward to the next 300.

[01:03:46] TB: Oh, yes.

[01:03:47] TU: Before we wrap up today’s episode of the Your Financial Pharmacist Podcast, I want to, again, thank our sponsor, the American Pharmacists Association. APhA is every pharmacist’s ally advocating on your behalf for better working conditions, better PBM practices, and more opportunities for pharmacists to provide care. Make sure to join a bolder APhA to gain premier access to financial educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacists.com/join and using the coupon code YFP. Again, that’s pharmacist.com/join using the coupon code YFP.

[END OF INTERVIEW]

[01:04:27] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

Furthermore, the information contained in our archived newsletters, blog posts, and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist, unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward-looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer.

Thank you, again, for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

[END]

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