Financial Planning / Podcast

YFP 325: Retirement Roadblocks: Identifying and Managing 10 Common Risks (Part 2)

Posted on by Tim U

YFP Co-Founder and CEO, Tim Ulbrich, PharmD and YFP Co-Founder and Director of Planning, Tim Baker, CFP®, RLP®, RICP®, wrap up a two-part series on 10 common retirement risks you should plan for.

Episode Summary

Key Points From the Episode

A brief recap of part one.
Frailty risk and what its major financial effects are.
How a good support system and a clear living situation can be a solution to frailty risk.
Financial elder abuse risk, why it often goes unnoticed, and how to mitigate it.
Why unity among siblings is important to avoid financial abuse of elders.
Insight into investment risk and its subsections.
How ensuring that your paycheck isn’t tied to the market can solve market risk.
The value of flexibility and inflationary protection to protect yourself from investment risk.
How liquidity risk plays a role in investment risk.
Sequence of return risk and how it can damage your overall retirement sustainability.
Work risk and some of the reasons that you might have to retire early.
How planning for retirement readiness at different ages can assist with work risk.
What re-employment means and how it affects work risk.
How the loss of a spouse affects the person left behind financially and how to mitigate this.
Ways that having unexpected financial responsibility can affect your retirement plan.
Why having a third party you can trust to help with unexpected risks is helpful.

Episode Highlights

“Studies have shown that, the longer you retire, the more your mental health decreases over time.” — @TimBakerCFP [0:03:25]

“Involve trusted family members [to avoid elder financial abuse].” — @TimBakerCFP [0:10:16]

“You mitigate market risk when a lot of your paycheck is – not tied to the market.” — @TimBakerCFP [0:14:12]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.8] 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, Tim Baker and I wrap up our two-part series on Ten Common Retirement Risks to Plan For. Now, in planning for retirement, so much attention is given to the accumulation phase but what doesn’t give a lot of press is how to turn those assets into a retirement paycheck for an unknown period of time. When building a plan to deploy your assets during retirement, it’s important to consider various risks to either mitigate or avoid altogether and that’s what we’re discussing during this two-part series, where today we cover the five remaining retirement risks, including frailty risk, financial elder, abuse risk, investment risk, work risk, and family risk.

Make sure to download our free guide that accompanies this two-part series, Retirement Roadblocks: Identifying and Managing 10 Common Risks. You can download that at, yourfinancialpharmacist.com/retirementrisks. Again, that’s yourfinancialpharmacist.com/retirementrisks.

Before we jump into my conversation with Tim Baker, let’s hear a brief message from YFP team member, Justin Woods.

[YFP MESSAGE]

[0:01:11.5] 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 Ulbrick, Tim Baker or one of our guests. A lot of people listen to this 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 are treading water financially, maybe took a DIY approach, reached a 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]

[0:02:16.9] TU: Tim Baker, welcome back.

[0:02:18.7] TB: Good to be back Tim, how’s it going?

[0:02:20.1] TU: It is going well. Last week, we started this two-part series on 10 common retirement risks to be planning for. We talked about things like longevity risk, we talked about inflation risk, we talked about excess withdrawal risk. Listeners can tune back to that episode. We’ll link to that in the show notes if they didn’t already listen, and we’re going to continue on.

So number six on our list of 10 common retirement risks to plan for, number six is frailty risk. Tell us more about this.

[0:02:49.0] TB: Yeah, so this is more related to – it’s a risk that as a result of either mental or physical deterioration of your health, mental health, physical health that you as a retiree might not be able to have sound judgment in managing your financial affairs or care for your home, those are the two big ones.

So just like we talked about in the last episode, like, with long-term care and a long-term care risk, this is one that people are like, “Oh yeah, this is important but it’s not going to happen to me” and you know, what studies have shown is that you know, the longer that you retire, the more your mental health decreases over time.

So this is going to be, you know, where we really want a good support system. So a solution here is if we work longer, obviously, our mental acuity, our mental sharpness kind of stays intact longer. We’re not as isolated, there’s lots of studies about depression and loneliness, Tim, you know, creep in.

A lot of things that have not really been talked about as regarding retirement in the past and I think a lot of this points back to some of the frailty risk. So having a good network involving your family to have help, whether it’s with decision-making or chores, hiring someone to manage money or a trustee is another good solution here.

Set up a power of attorney for you know, the financial situation. It can even be you know, things like healthcare. Probably a big thing that I often hear is having a good discussion and analysis of like the living situation, right?

[0:04:40.9] TU: Yes, yes.

[0:04:41.1] TB: So a lot of people as they age, they might not necessarily want to move out of the house where they raise their family. A house that might be three, four, or five bedrooms that has a big yard, lots of yard work, lots of housework. Maybe stairs to go up and down and because of the – you know, kind of the emotional attachment to the house, it’s just hard for the retiree to move on and you know, potentially downsize or you know, move into a townhome or a condo or a community that is different.

That’s probably has one of the biggest effects on the frailty risk. You know, if you’re less likely, I think, to kind of be exposed to this risk if you have, again, more people around you that are dealing with the same thing. We mentioned a trust, so potentially putting assets in the living trust that are basically managed by the trustee which could be used as a retiree and then you could have a successor-trustee, which can be a family member or family members.

But the whole thing I think is to kind of you know, plan for this. You know, we want to make sure that we don’t necessarily have to go through the courts that we can kind of do this preemptive, even simplifying the finances. So things like you know, direct deposit, you know, automatic withdraw for bills, you know annuities, checks coming in the door rather than you know, having to make decisions regarding, “Okay, how much should I withdraw this year?”

These are all things that I think would help, you know, simplify and make this risk, not avoidable but mitigated, Tim.

[0:06:14.2] TU: Yeah, and as we wrap up the previous episode, part one, talking about the importance of planning for this early, right? So here, we’re talking about potentially deteriorating mental or physical health. You know, obviously, if and when that happens, guess it’s just a matter of time, right? For all of us but if and when that happens, we don’t want to be making these decisions in that moment, right?

So, how can we be having these conversations in advance? You talked about an important one that often comes up around housing, what’s the desire? You know, I’m thinking about things like legacy folders and making sure you’ve got good systems and documentations in place. I think the housing one comes up so often, you know? I’m thinking about even my own family. Like, sometimes it’s just hard to cut through the noise on this because you know, you gave one example where people may want to stay in their own home, I think that’s a common one.

The other one that I see as well is where people are adamant on like, “Hey, I don’t want to be a burden on the family. So, just put me in a facility.” It’s hard sometimes to cut through the noise of like, where does the true desire and how is that being projected and you know, maybe there’s an interest and a willingness and the financial means for children, you know, to be able to care for their elderly parents and that’s a desire, you know?

For them to do but you know, you can’t get through some of those conversations. So just again, I think in a point of advocacy for talking through as much of this as possible, as early as possible, and for those that are listening where you know, maybe they have adult children that are going to be important caregivers, you know initiating that conversation with your adult children and those that are the children that have aging parents, you know, initiating those conversations as well.

[0:07:49.6] TB: Absolutely.

[0:07:50.8] TU: Tim, number seven, one that’s not fun to talk about, one that we have to just given, you know, the reality of what it may be, which is financial elder abuse risk.

[0:08:00.5] TB: Yeah, and this is the risk of being – basically being taken advantage of because of frailty. So these are kind of linked, Tim, and I saw a stat out there that this can cost anywhere from like, three to 36 billion dollars a year or something like that. It’s insane and probably the biggest culprits of this is people that the retiree knows and knows well. So that could be an advisor, financial advisor.

It could be a family member, so adult children are probably the bigger abusers of this but 55% of these cases are family members, friends, neighbors, or caregivers, and the crime or the abuse can be anywhere from bad advice to fraud, barred against the person’s home. Theft, which could either be, you know, cash, taking money out of accounts, using credit cards, embezzlement.

You know, misuse of power of attorneys, and unfortunately and I think it’s why it’s so hard to kind of like put a number to this, in terms of like what the losses are is that the abuse often goes unnoticed because you know that retiree can be embarrassed. They really don’t want to punish those that are close to them or they have fear of losing care that is being provided even though they’re being abused or even reprisals.

And it’s one of the things that you know, as an advisor, even though we’re on that list of abusers, that we’re kind of trained to look for and ask questions in terms of like, “Okay, is there something going on? You know, what is the cognitive ability of this person? Are they making sound judgment? You know, who in the family is involved?” That type of thing.

And there’s been you know, I’ve heard of cases where it’s like, Mr. Jones is having USD 50,000 of work you know, done to his kitchen at 85 years old and that doesn’t necessarily make a lot of sense but it could be a contractor that’s kind of taking advantage and sometimes, Mr. Jones, it’s a little bit of – it’s being taken advantage of but it’s also could be like they like the company, you know?

So I think you know, a major solution for this, I would say is you know, involve trusted family members and I underline trusted and I underline the asset members. It’s a little bit of checks and balances. You know, if you have you know, two siblings that are kind of looking after, hopefully, they’re not both, you know, criminally minded but I think it’s good to have a few people that are you know, over-watching so to speak, the situation.

I think as much as the person, the retiree can protect themselves by staying organized, tracking possession, tracking their assets, you know, as much as they can open their own mail, sign their own checks, manage their investment, manage their statements, their investment accounts, their bank accounts, you know set up direct deposit as much as they can for social security checks or annuity payments.

That can again, help, not necessarily avoid but mitigate some of the exposure to this risk. You know, screen calls, solicitations, you know, get second opinions on, you know, we come across things even with clients where like, “Is this legit?” You know, like clients that are in their 30s, 40s, 50s and sometimes are like, “Uh, it’s not.”

So you know, get a second opinion and make sure that we’re kind of hyper-aware because this is a big problem unfortunately and it’s tough to kind of diagnose and see and you know, at every angle, you know, because often the person that’s being abused is like for what I mention, is not necessarily willing to kind of come forward with this.

[0:11:54.5] TU: Tim, I have to bring it up since you mentioned siblings. I think this is an area where there’s so many dynamics, right? Every family’s different but you know I think that when you’re dealing with assets and estates and you know obviously, one, at the end of the day, is going to get assigned as a power of attorney and you know, people that are in are not in the will and whether those conversations are transparent or not.

I feel like, any sibling dynamics, you know, you can just put a magnifying glass on them here. So you know, Cameron Huddleston, who we were referenced in a previous episode and we had her on a few episodes ago about initiating some of these financial conversations with your parents, talks about the importance of sibling conversations in unity, ideally, easier said than done, to then be able to obviously translate that with parents as well.

[0:12:40.4] TB: Yup, absolutely.

[0:12:41.9] TU: Tim, number eight, investment risk, we talked about this briefly in the first part of this two-part series but I think it warrants going a little bit deeper.

[0:12:50.8] TB: Yeah, so, investment risk, I’m kind of going to break this down into kind of sub-risk to this. So what I really want to kind of address here is market risk, interest rate risk related to the investments, liquidity risk, and then kind of come back to the sequence of return risk. So if I take these in turn, market risk is really the risk of financial loss resulting from movements in market prices.

So, unfortunately, Tim, the market just doesn’t kind of increase steadily. As we go, we have lots of you know, ups and downs and twists and turns with regard to the market which often makes us kind of queasy as – and I would say, even more. I feel like for me when I first started to invest back in my 20s, you know, I would kind of feel those investments and I’ve kind of got to a point where I get zen and I try to like not pay attention to it because again, it’s not going to affect me until hopefully 30 years in the future when I do retire.

[0:13:46.6] TU: You should do some market meditations, right? Like –

[0:13:48.6] TB: Yeah, exactly but for a retiree, who you know, like their paycheck and their livelihood is kind of tied to the market, I could see how that could be overwhelming and distracting. So a solution here is I think, I really strive for balance and flexibility. So, we kind of mentioned in the past, like a flooring strategy.

So you mitigate market risk when a lot of your paycheck is not coming or not tied to the market. So that’s where we you know, are essentially, we’re looking at essential expenses and we’re saying, “Hey, my essential expenses or my basic needs are covered with an annuity” or social security or very low risk, you know, government securities like treasury bonds. You know, treasury bonds, notes, that type of thing and we’re good.

The other part of that is allocation. So obviously, a lower percent of your portfolio in equity, you know, particularly leading up to retirement is going to be important to kind of mitigate market risk. So even in some of the – you know, the dot com crisis, the subprime mortgage crisis, you know, the COVID crisis, like the market is still doing this but if you have less equity exposure, it might not be Rocky Mountains ups and downs.

It might be Appalachian Mountains ups and downs, where it’s a little bit smoother but I think, knowing what your allocation and what your glide path is, actually approach retirement is going to be important and then you know finally, I think for this particular risk is kind of going back to flexibility.

So if you’re in a year where the market is down and maybe inflation is up, you know, inflation is up, like maybe we say, “Okay, we’re not going to take that USD 15,000 out to go travel.” you know, do this huge cruise or make this, “We’re going to forego that and see when the market kind of recovers and then we’ll kind of assess it from there.” So flexibility of like, what you’re withdrawing and when I think is going to be important with regard to market risk.

The other ones, Tim, interest rate risk. So this is related to investment risk. So this is the risk of the change in value of an asset as a result of volatility in interest rates. So what does this mean? This essentially means that when interest rates go up as they have been over the last couple of years, the price of bonds go down. So there’s an inverse relationship. So, the price of individual bonds and bond mutual funds decreases.

So when interest rates go down, the price of bonds go up. So this is not necessarily a concern when bonds are held to maturity or what I was mentioning in the last episode, a bond ladder. So if I buy a year, a bond, or six-month bond that basically, you know, comes up at the end of the next or at the end of this year or a year, 18 months, or whatever that looks like, if it holds maturity, the fluctuation in interest rates do not affect the bond price.

So you’re kind of inoculated from that. It’s when you kind of are coming in and out of bonds, that’s where it becomes problematic. The other risk associated with this is and I’ve seen this, so one of the things that I – because I’m a nerd, but one of the things I do with my emergency fund is I buy 12 months CDs every quarter. So I have a quarter one CD. So let’s pretend I have USD 20,000 in my emergency fund.

10,000 might be in the high-yield savings account, 10,000 might be split up between four CDs and you can kind of think of these as like bonds. So Q1, I have 2,500, January one. Q2, April one, so on and so forth. So as prices, as interest rates have gone up, if I look back 12 months ago, man, I look at that interest rate, I’m like, “Man, that’s really low”. So when I renew, Tim, the – what I’m getting in terms of interest is a lot higher.

The opposite came true, and this is what’s called reinvestment risk. I could have this bond that I just bought at five or you know, the CD or bond that I just bought at 5% but in a year or two years, it could be at 3% and then that’s the reinvestment risk. So that’s another risk that we have to, you know, kind of be aware of. So I think the biggest they hear is, again, things that are inflation-protected.

So any type of income stream or investment that has inflationary protection like tips or strips, any type of COLA protection that’s going to really – what’s going to be to help reduce that risk and then finally with – or not finally, the third one is liquidity risk. So this is just basically the inability to have assets available to financially support unanticipated cashflow needs. I don’t think that this is a risk that’s really inherent just to retirement, we all have this at all times.

It might be a little bit harder to overcome because we don’t have – we don’t necessarily have cash flow from like a set job but planning for this, you know kind of plan as best you can for what could happen. So what are the situations and then what levers can we pull? What are the assets that can be sold? You know, what are things that can’t be sold, which you know, assets that can be sold.

It could be things like stocks and bonds and things like that. Maybe not so easily, it could be a business interest or real estate. You know, what are some other things that we can talk about to pull? Whether that’s life insurance, a HELOC, a reverse mortgage, and then one of the best reasons to employ a systemic withdrawal strategy is because of the flexibility.

Because you have this pot of money that you can reach into and say, “Okay, I didn’t think needed USD 30,000 for X but now, because that money is there and I can put it into liquid form and pour it” then you know, that’s one of the things, versus, if you were to say, “Hey, I’m going to put all my money to an annuity” that’s not flexible and that’s not liquid.

So it allows you to change your strategy in the face of you know, new information, new situations, and finally, the last one here and again, Tim, we could probably do a whole episode on sequence of return risk is this is the risk that the timing of your withdrawals from a retirement account will damage your overall return and really like sustainability.

So when you withdraw from a bare market or when the market is down, it’s more costly than if you draw – you make that same exact withdrawal in a bull market. So this is – so what we’re saying is that a large negative return during retirement, so during that risk zone, that eye of the storm of you know, 10 years before retirement, 10 years after retirement, has a much bigger impact on wealth accumulation and success in retirement than a negative return outside of that.

You know, so that’s why I’m saying that at 40, you know, I get zen because I’m like, “It doesn’t really affect me if the market goes down 40% because I know I have 30 years for it to recover” and it’s going to go down 40% a couple of times probably over the next 30 years but if I’m retiring in five years, I’m worried, Tim.

And again, like that’s where we have to be as safe as we can, you know, throughout our wealth accumulation journey is right in that zone, you know, five to 10 years before and five to 10 years after and this is when your retirement accounts are most vulnerable to investment returns and if you think about it, it kind of makes sense because this is typically, Tim, where you have the highest balance.

[0:21:29.9] TU: That’s right.

[0:21:31.2] TB: So wealth rises rapidly as you approach your retirement date due to the fact that you’re putting in probably the most in contributions you ever have because you know, a lot of people are like, “Oh, I didn’t do enough of this, I need to make up, I got to catch up” because of investment returns and compounding.

So that’s when you’re – you know, and the research says that in a defined contribution plan, say, like a 401(k), this is interesting, you accumulate half the value of the account in the final 10 years of savings. So we say save early and often but what moves the needle most is in the last 10 years. In the early years of savings, additional contributions can replenish account losses but later, the contributions are a much, much smaller needle mover than it is like investment losses or gains.

[0:22:21.2] TU: Yeah, and Tim, just to put – you know, I was thinking about this because I think it’s harder, especially if folks are earlier in their career to understand kind of the numbers of this. If you’re nearing retirement, you have a three-million-dollar portfolio, as you mentioned, one part that’s going to keep driving that up is typically your, maybe you feel like you had to play catch up or you’ve got more discretionary income at that phase.

You’re hyper-saving, trying to max that account but even if we just look at that three-million-dollar portfolio and assume something like a 5% return in that year, you know, USD 150,000 of growth that’s going to happen in that portfolio in that year, right? And you know, people that are early saving, the timeline to get to 150 can feel like forever, and here, we’re talking about 150 of growth in a portfolio just in that single year. So I think that makes sense.

[0:23:05.4] TB: Yeah, and if you compare that to what you can legally contribute, that’s the big thing.

[0:23:11.8] TU: Oh my gosh.

[0:23:12.7] TB: Whereas like, you know now, you’re like, “Oh, 20,500, that’s like, that might be a third of my savings.” So it’s huge. So really, what the research shows that the magnitude of the impact of a large negative investment return or shock grew as the shock occurred closer to retirement.

[0:23:34.8] TU: Yeah, exactly.

[0:23:35.7] TB: So it’s like if the epicenter is – if the epicenter of that shock is close to age 65 when you retire, the consequences are greater than if it were at 58, which makes sense. So for sequence risk, the order of returns becomes a far more important concern in that span of time over the breadth of the entire portfolio, particularly in accumulation, it’s the average return that matters, right?

So one of the things that I often say is like, “Hey, you don’t need a lot of bonds in your 20s, 30s, 40s” and I would even say even your 50s unless you’re retiring in your 50s, you don’t need a ton of bonds. So you want to almost have like a cliff, where you’re very much like pedal to the metal, you know you’re primarily in equities and then when you get to that 10-year, that’s where you start shifting, downshifting considerably.

So like a hard break versus what a lot of people do is they kind of glide into it. So in their 40s, they put a little bit more bonds, in their 50s they put a little bit more bonds and so on and I just think that and I understand why, you know, you’re kind of easing into it but I just think you leave a lot of meat on the bone with regard to investment returns but the same is true is like you kind of have to like you know, you kind of have to get into that period of 10 to 15 or 10 years pre-imposed retirement date and then start adding equities back in, which a lot of people don’t do.

So the solution for this is asset allocation and whether you follow on collide path or not in terms of you know, percentage of equities to bonds. Knowing what that is, we often see in the accumulation phase I think not the proper asset allocation, so too heavily in bonds and then closer to retirement, actually too heavily in equities. So if you have one of those shocks where the market is down, that’s where we have to have real conversations of like, “Hey, maybe we need to push out retirement to the market.”

[0:25:34.3] TU: Retirement date, yeah.

[0:25:35.6] TB: The market corrects. Again, flexibility; allow for changes and what is what’s wrong. So if it’s a down market, you know either decrease the amount that we’re withdrawing or actually that the entire – shift the entire equation where you know, we’re not retiring this year or next year, we’re retiring when the market recovers and then another solution is to kind of get out of the game or at least partially convert a portion of the portfolio to an income annuity, which essentially you know, means less overall volatility because you have that income for in place.

[0:26:10.7] TU: Yeah, Tim, great overview. The investment risk to your point, we probably can and should cover this in more detail in future episodes and I think flexibility keeps coming back as a theme but I want to acknowledge how hard that can be, right? When you talk about something like, “Hey, maybe shifting your retirement date” makes a whole lot of sense objectively, right?

If I had planned a retirement age, I’m listening of you know, 2026 and we see the market tank in 2025 like I’ve been mentally preparing for retirement in 2026, that’s a hard thing to consider but I think that open-mindedness and the options to be able to pursue some of those things that gives you more of that flexibility to maximize your portfolio is going to be really important. The other thing I just want to mention that we see a lot because especially folks that are maybe introductory in terms of investing or learning or aren’t working with a planner.

I’m thinking about a lot of folks that are investing heavily in target date funds, where we maybe see some of that conservative investing happening too early, in my opinion, in the portfolio, yeah.

[0:27:12.5] TB: Yeah and just to go back to what you’re – yeah, I completely agree it is and again, not every target date fund is created equal. We actually crack those target date funds open and you can see the allocation, you know something then might be 2035. You know, if you stack up a 2035 or 2055, you know target date fund, what is in target date fund A is going to be, you know 2035 is going to be a lot different than what’s in a target date fund B that’s in 2035.

But to go back to your other point, you know like and we’re going to get into this in the next couple of risks here, sometimes like you’ve mentally said, “All right, I’m going to work for another two years” sometimes that decision is made for you and that could be hard. So then what do you do?

So I think a lot of these risk is like if you can kind of maintain as much control over your destiny and I think part of this is having options, particularly with things related to work, it allows you to kind of pivot and adjust and kind of parry some of these things that are thrown at you because I keep saying, “I want to retire at age 70” you know? I mentioned earlier in the first episode of this is like that might be out of my control and you know, that’s something else we have to account for.

[0:28:36.5] TU: Yeah, if Mike Tyson were listening, he’d say, “Everyone has a plan until they get punched in the mouth” so yeah.

[0:28:41.0] TB: Yeah, exactly.

[0:28:42.4] TU: So let’s talk about that, work risk is number nine on our list. What is that?

[0:28:46.5] TB: So again, I’m going to break this down into some sub-risk. So the first one would be forced retirement risk. So this is the risk that work well and prematurely because of poor health, disability, job loss or to care for a family member because of some of these issues and this is an eye-opening stat, Tim, is 40% of retirees retire earlier than they plan and it’s really because of one of those issues, health, job loss, caring for a family member.

This happened to my dad. My dad tells the story, you know, when we try to talk about this, you know his company was bought by another company. He was kind of duplicitous, you know, kind of at the tail end of his career and he was laid off. So it was – so if he was planning to retire by X and his portfolio and all, we had to kind of reconfigure, jostle things around, and make sure that we’re planning accordingly.

So I think having like a pulse on kind of your retirement readiness at different ages, “So okay, what happens to my plan if I have to retire 10 years before I want to?” So for me, it will be 60, right? 65 like what happens.

[0:29:54.8] TU: Yes, zero, one, two, three.

[0:29:56.3] TB: Yeah and you know, what happens to my lifestyle, you know, what do I have to – like are there things that I, other levers that I can pull? So one of those I think is career. So I think staying current, you know learning new skills. You know I think, Tim, like we’re naturally like this as like lifetime learners and always trying to you know, self-improve. That’s not everyone’s cup of tea but I think maintaining your network.

I don’t know the last time I actually put my resume together, Tim but I think that would be something that you would want to do. It is a lot easier to kind of brush that up every year or so versus kind of cracking that open every decade. Are there – is there opportunities to pivot to consulting, to kind of work on your own? I think a lot of people paying attention to severance policies and negotiating benefits related to your career is going to be important.

Another thing to kind of you know, mitigate the health stuff is maintaining a healthy lifestyle. So you know diet, weight, sleep, exercise, and potentially reducing stress by cutting back hours. So we kind of mentioned of like a glide path of going from a one to a point eight to a point six, you know to work in a couple of hours here and there. So I think that can potentially allow you to work part-time longer into retirement by maintaining a healthy lifestyle, maybe meditation, all that kind of stuff.

The second work risk we talk about is re-employment risk. So this is the inability to supplement retirement income with employment due to kind of down job markets, poor health, or if you’re caring for others. So I think for my dad, you know when I happened to him you know I think it was hard for him because he had worked for the same company for 40 plus years to actually go into market and interview and do something else.

So for him, it was kind of more about like comfortability and he really didn’t have anything else outside of that where he could consult or do part-time. Like I’ve heard people like drive a bus for a school and liking that because you know, they’re connected to kids or turning hobbies into profit-making activities. I was talking with my brother and his fiancé last night because we were actually talking about, “Hey, when do you want to retire, and when is that?”

You know, one of the things that he brought up that I thought was interesting, he’s like, “I think I’d love to do like a bed and breakfast.” That’s cool. You know, he likes to cook, he likes to host, so I think that would be something that would be good for him.

[0:32:37.3] TU: That is cool, yeah.

[0:32:39.4] TB: Planning on earning significant income in retirement may be unrealistic for a lot of people. There are certain industries where it’s very easily, you can very easily kind of pivot to a consultant role and make just as much money as you would working full-time but that’s not necessarily the case for a lot of people.

So I think kind of again, planning for this, talking through this, and understanding you know, what are some things that you can potentially lean on or pivot to in the event that what you thought was a short thing, which was like your employment is not so much and again, I think this often is one of those things where it’s like, “Hey, that’s not going to happen to me.”

[0:33:25.4] TU: Yeah.

[0:33:25.8] TB: I think this has probably evolved over time, right Tim? Because again, it’s rare where you find someone like my dad that’s worked for the same company for 40 or 45 years. So I think our eyes are a little bit more open to this risk but I think what maybe might not be is the fact that like, “Hey, your health or someone close to you” or something like that could affect your timeline, so to speak for retirement.

[0:33:50.1] TU: Yeah, and as you’re talking Tim, I’m thinking about many people in our community of which many of them have been on the podcast where you know I think they may intentionally or unintentionally are preparing themselves for something like this and the risk you’re talking about, right? They’ve got you know, maybe they’re investing in real estate in a variety of ways, they’re working a full-time job.

They’re doing some consulting, they’ve got a side hustle, they maintain an active network, you know, they’re constantly developing their skills, right? Just multiple strategies of diversification that I think help mitigate against some of the risks that you’re talking and maybe they’re not even thinking about it in that way, it’s coming from an area of energy and passion but it can be really helpful as we talk about strategies to plan for this type of risk.

[0:34:33.3] TB: Yeah, absolutely.

[0:34:35.0] TU: All right, number 10 on our list is family risk. Take us home, Tim.

[0:34:41.4] TB: Yeah, so the two kind of sub-risk that we would talk here is kind of the loss of spouse risk and then unexpected family financial responsibility risk. So the loss of spouse essentially is where you know, I’ll use myself, I retire at 70. I think I’m going to live at least to 87 or 95 and I pass away unexpectedly at 72, right? So the problem often with that is you know, you’re often, for many spouses, you’re kind of known two social security income streams, right?

You know, so one of those goes away, you keep the highest one but the problem – so you still have all of the assets. The spouse will inherit all the assets that are in their name obviously but what typically doesn’t reduce is a lot of like living expenses, right? So your food might go down but you’re still going to have to pay if you have a mortgage.

[0:35:41.9] TU: Property taxes, yeah.

[0:35:42.8] TB: Or you know, rent or things like that, tax, all of those, your utilities are going to be very similar. So just because your income or a good chunk of your income could be cut in half or even a third, your expenses don’t and what we’ve seen at least with baby boomers is that you could be a widow or a widower for 15 or 20 years. So it’s not like you know one and this happened where one spouse dies and the one will die within a year or two.

I mean, but that does happen but you could have long periods of time where you’re by yourself. There was a stat that I saw that was really interesting Tim, was within five years of a death of a spouse, 40% of widows become impoverished.

[0:36:29.9] TU: Wow.

[0:36:31.1] TB: That’s insane to me and I think if I had to guess, I don’t know this Tim, but if I had to guess, I would think that that’s probably again, people that are lower income that might like a huge chunk of their livelihood is in disability. So if a good chunk or not, disability, social security, so a good chunk of that goes away, so you have two paychecks is now one, you know that could be very problematic for kind of sustainability of overall wealth.

But that to me was eye-opening and I’ve heard that before with husbands will say like, “I just want to make sure my wife is taken care of if I’m gone” and again, I don’t want to get into much of like gender roles and things like that.

[0:37:17.4] TU: Sure.

[0:37:17.8] TB: But I still think that that exists in a lot of relationships, particularly older couples where you know, one partner handles the money and the other one doesn’t or has an interest in the other one doesn’t. So you know I think the solution for this is and I’ve talked to people in the past is like, “I want a relationship with like an adviser where I trust them because even when I’m gone they’re going to take care of the person, you know, my spouse.”

So I think having a relationship with that, with like a planner I think can be important. I think involvement, you know I often say this with couples of all ages, you know the more that you are involved with your plan.

[0:38:00.6] TU: Absolutely, yes.

[0:38:02.0] TB: And the more you are engaged with the plan like both of you, I think the better the results will be but I also understand that there’s some like, there’s some couples that there might be engagement in the front end and then maybe one spouse kind of you know drives the train after that but then often what happens is like again, if that spouse dies like they kind of have to reengage is necessarily like the easiest thing.

So you know, what are the contingency plans if this were to happen? Even sometimes like when we – so if we were to say, “Hey Tim, you know we’re going to peel off a quarter million dollars of your portfolio to provide an income for you and Jess.” What’s attractive about those payoff schedules is like the one that just pays your lifetime is the highest but we would want to say, “Okay, let’s have a joint life payout.” So it would pay you as long as one of you are alive but that benefit is going to be lower.

[0:38:54.8] TU: Yeah.

[0:38:55.4] TB: So decisions like that, you know if you have second-to-die policies or you know again, social security claim, and there is a lot of people that they don’t look at the layers of that decision that says, “Okay, even if Tim is in poor health than Shay, if I have a larger benefit that I want to defer that I should defer, that benefit grows and then when I pass away, Shay takes that on.”

So some of that, some of those nuances aren’t necessarily you know, evaluated. So those would all be things that you know again, it’s not just the abrupt, “Okay, the husband is gone or the wife is gone,” these are things that we have to bake into the plan as we go because you know, things like social security or you know, payouts and things like that have to be decided. So it’s not just the abrupt, “Okay, what happens once that happens in that moment?”

It’s the multitude of decisions that you have to make potentially leading up to that and then lastly, it’s the unexpected financial responsibility risk. So this is kind of the risk of failure to launch, Tim. Like, “Hey, I’m 40 years old. I just lost my job” or “I’m divorced. I’m moving back in with mom and dad” or you know, care of a grandchild or because parents have problems with the law or drug addiction.

These things happen you know and sometimes, we can kind of put this thing in like a liquidity risk of like unanticipated events but I would say like those would be things that I would want as a planner to know like, “Is there a possibility for this and if this were to happen, what do we do?”

[0:40:40.8] TU: Yeah.

[0:40:41.3] TB: So that’s another you know, risk associated with family. Families can be great obviously but sometimes, you know that’s kind of my biggest fears. You know, I want to make sure that as I’m raising my kids and I know it’s the same, it’s true with you, Tim, like they can be contributing members of society that can you know, be self-sustaining but sometimes that’s even out of their hands, right? So we want to make sure that in the event that that happens, we can plan accordingly.

[0:41:11.4] TU: Tim, as you talk about loss of spouse, a couple of things are coming up for me. One that’s timely, you know where Jess and I are working on, just updating your legacy folder that we created several years back but in our planning with Kelly from our team. You know, it’s a part of the process that we need to go back to and update it and you know to you comment about the importance of joint planning and all parties being involved ideally.

Even in this situation where Jess and I feel like are both very well informed, I do take a little bit more of the lead but it is very much a shared agenda and execution and both of us engage with Kelly and the planning. You know, instructions on that legacy folder, while they’re spelled out as much as possible, you know for either one of us or in the event that both of us were to pass away, for our parents or whoever it be taking care of the finances and the boys, it’s, “Go call Kelly.”

Like someone we trust that knows this plan inside out, that has these documents, that understands all of the nuances and what is going on and that is so reassuring. Again, assumption is you have someone you trust. It’s so reassuring to know you’ve got a third party that not only is there to help you develop the plan but is there in the event of some of these challenging situations that may come up to make sure that we’re executing how we wanted it to be executed.

[0:42:29.1] TB: Yeah, and I think what’s not covered in that like I love the idea of like, “Okay, Kelly is a safe haven. She has the documents, she knows your situation” I think it’s hugely, hugely important but I think what’s also not necessarily discussed in this is kind of like the emotional or social like you know, my parents were in town this week, last week and this week. It’s been cool because my brother has been in town too. So the three of us have been spending – my dad just turned 77.

[0:43:04.9] TU: Baker pow-wow.

[0:43:05.7] TB: Yeah, and we’re joking with my dad that like if mom passed away like I don’t think my dad knows how to do like a load of laundry. I love you Dad but he’s very much dependent on my mom over you know, decades and decades of marriage. If something were to happen to them like I think he would have to move in with one of us to live and I’m sure a lot of people are thinking about their parents and they’re like, “That’s my dad” or “That’s my mom.”

You know, I think even that of the loss of spouse not just from a financial standpoint or like where are the documents or things like that, it’s kind of a day-to-day living in terms of like what am I doing or what can I do or what can I not do and who am I leaning on and you know, I think that kids are probably the first people that are in that role but I think like having those conversations before that happens where maybe there’s less emotion involved is smart.

So it’s not just the numbers, it’s what’s the quality of life? What are the things that we’re going to do to move forward? And unfortunately, it is part of life and I think the more that you can kind of get in front of things just like anything else, I think the better result you’ll have.

[0:44:28.6] TU: Yeah, the other thing to your point about the emotional journey that’s coming up is a throwback almost four years ago now but we had on episode 127, we had on Michelle Cooper, who wrote the book, I’ve Still Got Me: A Widow’s Journey to Love, Happiness & Financial Independence, lost her husband to suicide and talks about not only the importance of joint planning and shared understanding of processes and documentation but also navigating that in the midst of that emotional loss.

Great interview, great resource. We’ll link to that in the show notes as well. Tim, this has been fantastic as we’ve covered in two episodes now 10 of these risks we need to be planning for and mitigating the best that we can. For folks that are listening, you know you heard a theme here of early planning. Obviously, we would love to have the opportunity to talk with you if you are interested in working more with one-on-one with a financial planner that you can trust.

We’ve got a team of fee-only certified financial planners, tax professionals that work with pharmacists households all across the country at all stages of their career. You can learn more by going to yfpplanning.com and you can book a free discovery call from that site. Again, yfpplanning.com. Tim Baker, as always, great stuff. Thanks for the contribution.

[0:45:41.4] TB: Yeah, thanks, Tim.

[DISCLAIMER]

[0:45:42.4] 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.

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, 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 324: Retirement Roadblocks: Identifying and Managing 10 Common Risks (Part 1)

Posted on by Caitlin Boyle

On this episode, sponsored by First Horizon, YFP Co-Founder and CEO, Tim Ulbrich, PharmD and YFP Co-Founder and Director of Planning, Tim Baker, CFP®, RLP®, RICP®, kick off a two-part series on 10 common retirement risks you should plan for.

Episode Summary

While a lot of emphasis is placed on the accumulation phase when preparing for retirement, there is considerably less focus on simple strategies for turning assets into retirement paychecks, for example. This week, Tim Ulbrich and Tim Baker kick off a two-part series on 10 of the most common retirement risks you should be planning for. Today, Tim and Tim cover five of these risks, including longevity risk, inflation risk, excess withdrawal risk, unexpected health care risk, and long-term care risk. You’ll find out why thinking about retirement as “half-time” is a good idea, the different options for taking out annuity payments, and why it is important to think about your withdrawal strategy, as well as what a bond ladder is and why you should consider unexpected medical expenses. Whether you are nearing retirement or are still in the accumulation phase, this episode is full of valuable insights.

Key Points From the Episode

Introducing our two-part series: 10 Common Retirement Risks to Plan For.
Background on why this topic is so important.
A couple of important disclaimers before we dive into the first risk: longevity risk.
Viewing your retirement as half-time.
Setting realistic expectations and planning as best as you can.
Lifetime income: a careful analysis of Social Security claims and strategies.
Options for taking out annuity payments.
Thinking about your withdrawal strategy to mitigate longevity risk.
The risk associated with inflation.
Defining what a bond ladder is.
Why social security is one of the most important things to evaluate in retirement.
How higher rates of inflation have influenced Tim and the planning team’s models.
Whether or not there should be a glide path from a work perspective.
Excess withdrawal risk: depleting your portfolio before you die.
A quick recap of the bucket strategy.
Healthcare risk: facing an increase in unexpected medical expenses in retirement.
Different Medicare plans: Part A, B, C, D, and Medicare Advantage plan.
Long-term care risks, misconceptions, and potential solutions.
The tough conversations we need to have.

Episode Highlights

“You get to the end of the rainbow and you have hundreds of thousands of dollars, millions of dollars. The question is how do you turn these buckets of assets into a sustainable paycheck for an unknown period of time?” — @TimBakerCFP [0:04:02]

“Longevity risk is the risk that a retiree will live longer than – they expect to. What this really requires is a larger stream of lifetime income.” — @TimBakerCFP [0:06:48]

“There’s a whole other race to run after your career.” — @TimBakerCFP [0:09:44]

“The more flexible you can be with your withdrawal rate, the greater the portfolio sustainability will be.” — @TimBakerCFP [0:18:15]

“Essentially, in retirement, inflation could erode your standard of living.” — @TimBakerCFP [0:21:57]

“Abrupt retirement sounds sweet, but in reality, it’s really hard.” — @TimBakerCFP [0:29:37]

“It’s less about the actual return and more about the sequence of when that return comes that can affect the sustainability of [your] portfolio.” — @TimBakerCFP [0:35:55]

“You don’t want to get to a point where you’re having to go through the courts to get the care that your loved ones need. If you can avoid that at all costs, even if it means having an uncomfortable conversation – I think it’s needed.” — @TimBakerCFP [0:48:07]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00] 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, Tim Baker and I kick off a two-part episode on 10 Common Retirement Risks to Plan For.

When planning for retirement, so much attention is given to the accumulation phase, but what doesn’t get a lot of press is how to turn those assets into a retirement paycheck for an unknown period of time. When building a plan to deploy your assets during retirement, it’s important to consider various risks to either mitigate or avoid altogether. That’s what we’re discussing during this two-part series, where today we cover the first five common retirement risks, including longevity risk, inflation risk, excess withdrawal risk, unexpected health care risk, and long-term care risk.

Now, make sure to download our free guide that accompanies this series, that guide being the 10 common retirement risks to plan for, and you can get that at yourfinancialpharmacist.com/retirementrisks. This guide covers the 10 common retirement risks you should consider and 20-plus solutions on how to mitigate these risks. Again, you can download that guide at yourfinancialpharmacist.com/retirementrisks.

All right, let’s hear from today’s sponsor, First Horizon, and then we’ll jump into my conversation with YFP Co-founder and Director of Financial Planning, Tim Baker.

[SPONSOR MESSAGE]

[0:01:24] ANNOUNCER: Does saving 20% for a down payment on a home feel like an uphill battle? It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. We’ve been on a hunt for a solution for pharmacists that are ready to purchase a home loan with a lower down payment and are happy to have found that option with First Horizon.

First Horizon offers a professional home loan option, AKA doctor or pharmacist home loan that requires a 3% down payment for a single-family home, or townhome for first-time home buyers, has no BMI, and offers a 30-year fixed rate mortgage on home loans up to $726,200. The pharmacist home loan is available in all states, except Alaska and Hawaii, and can be used to purchase condos as well, however, rates may be higher and a condo review has to be completed.

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.

[EPISODE]

[0:02:36] TU: Tim Baker, welcome back to the show.

[0:02:38] TB: Good to be back, Tim. How’s it going?

[0:02:39] TU: It is going. We have an exciting two-part series planned for our listeners on 10 common retirement risks to avoid. I think as we were planning for this session, just a lot of depth and great content, that we want to make sure we do it justice, so we’re going to take five of these common retirement risks here in this episode. We’ll take the other five next week. Tim, just for some quick background, one of the things we’ve talked about on the show before is so much attention is given when it comes to retirement, is given to the accumulation phase as we’re saving, especially for those that are maybe a little bit earlier in their career.

It’s save, save, save. But I even think for all pharmacists in general, that tends to be the focus, but we don’t often think about, what does that withdrawal look like, both in the strategy, which we talked about on the show previously, but also in what could be some of the risks that we’re trying to mitigate and avoid. Just give us some quick background on why this topic is so important as we get ready to jump into these 10 common mistakes.

[0:03:39] TB: Yeah, I think to your point, I think a lot of the, even the curriculum in the CFP board standards is very much focused on the accumulation phase of wealth building. I think there’s a lot of challenges and a lot of risks that you have to deal with during that phase of life and during that phase of wealth building. But I think what doesn’t get a lot of the press is like, okay, you get to the end of the rainbow and you have hundreds of thousands of dollars, millions of dollars. The question is, how do you return these buckets of assets into a sustainable paycheck for an unknown period of time?

While navigating a lot of these risks, I don’t know if it’s risk avoidance, Tim. I think it’s just planning for the risk. We’re talking about avoiding risk. Some of these, you can’t really avoid. You just have to plan for it. I think that what we’re finding is, I think the whole general rule of like, “Oh, I’ll get to the end and I’ll have a million dollars and I’ll put 4%, $40,000 a year for the rest of my life.” There are a lot of pitfalls to that. I think that hopefully, this discussion shines a light on some of that. I think it is just important because we think that the – the hard part is, hey, I just need to put assets aside, but I think equally as hard as, okay, how do I actually deploy these assets for a wealthy life for myself in retirement?

[0:05:04] TU: Yeah, good clarification, right? Some of these, as we talked through the 10. Avoidance isn’t necessarily possible. It’s the planning for, it’s the mitigation, minimizing the impact, however, we want to say it. I think, what you articulated is just spot on, right? I think when it comes to retirement planning, saving for the future, we tend to view that nest egg number, whatever that number is, 3, 4, 5 million dollars, whatever is the finish line. So many other layers to consider there.

Not only getting there, which again, we’ve talked about on the show previously, and we’ll link to some of those episodes in the show notes and the strategies to do so, but how do you maintain the integrity of that portfolio? How do you optimize the withdrawal of that portfolio? If we’re doing the hard work throughout one’s career to be saving along the way, we want to do everything we can to get as much juice out of that as possible.

That’s the background as we get ready to talk through some of these 10 common retirement risks to plan for. Just a couple of important disclaimers; We’re not going to talk about every retirement risk that’s out there, of course, Tim, so there’s certainly more than 10. You’ll notice them overlap as we go through these. This is not meant to be an all-encompassing list. Of course, this is not advice, right? We obviously advocate that our listeners work with a planner, no matter what stage of your career that you’re in to be able to customize this part of the plan to your personal situation.

For folks that are interested in learning more about our one-on-one financial planning services, our team of certified financial planners and tax professionals, you can go to yfpplanning.com and book a free discovery call to learn more about that service.

All right, Tim. Let’s jump off with number one, which is longevity risk. What is that risk? Then we’ll go from there and talk about some potential solutions.

[0:06:48] TB: Longevity risk is the risk that a retiree will live longer than what they expect to. What this really requires is a larger stream of lifetime income. We’ll talk about that in a second. The hard part about this whole calculation, Tim, is that there are lots of unknown variables. Unfortunately, or fortunately, I guess the way – depends on how you look at it, I don’t know when I’m going to pass away. Social Security obviously has a good idea of what that is. When I was preparing for this episode, Tim, I looked at, I went onto socialsecurity.gov, and put in my – basically, my gender and my birthday. It comes back with a table and it doesn’t factor in things like health, lifestyle, or family history. But it essentially says that for me at 40 – oh, man, it’s tough to look at that, Tim. 40 years old in 10 months, that my estimated total years, I’m halfway there.

[0:07:47] TU: Halfway. I was going to say. Yeah.

[0:07:49] TB: I’m 81.6. Now, once you get to age 62, then it starts to go out. At age 62, it says I’m going to live to 85. If I make it age 67, then it says, hey, I’m going to live to 86 and change. Then at age 70, which is when I think I’m going to retire, Tim. That’s my plan, at age 70, 87.1 years. I think that for a lot of people, this is an unknown. I overlay like, okay, when did my grandparents pass away and things like that.

Some general stats, one in four will live past age 90 and one in 10 will live past age 95. I think these stats fly a bit in the face of Social Security, but maybe not. I think they factor some of this in. One of the big discussions that we have in our community is like, what should we plan to? What should we plan to? Should it be age 90? Should it be to age 100? We default to 95, which is right in the middle. For me, being in my 40s, it says 87.1-years-old.

I think, this unpredictable length of time really puts a huge unknown out there in terms of like, okay, because there’s a big difference between I retire at age 70 and I pass away at 87. That’s 17 years of essentially, senior unemployment retirement. Or if I live to 100, which is another 13 years. It’s huge. I saw a visual table recently, not to go on too much of a tangent, but it was like, your youth and then your college years was – If you imagine a square, was a shade on the square and then your career and then your retirement and your career and retirement in this visual were pretty close.

[0:09:33] TU: Which we don’t think about it like that, or I don’t, at least.

[0:09:36] TB: No, I don’t either. But I saw that. I’m almost eyeballing them, like, they’re pretty close. People think of like, “Oh, rat race and things like that,” but there’s a whole other race to run after your career. I think we overlooked the time on that. I do think that people will, because especially with a lot of the economic things people may be joining the workforce later, starting families later, maybe starting to save later, we’re living longer that it could push everything to the right a little bit. I think that could be one of the things that they do with Social Security is that maybe we don’t get our for retirement age of 67, then we get the for all credits at 70. Maybe they push those back a little bit. But it’s still a long time, Tim, is what I’m saying.

[0:10:23] TU: Yeah. It really is. As you’re sharing, Tim, it reminded me of a great interview I had with a retired dean and faculty member, Dave Zgarrick on episode 291. He talked about exactly what you’re saying in terms of that timeline perception. He was really encouraging our listeners to reframe your retirement date as essentially, half-time, right? We’ve got some opportunities to reset, reframe, and figure out, but it’s not the end of the game. There’s a whole other half that needs to be played. Obviously, here, we’re talking about making sure that we’re financially prepared for it, but there’s certainly much more to be considered than just the financial side of this as well.

I think the piece here that really jumps out to me, Tim, when people think about longevity risk is there’s really a lot of fear that I sense from individuals of – and the last thing I want to do is run out of money. I don’t want to be a burden to my family members. I really want to make sure I plan for this. The challenge, I think, here is there’s a balance to be had, right? We also don’t want to get to the end of our life and we’ve been sitting on this massive amount of money that maybe it’s been at the expense of living experiences along the way. I think this is just a really hard thing to plan for. To your point, I think a general number is a good place to start. So much of this literature on longevity comes down to family history, lifestyle, and other things that are going to help inform this.

[0:11:44] TB: I don’t think that you can – oftentimes, when we work with particularly younger pharmacists, we’ll get to a point and they’re like, “Hey, I got it from here. I’m good.” It’s almost like, they chunk the next five or 10 years of their life is autopilot. I always be – if I look back at the last five or 10 years of my life, it’s been anything but that. What I would say to, even in retirement, you have to take it year by year and you have to assess this year by year. I think, hitting the easy button and saying, okay, for the next five or 10 years, it’s going to be like this, is not great for your plan, right?

I think that’s probably if we talk solutions, we’re probably going to say this on repeat with a lot of these is like, you have to plan for this as best you can. Whether it’s set in a realistic expectation. For me, I think it would be irresponsible for me to say like, okay, 87 years old. I’m going to retire at 70, have set – and again, we’ll talk about this, too, is I might not retire at 70. I might have to retire a lot sooner than that. If I say, “Hey, 70.” Then I have to plan for 17 years, I think that would be really irresponsible. I think, set in realistic expectations in terms of life expectancy. Consider personal and family health history.

I think, you do pay a price, Tim, for a longer plan horizon, to your point, because you need more resources, which means that you have to save potentially more in your accumulation phase. Then when you’re in retirement, you have to be more conservative with what you’re withdrawing. That could lead to, again, you forgoing things today for a longer future, I guess, or being all sustained. That’s definitely one thing. It’s just, how do you best plan for that longevity?

[0:13:32] TU: You know, the other thing that’s coming up for me, Tim, as you’re just sharing this solution around planning for longevity is if folks end up erring on the side of your example, right? Social Security says one number. Maybe we’re planning 10 years further than that. Then there’s an interesting – certainly, you’re mitigating one risk, but you’re also presenting another risk, which is potentially having excess cash at the end of life, which obviously, there has to be planning done for that. What does that mean for the transfer of assets? Is there philanthropic giving that’s happening?

Then there’s a whole tax layer to that as well, right? In terms of, how are the taxes treated on that if we’re planning, perhaps, to not die was zero, but we may have additional funds that are there at the end of life. Just another great example, I think, of where financial planning comes together with the tax plan, and obviously, everyone’s situation is going to be different.

[0:14:21] TB: Another solution that would bring up for this risk, Tim, would be lifetime income. This is where I think, really a careful analysis of Social Security claims and strategies is needed. Because I think a lot of people, they’re like, “Okay, I’m 62. I’m eligible for my Social Security. I think, my parents died at 80. Probably going to die right there.” There’s a lot of things that I think we just blow through. One of the biggest retirement decisions is just going to be this decision on how and when you’re going to claim. Social security is a lifetime income. If you start claiming at 62, you’ll get that until you pass away. Start claiming at 70, and you’ll get a much greater benefit until you pass away.

There are not very many sources of income like that. Pensions might be another thing, but that would be one of the things that we would want to make sure that if we need X per month, or per year, a good percentage that is lifetime income, meaning not necessarily out of your portfolio, on a 401k.

Another way to do this is to transfer the risk of longevity to an insurance company by purchasing something like an annuity, so you can provide protection from the risk of dying young by purchasing a term certain. You could say, “Hey, I want this annuity to pay me for a lifetime and I’ll get a lesser amount, or for the next 10 years and I might get a higher amount.” But a lot of people are really not crazy about that, because they could give an insurance company $100,000 and then get one or two payments and die the next month or whatever. There are refund riders and things like that, so I think looking at that is something that definitely in the lifetime income.

I think, one of the things that people don’t know of, is if you have a 401k, a lot of people, they’ll take a lump sum and they might put it into an IRA. One of the things that you could do is take annuity payments for life out of that plan. What they essentially do is go out, most of the time they go out and buy an annuity for you. That’s a way to do it, instead of taking a lump sum, you can buy, basically, annuity payments from a 401k, that type of 403b. You can get lifetime income from insurance contracts, so cash value, life insurance, death benefit, there’s an annuity option.

This can even be true for a term policy. If I pass away and shay, most times will elect a lump sum, but you can say, “Hey, I want this payment for life, or for X amount of years.” Those securities are probably going to be the biggest ones, but then an annuity or something like that would probably be a close second to provide lifetime income for you to negate some of the longevity risks that’s there in retirement.

[0:17:04] TU: Yeah, a couple of resources I want to point our listeners to episodes 294, 295, you and I covered 10 common social security mistakes to avoid, along with a primer we did back on episode 242 of Social Security 101. Really reinforces what Tim’s talking about right here. Then we covered annuities on episode 305, which was our understanding of annuities, a primer for pharmacists. Certainly, go back and check out those resources in more detail. Probably lots of avenues to consider, but any other big potential solutions as people are trying to mitigate this longevity risk?

[0:17:37] TB: I think, probably the last one, and I mean, there are others, but probably the last big one I would bring up is probably, what is your withdrawal strategy? We’ve mentioned the rule of thumb of 4%, but I think that’s limited in a lot of ways. One is a lot of those studies are based on a finite number of years, i.e. 30 years from age 65 to 95, and we know that people are living beyond that 30 years that that’s been planned. That’s one thing.

For longer periods, the sustainable withdrawal rate should be reduced, but typically, only slightly. What’s left out of that, the 4% study is flexibility. The more flexible you can be with your withdrawal rate, the greater the portfolio sustainability will be. When the portfolio is down, and you can withdraw less, that allows you to sustain the portfolio a lot longer. Then, I think, the other thing that’s often overlooked with this is that typically, and we’ll talk about sequence risk, but typically, once you get through that eye of the storm retirement risk zone, you want to start putting more equities back into your portfolio.

I think, just the proper allocation strategy, which is where you’re considering portfolio returns, inflation, what your need is, what your flexibility is. Again, I think that becomes a lot easier, or palatable if you have, say, an income floor, or if you have a higher percentage of your paycheck coming from Social Security. All of these things are kind of, just like systems of the body are intertwined, but just your withdrawal strategy and allowing for that to sustain you for a lifetime is going to be very, very important along with some of the other things that we mentioned.

[0:19:19] TU: Yeah. Tim, I think there are a couple of things there that are really important to emphasize, that I think we tend to overlook when it comes to the withdrawal strategy. One of which you mentioned was that flexibility, or the option to be flexible on what you need. When we show some of these examples, we just assume, hey, somebody’s going to take a 3%, or 4% withdrawal every year, but depending on other sources of income, you’ve mentioned several opportunities here, depending on other buckets that they have saved, right? That flexibility may, or may not be there, which ultimately, is going to allow for us to be able to maximize and optimize that even further. All right, so that’s number one, longevity risk.

Number two is inflation risk. Tim, I think this is probably something that maybe three, four, five years ago, people were asking, hey, what inflation? Obviously, we’re living this every day right now. We’ve seen some extremes, although our parents would say, we ain’t seen nothing yet from what they saw growing up. What is the risk here as it relates to inflation?

[0:20:16] TB: We’re going to talk about inflation a few times in this series. What we’re talking about with regard to this risk is this is really the risk that prices of goods and services increase over time, right? The analogy or the story I always give when I talk about investments is that the $4 latte that you might get from Starbucks in 2020, 30 years might be $10, $11, or $12. If you look back at, I would encourage a lot of people that, hey, I had a conversation like this with my parents like, “What did you buy our house back in New Jersey?” I think they said, it was $41,000.

Now, when they – because they were – we were talking about what we bought our house at and the interest rates are like, it’s unbelievable. They don’t understand. I think this is a huge thing, especially with retirees, you’re thinking, or you’re dealing with a fixed income, more or less. The larger percentage of your income that’s protected against inflation, which social security is, which is another reason that it’s also very valuable is because it’s lifetime, but then basically, it gets adjusted by the CPI.

When you work, Tim, inflation is often offset by increases in salary, right? The employer has to keep pace as best they can –

[0:21:42] TU: Hopefully. Yeah.

[0:21:43] TB: Yeah. Or they’ll lose talent. In retirement, inflation reduces your purchasing power, so you don’t have an employer to raise. Now, like I said, you can think of social security like that, because they’re going to do that adjustment every year. But essentially, in retirement, inflation could essentially erode your standard of living.

Again, the first solution here is to plan for this. I would throw taxes in here, but even inflation is often overlooked in terms of like, how do we project these numbers out? What is a realistic estimate of inflation over the long term? I would encourage you, again, I’m a financial planner, so I’m biased, but I think using software and accounting for inflation almost by category of expense. We know that things like medical expenses, and the inflation for medical expenses is going to outpace a lot of other things, whether it’s fuel, utilities, or food, that type of thing.

That would be the big thing. I think overlaying some type of inflation assumption into your projections and seeing how that affects your portfolio, your paycheck is going to be super important. Another solution to this, Tim, would be going back to longevity. We talked about lifetime income. I’m going to say, not necessarily lifetime income, but inflation and adjust in income. Social Security, again, is the best of this. That we saw last year, I think it was – someone might have to correct me. It was like, 9% year over year. That’s pretty good.

If you were to buy an annuity, a lot of insurance companies won’t offer a CPI rider. They might say, “Hey, your payment in your annuity, you can buy a rider, which is going to cost a lot of money,” that it says, it’ll go a flat 2% or 3%. The insurance companies are not going to risk saying, “Okay, it’s with whatever the CPI is, because they’re not going to be able to price that accordingly.” Inflation-adjusted income.

Some employer-sponsored plans, like a pension, could offer some type of COLA increase. This is more typical in government pensions, government plans than it is with private plans. Like I said, you can purchase a life annuity with a cost-of-living rider, but it’s typically very limited and very, very expensive. You might get, for kicks, Tim, these are just round numbers. You might say, “Hey, give me straight up $1,000 as my benefit.” But if I add a, COLA rider, or something like that, it could cut it down to $800. Again, that’s not real numbers. That could be the cost there.

Then the last thing for this is to build a bond ladder using tips. A bond ladder is essentially, and we could probably do a whole episode on this, Tim, but a bond ladder would be, hey, basically, I want to build 10 years of income, say. Let’s say, I’m retiring in 2024, or let’s say, 2025. My first bond ladder might come due at the end of 2024. Then that’s going to give me $30,000 or $40,000. At the end of 2025, going in 2026, the second run of my bond ladder is going to pay me and basically, do that for the next 10 years.

Then essentially, what you do is you try to extend that ladder out. You might go to year 11, might go to year 12 as you’re spending that down. A good way to do that is with tips, which is an inflation security, an inflation-protected security. That’s one way to inoculate yourself from the inflation risk.

[0:25:14] TU: I looked up Social Security while you were talking there, you’re spot on. 8.7% in 2023. Yeah, that’s significant, right? I think especially for many folks and hopefully, as our listeners are planning, that won’t be as big of a percentage of the bucket for retirement. The data shows that across the country, it really is.

[0:25:33] TB: Yeah. I think, again, I think, when we’ve gone back to my own, it was something like, if I claimed at 62, I have to remember the numbers. If I claimed that 62, my benefit would be $2,500. If I claim at 70, I think it’s over $4,000.

[0:25:49] TU: Something like that. Yeah.

[0:25:50] TB: But then, if you then tack on the inflation on that, it’s just huge. Again, I think, that is going to be one of the most important things that you evaluate in retirement is the social security stuff.

[0:26:01] TU: One of the other thoughts that have gone to mind, Tim, as you were talking with inflation is just rates of return. We tend to, at least on a simple high level, right? We think of rates of return and a very consistent 7% per year. We know the markets don’t obviously act like that. We have huge ups, huge downs. We’re seeing that with inflation as well, right? We tend to project 2%, 2.50%, and 3%. But we lived in a period where inflation was really low. Obviously, we’re now seeing that bump up. My question for you is, as you beat this up with the planning team like, has this period of high inflation, at least higher than what we’ve seen in our lifetime, has that changed at all? Some of the modeling, or scenarios that you guys are doing long term?

[0:26:42] TB: I think, we’ve ticked it up a bit. I definitely think it’s probably too soon to say like, hey, for the next 30 years, we got to go from 3%, which has typically been the rule of thumb, to 5%. I think as we get a little bit further from quantitative ease in and putting a lot more money in circulation and we’re seeing the result of that, that I do see some modification of models and that’s going to be needed.

One of the things that the government and the Fed try to do is keep inflation at that 3%. I just don’t know if they’re going to be able to – the new norm might be keeping it as close to 4%, or 5%, right? I would say for me, and again, I try to keep on this as best I can, but I think for me, I think it’s a little too soon to tell. To your point, the reality is that I would say, less so for inflation, because I think there is a little bit of the thumbs on the scale with the government and the Fed, but we do see fluctuations in market returns. We’re seeing now more fluctuation in inflation.

I think, a lot of what I’m reading is that we’re probably at pretty much the end of rates going up. But I’m interested to see is like, okay, when they start to potentially reverse, or normalize, what is the new normal? I think if you put as much money in circulation as we have, I think this is one of the side effects, and we’re paying for that now.

[0:28:15] TU: The thing that’s coming to mind here as you’re talking about inflation risk and even tied to longevity risk is we often assume retirement is a clean break, right? You were working full-time, you’re no longer working full-time. For many folks, either based on interest, passion, or financial reasons, there could very well be some type of part-time work, right? Whether that’s consulting, whether that’s part-time PRN work, or whatever. To me, that’s another tool you have in your tool belt, when you talk about inflationary periods, or what’s happening in the market and whether or not we need to draw from those funds. Having some additional income, if you’re able and interested, could be an important piece of this puzzle.

[0:28:57] TB: We often think of a glide path in retirement. Meaning that, the closer we get to retirement, the less stocks we have, the more bonds we have, safety, that type of thing. I think, we have to start talking more about a glide path, like a work perspective, where you go from 1 to 0.8 to 0.6 to 0.2, or whatever. Then maybe, it’s just 10.99 PRN, or something like that. This is for a variety of reasons. It’s for the reasons that you mentioned market forces, and inflationary forces, I think even more so for mental health.

[0:29:29] TU: Mental health. Yeah, absolutely.

[0:29:31] TB: IR, like we talk about our identity and role and things like that and a soft landing. I think, abrupt retirement sounds sweet, but I think in reality, I think it’s really hard for, if you’ve been in the workforce for 30 years and there might be people that are like, “Nope. You’re crazy, Tim.” I talked about this and some retirees will probably roll their eyes. When I took my sabbatical, it was just a month, right? It wasn’t a ton of time. I literally was like “All right, I’m not going to touch work.” I’m like, “What am I doing?”

I guess, my thought process was I could see how it could be where you’re directionless, right? I spent a lot of time planning for just that month and I’m like, it was an interesting test case for me to be like, all right, I just need to make sure that when I’m positioning myself, I still have availability for meaningful work and other interests and things like that. Yeah. I mean, everything that you read is that the best thing to combat a lot of these risks is actually not to retire. It’s to work or work at a reduced – If you’re working and you’re not drawing on your portfolio, then problem solved. Obviously, we know that’s not necessarily the best solution.

I think, having the ability to do that, there’s from a mental health perspective and a lot of these other reasons. I think pharmacists in particular are positioned with their clinical knowledge and things to do things with their PharmD that provide value in retirement and that are not necessarily stressful, or strenuous. So —

[0:31:04] TU: Yeah, I think that feeling of contribution is so important. I just listened to a podcast this week with Dr. Peter T on one of my favorite podcasts, The Huberman Lab Podcast, and he was talking exactly about longevity and some of the risks to longevity in that context of mental health. He was talking about the value of contribution, the value of work. I think for all of us, it’s natural in those moments and seasons of stress. That feeling of contribution can get overlooked, right? I mean, I think it’s a natural thing to feel. Really, really good discussion. I think, it highlights well. We’re obviously talking about X’s and O’s in terms of dollars. But when it comes to retirement planning, so much more than that.

Number three, Tim, we talked briefly about, but we can put a bow on this one, would be excess withdrawal risk. Tell us more here.

[0:31:52] TB: Yeah. This is really just that you’re withdrawing at a rate from the portfolio that will deplete the portfolio before you die. Which is one of the biggest fears and one of the biggest risks is like, “Hey, I just want to make sure that I have enough money to last me throughout retirement.” I think, the biggest thing again for this is to have a plan, have a strategy and be flexible with that plan.

There are ways that you can build your retirement paycheck, and we’ve talked about this before, where it’s coming from a variety of sources. At the end of the day, there is still going to be a portion of your paycheck, the retiree, you are pulling the string. You’re saying, “Okay, I’m going to get X amount from Social Security, potentially X amount from maybe a floor, an annuity, but then the 60%, or whatever it is has to come from these buckets that I’ve filled in the accumulation phase.” Like I said, the default that a lot of people use is, hey, it’s the 4% rule. There are other strategies, like [inaudible 0:32:54], guardrails that are more, look at market forces, look at inflation, and then basically, adjust your portion of your paycheck accordingly.

If you do that consistently and you stick to that plan, you’ll basically see the portfolio sustained for 30-plus years. I think that’s probably the big thing that in all the research says is that if you can adapt your spending, which is hard, right? It’s hard for us to do that in the accumulation. It’s often hard for us to do that in retirement, but if you can adapt your spending with the ride the roller coaster of market volatility inflation, it lands in sustainability. We’ve also talked in the past about the bucketing strategy. You make sure that you have the next five years, basically, in very CDs, money markets, very safe investments. Then that allows you to inoculate, at least for the next five years to do more mid-risk type of investments. Then for those 15-plus years, more risky investments with regard to the portfolio.

The bucketing strategy is just a take on the systemic withdrawal strategy but allows the retiree to understand more and compartmentalize and say, “Okay, if I have the next five years planned out, if I need 40,000 times five years, I had that in that bucket. I don’t really care what the market does. If the market goes down today, I know that in most cases, it’s going to recover in the next three and a half, four years and we’re good to go.”

Again, a lot of people, I think will say, “All right, well, this year, regardless of what’s going on in the world, I need this. Then the next year –” Then they wake up and they’re like, “Man, I had a million dollars, seven years in retirement, I have 200,000 left. This is no bueno.”

[0:34:51] TU: Yeah. Another important point you’re bringing up here and you mentioned earlier in the show, I think we tend to oversimplify, especially when we’re thinking accumulation of, “Hey, I’m going to save two, three, four million dollars. Maybe I’m going to be moderately aggressive, or aggressive. Then I retire.” We don’t think about what is the aggressive to moderate to non-aggressive strategies of investing in retirement, right? We’re not taking a portfolio of two, three, four million dollars, and also just moving it into something that’s liquid. We still have to take some calculated risks, to your point earlier, that we’ve got potentially a long horizon in front of us.

Tim, what I think about is the double whammy of potentially, when you retire, which depending on where the markets are, you may or may not have control of that. I think about people that may have retired pre-pandemic, not knowing what was coming and then the markets did their thing. The double whammy I’m referring to is if you retire and start withdrawing at a period where the market’s down significantly and you’re dependent on that draw, we’ve got a double effect of what we’re getting hit there.

[0:35:52] TB: Yeah. We’ll get into more of that in the sequence risk, in terms of, it’s less about the actual return and more about the sequence of when that return comes. That can affect, basically, the sustainability of that portfolio.

[0:36:06] TU: Since you mentioned the buckets and building retirement paycheck, as you call that, we did cover that previously, episode 275. We’ll link to that in the show notes. That was one of four episodes that we did, 272 through 275 on retirement planning. All right, so that is number three, excess withdrawal risk. Tim, number four on our list is unexpected healthcare risk. Tell us more here.

[0:36:29] TB: Yeah. This is the one we haven’t really covered much. We probably should give it a little TLC, maybe in future episodes. I think that Medicare and the decisions around Medicare is also another huge decision to make in retirement. This is the risk of facing an increase in unexpected medical expenses in retirement. One of the things that people often get wrong is that it’s like, okay, I qualified for Medicare at 65, I’m good. All my medical costs will be taken care of. That’s not true.

The decision of when to enroll and whether to choose the original Medicare or Medicare Advantage plan, choosing the right Part D plan for drug prescription is really going to be important. The figures, they’re not overly impressive, Tim. In 2019, they said, the average male at age 65 is going to spend about $79,000 to cover medical, or healthcare costs in retirement.

[0:37:25] TU: That’s lower than I would have thought, to be honest.

[0:37:26] TB: Yeah. Now, I think it goes out – I mean, again, you can see for if you look at the tables, what did it say for me at 65? I was going to live to – does it have at 62 to 67. Let’s say, it’s another 20 years. Yeah, it seems low to me. I mean, females, age 65 is a lot more, a $114,000 to cover healthcare expenses in retirement. It doesn’t seem a lot in terms of your – it is outside of housing. It’s going to be one of the bigger things, especially when you’re in the phase of older retirement.

I think, probably the default here is how – it goes back to planning and understanding what’s available to you. I think, choosing the appropriate insurance is going to be important. One of the things, and we’ll talk about this in the next for us, but a lot of people think that long-term care is covered by Medicare. It’s not. Another thing that a lot of people don’t know is that Medicare doesn’t have a cap on out-of-pocket expenses. If you have large amounts of medical expenses, you could be paying in perpetuity, that’s where a supplemental plan, or a Medigap plan will be important.

Part A, to break these down, covers a lot of hospital visits and inpatient stuff. Part B is more, I think, outpatient, like covers medical necessary services, like doctors, service and tests, outpatient care, home health services, durable medical equipment, and that type of thing. Then part C is going to be the drug. Then there’s going to be lots of variations of part D. Then what people then assess, Tim, is, should I get a supplemental plan, or a Medicare advantage, which is not to say under traditional Medicare, but it’s more of a reimbursement through a private medical, or private insurance company.

This is one that I think that is often overlooked. It’s hard because every state and area of the country is going to be different. What you can get if you’re a resident of Florida is going to be different if you’re a resident of New Jersey or Ohio. I think, going through this and probably on an annual to reassess is going to be an important part of making sure that you’re mitigating, as much as you can, the risks of those increased, or unexpected medical expenses while retired.

[0:39:44] TU: A couple of things are coming up for me, Tim, here. Obviously, one would be, if we’re factoring this into the overall portfolio nest egg. Certainly, that’s one strategy. The other thing I’m thinking about, if folks have access to an HSA and are able to save in that long term, without needing those for expenses today. Obviously, if you need them, you use them. That’s what it’s there for. If not, the opportunity is for these to grow and to invest and invest in a tax-free manner, such that it could be used for six-figure expenses right in retirement.

We’ve got an exciting – October is all going to be about healthcare insurance costs. We’re going to have several episodes all throughout the month. One of which is going to be focused on Medicare. We’re also going to be talking about healthcare insurance for those that are self-employed. Then we’ll be talking about open enrollment, other topics as well. Looking forward to that, that series that we’re going to do in October.

Tim, number five on our list, which will wrap up our part one of this two-part series is long-term care risk. Now, we did talk about long-term care insurance previously on the show. That was episode 296, five key decisions for long-term care insurance. You just mentioned not something that Medicare is going to cover. Tell us about this risk and potential solutions.

[0:40:56] TB: Yeah. This is the risk of essentially, not being able to care for oneself. It basically leaves you dependent on others to perform, or help you perform the activities of daily living. These ADLs are called activities of daily living, are bathing, showering, getting dressed, being able to get in and out of bed, or in and out of a chair, walking, using the bathroom, and eating.

Typically, if you need help with two or more of these things, this is typically where a long-term care insurance policy will actually trigger. These could be cause for a variety. It could be chronic diseases, orthopedic problems. Alzheimer’s is probably the biggest one that is the biggest threat for this particular risk. Planning for this is huge. It’s funny, Tim, because – not funny, but it’s interesting is that this is one of the risks where it’s like, it’s not me, right? It’s someone else. Most people see this as an important thing to plan for, but not necessarily for themselves.

The reality of the situation is that in most cases, family members will provide the care, which is about 80% of the time in the home, which is unpaid care, averaging about 20 hours per week. If you imagine that, Tim, if that were laid at your feet, how that could affect your health, your finances, just your career. That’s the effect that it has on the family. Like I said, most people think that Medicare covers long-term care costs. It doesn’t. Many people think that this is a risk, or a concern in retirement, but not necessarily for them, it’s for somebody else.

I think, one of the misconception is like, if you look at things like insurance, a lot of people think, “Hey, it’s too expensive.” In that, I think, that reputation is probably earned, because I think when they first priced these policies, when they first came out, there were a lot of policies that were not priced expensive, or the right way, so they got more expensive year over year. There was a study that said that less than 10% of people that were age 65 and older had long-term care.

Really, the need is not as long as you think. The average time that a male needs long-term care is about a little bit more than two years. For females, a little bit less than four years. Solutions for this is plan for this. Understand what are the risks and costs associated with it. Again, every state is going to be different in terms of what these costs and what is the cost for something like, anything from being able to age in place and have care given in your home, to a nursing home. Understand, what is that in your area? How do you want to pay for long-term care? I mean, how do you want that care delivered?

A big part of this is just getting organized with, okay, if this were to happen, where can we get this money from? Is it insurance policy that we purchased? Is it family members? Is it something like a reverse mortgage? Are there government programs, like if you’re a veteran, there’s some programs for that. Could be Medicaid. That is a program that’s probably the largest funding source of long-term care, but you have to be impoverished to do so. A lot of people will purposely spend down their estate to become impoverished, to get care, which there’s a lot of hoops and things that you have to be careful of.

But insurance is probably, and I know we did an episode on this is like, that’s another one to really look at is when to purchase a lot of people, we should really start talking about this in late 40s and purchase in your 50s. I think 55 is the average, if I’m not mistaken. If you wait longer than that, Tim, that’s when you have increased instances of the coverage being denied and it gets really expensive. You have to thread that needle a bit. What is the amount needed?

I think at a minimum, we should be pricing and we say, okay, for us to be able to age in place, so have someone come in 20 hours a week, five days a week, or whatever that looks like, is that $3,000? Is at $6,000? Find that number and be able – A lot of the study says, the longer that you can stay in your home and not in a facility, the better. What’s the amount? Is that inflation-protected? What’s the elimination period? Is it a straight-up long-term care insurance plan? Or is it linked to an annuity purchase or a life insurance purchase?

Or if you go through all that, you’re like, “You know what? I got this and we sell fund, which is probably the most popular sell fund with the family as ad hoc caregivers.” Unfortunately, I think that’s really more of a lack of planning than anything. But that is a solution as well to say, okay, if that’s the case, again, looking at funding sources and things like that. This is another thing that I think is often overlooked, because, I think, some of the misconceptions about long-term care. But if you can get a policy that pays you $3,000, $4,000, $5,000 a month for care, to be able to stay in the home, I think for a variety of reasons, that’s worth looking into.

[0:45:57] TU: Yeah, Tim. I agree. I think that this is often overlooked, perhaps from a misunderstanding, or evaluating the risk. The other thing that comes up for me often here is just the difficult conversations that need to be had to really navigate this. We just, a few episodes had back on the show, Cameron Huddleston, who is just fantastic. She wrote, Mom and Dad, We Need to Talk, how do you navigate difficult financial conversations with parents? Some listening to this are thinking about it for themselves, certainly. Others may be working with aging parents and trying to navigate these conversations.

Who wants to initiate a conversation of, “Hey, Mom and Dad, what are you doing for long-term care insurance?” Or, maybe that age window has passed, where a policy makes sense. Now, we’re back to, okay, what’s the game plan? What does this look like financially? What does this look like in terms of the ability of our time to be able to care and care well? I think, there’s just a lot to navigate here that is not just financial, but that is emotional as well. She does a great job in that book, in the episode, we just recorded as well, of how do you initiate these conversations in a loving and respectful way? But more than anything, to get out in front of the planning. Again, whether you’re planning for yourself, whether you’re planning for aging parents, so important to be thinking about this.

[0:47:14] TB: This is a little teaser into our next few risks that we’ll cover in the next episode, in terms of just tough conversations that need to be had, so we can prevent things happening in the future. It’s just a byproduct of old age and being able to care for oneself. That can be hard to broach those subjects with your children, even adult children. There’s some vulnerability. I think, just the way you approach that, and obviously, people have different relationships with parents, and some people are really close. Some people brought up in a house where you don’t talk about money, you don’t talk about some of these things. It can be really hard.

I think, one of the things that really stuck with me with Cameron’s work and her writings is like, you don’t want to get to a point where you’re having to go through the courts to get the care that your loved ones need. If you can avoid that at all costs, even it means having an uncomfortable conversation, or maybe it’s not a conversation, maybe it’s a letter to break the ice and you go from there, I think it’s needed.

[0:48:25] TU: Yeah. Whether it’s the courts, or in her instance, and we’re going through this right now with my grandmother as well. But in Cameron’s instance, she had a mom who is struggling with memory loss and Alzheimer’s that her message, and one of her main messages, hey, you want these conversations and planning that be happening before those instances are in question, where you’re now dealing with more challenges of, is someone in the right state of mind to be able to make those decisions, and what are the legal implications of that?

Great stuff, Tim. That is five of the 10 common retirement risks to plan for. We’re going to be bringing the rest of this list back on the next episode, so make sure to join us here next week. Of course, for folks that are listening to this and thinking, “Hey, it’d be really helpful to have someone in my corner that really can help me plan for retirement, as well as other parts of the financial plan,” we’d love to have a conversation with you to have you learn more about our one-on-one fee-only financial planning services, as well as to learn more about your individual plan and the goals that you have. You can book a free discovery call by going to yfpplanning.com. Again, that’s yfpplanning.com. All right, we’ll see you next week.

[END OF EPISODE]

[0:49:33] TU: Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Financial Pharmacists 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 BMI 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.

[DISCLAIMER]

[0:50:18] 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 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 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 Pharmacist Podcast. Have a great rest of your week.

[END]

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YFP 318: Midyear Tax Planning and Projections

Posted on by Caitlin Boyle

YFP Director of Tax, Sean Richards, CPA, EA digs into what midyear tax projections are, why they matter, and specific examples where a midyear projection can help someone optimize their financial situation. We discuss the importance of adjusting withholdings, ensuring record keeping is up to date, common pitfalls business owners and side hustlers can avoid with a projection and tax considerations with student loan payments coming back online.

Episode Summary

YFP Director of Tax, Sean Richards, CPA, EA is here to explain the incredible benefits of doing a midyear tax projection. Sean defines a midyear projection, illustrates how projections can lead to peace of mind, and clarifies why everyone should be doing their own midyear projections. Our conversation explores why being proactive is always better than being reactive, why proactive planning is necessary when making big life changes like getting married or buying property, or getting a new job, and a host of real-world examples that highlight the undeniable benefits of midyear projections. Plus, Sean describes how midyear projections can help with tax optimization and strategies for student loan repayments, and the wealth of opportunities that become available to business owners who embrace proactive planning.

Key Points From the Episode

A warm welcome back to the show to YFP Director of Tax, Sean Richards.
How he’s spending his free time post-tax season as a father of two under two.
Sean explains what a midyear projection is.
How projections can lead to peace of mind.
Why everyone should be doing a midyear projection for themselves, according to Sean.
Real-world examples of the benefits of doing a mid-year projection.
How being proactive is better than being reactive.
Why proactive planning is a necessity when making big life changes like buying property.
The role of midyear projections in tax optimization.
Exploring the opportunities available for business owners who do midyear projections.
How a midyear projection can help you optimize your student loan repayment strategy.

Episode Highlights

“A lot of people get stressed out about taxes, and I don’t blame them — when you’re in high school, you learn that the mitochondria is the powerhouse of the cell, but they don’t teach you how to file your taxes and do basic finance things.” — Sean Richards [04:52]

“At the very minimum, anybody who’s paying taxes and has a job and has to file a tax return at the end of the year should be doing some level of projecting the end of the year, to make sure that there’s no crazy surprises.” — Sean Richards [09:27]

“To the extent [that] you can mirror your tax strategy with your financial plan; it’s always just the best way to do things.” — Sean Richards [34:25]

Links Mentioned in Today’s Episode

Episode Transcript

EPISODE 318

[INTRODUCTION]

[00:00:00] TU: Hey, everybody. Tim Ulbrich here, and welcome to this week’s episode of the YFP Podcast, where we strive to inspire and encourage you on your path towards achieving financial freedom.

This week, I welcome back to the show, YFP Director of Tax, Sean Richards. We discuss mid-year tax projections, what they are, why they matter, and specific examples for how a mid-year projection can help someone optimize their tax situation. We discuss the importance of adjusting withholdings, ensuring record keeping is up-to-date, common pitfalls that business owners and side hustlers can avoid with a projection, and tax considerations with student loan payments coming back online in a couple of months.

You can learn more about YFP tax services for both individuals and businesses, by visiting yfptax.com. Again, that’s yfptax.com.

[INTERVIEW]

[0:00:50] TU: Sean, welcome back to the show.

[0:00:52] SR: Thank you. It feels like I was just here, but it also feels like it was just tax season yesterday. So I think things are all sort of blending together at this point, which is understandable given the rush of everything, and now that we’re in summer and all these other stuff going on, but I love being here. I appreciate you having me back on.

[0:01:08] TU: So, we’re post-tax season, you’ve got a new baby in the house, we’re gearing up for mid-year projections, which we’re going to talk about in this show. You should have ton of free time right now, right?

[0:01:19] SR: Yes. I really haven’t been doing a whole lot of anything, just kicking back on the couch, and kind of watching a lot of TV and stuff. It’s baseball season, so you get these games that you can just sort of put on the background and sleep all day. That’s basically what I’ve been doing. Yes, nothing really going on at work, at home with the new baby, and the other baby who’s under two. Two under two right now, so yes, a lot of free time. So if you’ve got anything for me to work on, please send it over.

[0:01:45] TU: I’ll keep that in mind. Two under two is intense. Yes, I remember, I shared with you our oldest two are separated by 17 months, and our other two are a little bit further spaced out. Two under two is the real deal, so kudos to you and your wife for making that happen. As you were talking about yesterday, I can remember very well. All of a sudden, baby comes in and your oldest, who still is relatively young looks much older all of a sudden, right?

[0:02:11] SR: Yes, she does look much older. But she also – and I swear it’s not just a comparison of or – I shouldn’t say the comparison, but now, we have a little one at home, so she seems older. But I swear, overnight, she went from being one and a half to being two and getting those terrible twos right in there. Because, man, it’s like you said, it’s intense. But it’s really exciting, it’s awesome. I mean, I couldn’t be happier with everything. But it definitely – it’s exciting challenge what I would say for sure.

[0:02:38] TU: Well, last time we had you on was Episode 309. We talked about the top 10 tax blunders that pharmacists make. That was coming off of the tax season. Here we are, end of July, people may not be thinking about taxes in the middle and dead of the summer, but we’re going to hopefully make a case of why tax is important to consider not just in tax season, not just in December, but really year-round. That’s our philosophy, our belief at YFP Tax, that tax planning, especially for those that have more complicated situations, when done well, is exactly that. We’re doing year-round planning, we’re proactive, we’re not as reactive. We’re going to talk about an important piece of that year-round approach, which is the mid-year projection today.

Before we discuss that midyear projection and some of the details and reasons of doing that, Sean, just define at a high level by what we mean by that term, right? We throw that around internally all the time, mid-year projection. All of our listeners certainly are familiar, hopefully, with filing taxes, but maybe not as familiar have experienced with a mid-year projection, so tell us more.

[0:03:42] SR: Yes. I mean, it really is. I mean, if you look at what it says, it’s a projection, right? You’re projecting out what you expect to have at the end of the year. Really what it is, is kind of like putting together your tax return now based on what you think it’s going to be at the end of the year. Obviously, there’s some variables there and some uncertainty with everything, as it always is with forecasting, and budgeting, and that sort of thing. That being said, given that there are uncertainties, there are things that you want to keep an eye on. So, yes, it’s really just doing a projection of your finances for the year, and really coming down to what we think your tax return is going to look like. Are you going to have a bill? Are you going to have a refund or not? Then, looking at that and working backwards to say, “What can we do to tweak things?”

[0:04:29] TU: If we go a layer deeper on that, Sean, why do one? What’s the case to have one done? What’s ultimately the goal that we’re shooting for here?

[0:04:38] SR: I think the goal, and I mean, you kind of alluded to before saying, people probably aren’t thinking about taxes right now, and that’s totally fair. I don’t expect people to be thinking about taxes right now, unless you’re maybe me or somebody in similar shoes as me. But, I mean, the goal is that a lot of people get stressed out about taxes, and I don’t blame them. It’s one of those things where I joke that when you’re in high school, you learn that the mitochondria is the powerhouse of the cell, but they don’t teach you how to file your taxes, and do basic finance things, right?

What generally happens is, you’re kind of – I don’t want to say sweeping things under the rug, but you’re not thinking about taxes, or it’s not top of mind throughout the course of the year. Then you get to the end of the year, and you’re doing your return. It’s all looked back, all historical. There’s not much you can do at that point, right? So if you’re filing your return next year, for this year, and you have a big refund, it’s nice to have a refund, but you’ve got all this cash all the sudden that you could have been doing stuff with last year or vice versa. You get to the end of next year, or the end of this year, you’re filing next year, and you have a huge bill.

Whether you have the cash ready to pay it or not, it’s nothing that anybody wants to have, right? The idea of doing the projection now is that you’re not getting to a point where you’re stressed out, thinking what could have been, what should have been last year. You’re getting ahead of those things and saying, “Hey, right now, things look great. Don’t have to do anything, or things don’t look as good as they could be. Let’s tweak that.” Or maybe not even any of those. It’s just, “Hey, right now, we have status quo, but there’s some things that are changing in my life. I have a new job, or I’m thinking about opening up a rental property, or something.” And making sure you have those ideas in your head now as opposed to, again, in April and handing it to your accountant saying, “I forgot to mention, I bought that house last year. Oops.”

[0:06:30] TU: Yes. I think with most things, and we’ll talk about some specific examples here. But most things when we shift to more proactive planning versus reactive, and obviously, for those that have more complicated situations, the more the proactive planning is going to help, and we’ll talk about that in more detail as well. But anytime we make that mindset shift, there’s an opportunity for peace of mind as well, right?

I think a lot of people I talked to, Sean, when I say, “Hey, what are the opportunities? Are you thinking about opportunities to really optimize tax as a part of your financial plan?” Everyone’s like, “Yes, I want to do that. I want to make sure that I’m paying my fair share, but no more.” But then actually, executing on that. It’s like this cloud of not exactly sure what to do, how to best navigate it. I think that is the opportunity with the year-round planning. Ideally, we’ll make the case of why it’s important to have a CPA in your corner throughout the year as well. But I think that peace of mind part is just such an important piece, especially for many pharmacists, I know that have this lingering question of like, “Am I doing everything that I can?”

There’s the cleanup part where maybe we’ve made mistakes, or we don’t want to have a big bill or refund, but then there’s the second layer of that, which is that nagging feeling of like, is there something else I could be doing? I think that’s one of the values of projection.

[0:07:49] SR: Yes. I mean, the peace of mind thing, like you said, is that I feel like going back to the whole high school idea of how they don’t teach these things to a lot of folks. I remember getting my first job out of college, and I had an accounting, and finance, and even tax background from college. You start getting these things, “Hey, do you want to do an HSA? Do you want to do 401(k)?” There’s ROTH and traditional, there’s IRAs, and everything, and people are like, “I don’t know what any of this stuff is. I’m just – I’m getting a nice paycheck for the first time now. I know I want to save, but I don’t know what any of this stuff means.” It becomes overwhelming to have all these things happen.

Like you said, you don’t want to come to the end of the year and say, I wish I had done these things. Because I didn’t know that that – there were opportunities for me to save here and there. I just thought that I was doing the right thing by putting my money in this savings account or in this account. So yes, I think, again, the uncertainty, and just sort of lack of general tax knowledge in the country, and world can be stressful, and not having to worry about that is very important for peace of mind in general sanity.

[0:08:55] TU: To be fair, the process is more complicated than it probably needs to be. And because of those complications, there’s some of the ownership and work on us to be planning throughout the year. One of that part piece, of course, would be the mid-year projection. Sean, I have to admit, prior to really building our tax team over the last several years, a mid-year projection was something that was never on my radar. My question for you is, should everyone do a mid-year projection? Is this necessary for everyone?

[0:09:26] SR: I think it is. I think at the very minimum, anybody who’s paying taxes, and has a job, and has to file a tax return at the end of the year should be doing some level of projecting the end of the year to make sure that there’s no crazy surprises. You might be listening to this and saying, “Hey, my situation is really simple. I filled out my W-4 when I started my job. I don’t have any crazy stuff going on. I don’t think I really need to do this.” But again, we keep coming back to this peace of mind thing and that could be great. Maybe your return last year was fine, and there’s not a lot of stuff that’s changing, but there’s always changes to the tax law. I mean, the W-4 system changes all the time, and I know it’s not – people don’t even realize, “Hey, can I claim one or two exemptions?” That’s not how it works anymore.

There’s always changes to the law, and changes to things going on. Even if you think your situation is pretty simple, and doesn’t apply to you, just doing a quick check to make sure, “Hey, there’s not going to be any crazy surprises.” Again, with something like that, you’re not necessarily going to be saying, “Oh, am I taking advantage of all the laws that exist out there, and all the different ways to maximize my tax savings?” But you just want to make sure. “Hey, am I going to owe a ton of money to the IRS at the end of the year? Or am I going to get a ton of money back that the government was borrowing for me for free for the entire year?” What I would say is, if your situation is simple, you can even just go on the W-4 calculator that the IRS provides. It’s not perfect, please. No one from the agency come and chase me down. It’s not a perfect system, and there’s a couple of different things that can happen there.

You might go through the whole process and get a bad answer, and then say, “Well, what am I supposed to do with this? It just says that I’m going to owe a lot of money, but I don’t know how to fix that.” Or you might just use the tool, and like I was alluding to, you might just get frustrated with it and say, “Why all these questions they’re asking me? I don’t understand any of this stuff. Why is it so complicated?” It is a good starting point, I would say, especially for those with simple situations. But I would just advise to be wary when you’re doing it that. It’s not a perfect system, and it definitely can be a little confusing.

[0:11:34] TU: Yes, and I’ll be honest. Admittedly, I’m a little bit impatient, and want these tools to always be better than they are. I’ve been on the IRS W-4 calculator tools, and I’ve gotten annoyed, frustrated playing with that, and I’ve left. I think the decision tree to your point, for people that have a very simple tax situation, can they do it themselves? The technical answer is yes, there’s an IRS calculator. It’s going to give you some basic information. The follow-up question is, do you want to do it yourself? Then the follow-up question to that is, if you have a more complicated situation, and/or you’re looking for more input of advice based on the output of that number, that’s really where some of the assistance and help that can come in from working with professionals.

We’ll link to the show notes to the IRS W-4 calculator. Certainly, people can play around with that, which I’d recommend regardless of working with someone else. Just have a better understanding of the different inputs in these numbers, and hopefully to get the conversation started as well.

[0:12:33] SR: Yes, absolutely.

[0:12:34] TU: Let’s talk about some common examples where a mid-year projection can help. You’re in these conversations every week with our year-round tax planning clients. We talked about several these in Episode 309. Again, we’ll link to that in the show notes. That was a top 10 tax blunders that we see pharmacists making, which we recorded after the tax season. But I think there’s an opportunity here really to bring to life, not just the academic or theoretical side of why a video projection may be necessary, or what it is, but some actual examples where a mid-year projection can help. I’ll turn it over to you to talk through some of the most common places where you see this having value.

[0:13:11] SR: Yes, sure. I would say, the number one thing probably is just adjusting withholdings in a very – to put it in two words, it’s adjusting your withholdings, or adjusting withholdings, get rid of the “your” and “there.” But I swear I’m better at math than I lead on when I do these things. But yes, it’s adjusting withholdings. Like I said, the W-4 system changed a few years ago. Some people don’t even realize that. Some people probably set up their withholdings 20 years ago, and they started a job, and haven’t done anything since then. That might work for some folks, but the way that the W-4 holdings works now with the IRS is, if you get a new job, or your spouse gets a new job, or you have changes in salary, and everything, your withholdings might not be working the way that they did in the past.

You can also have other life events that sort of throw a wrench into that. You can get married, have kids. Even if you are married, you can kind of consider, and we’ll talk more about this when we get into some of the other blunders, but consider whether you’re going to file separately or file jointly. That changes the way you do withholdings and everything. That’s probably the number one area. Like I said, not withholding properly at the end of the year is almost certainly going to cause a problem whether it’s you’re over withholding, and you’re getting that big refund back, or you’re under withholding and you have a big bill.

The biggest and easiest way to kind of course correct. If we do a projection and we see that that’s the case, submit your W-4 to your employer, all of a sudden, you’re withholding appropriately. We can do a catch up to get you to where you need to be, or make an estimated payment or something like that. But I would say that’s the number one thing, and it sort of encapsulates everything else. Not entirely, but just because holding down a W-2 job and getting the taxes taken out of your paycheck is the way that most folks are paying the IRS. I would say, that’s probably the biggest one.

[0:15:04] TU: Let me jump in real quick, Sean, before you move on to other common examples, because that one is so common. I just want to highlight, when you think about the situations where withholding adjustments are necessary, you mentioned individuals getting married, and need dependents, I think about people that are moving different locations. They’re buying homes, new job, changes in income. These are things we see all the time. The key here is, we want to give ourselves as much time as possible to make a pivot, or a change on either side of this. We find out that, “Hey, because of X, Y and Z, we’re anticipating a big refund. All right. Let’s start making some adjustments, so we can put that money to work in other parts of the financial planning.”

We find out that we’re going to have a big liability due. Well, we just bought ourselves some more time to kind of budget, and plan before that payment is going to become due, and to make those adjustments. That’s so important, because this is the phase of life where we least want a surprise, right, especially on the O side of things, right? Getting married, moving, new job, new house, expenses that come with that. We want to avoid as much as possible, the surprises that are going to put a wrench in the other part of the financial plan.

I think withholdings, adjusting withholdings, we all are familiar with. You take a new job, you fill out the paperwork, but I think we can lose track of that throughout the year, or when those job changes aren’t happening. Just wanted to drive that home further.

[0:16:26] SR: The two things I would add to that are also – the big thing is that people are always excited about getting their refunds, right? If you get a big refund back, it’s cool. It’s almost like you found the $20 bill in your pocket, and went to the washing machine that you didn’t know about. But would you rather find out about a refund in April and get the cash back now, or find out now that you’re going to be getting that refund back, and then be able to actually put that in a savings account, or deploy it somewhere where you can get a return on it, as opposed to getting that cash back in a few months with nothing, right? It’s like a net present value sort of thing to borrow finance term. But would you rather get $10,000 in six months or $10,000 now? The answer is now, right?

[0:17:09] TU: Especially with where interest rates are on high-yield savings accounts and other things.

[0:17:12] SR: Exactly. I mean, any way that you can get a little bit of extra cash now as opposed to tomorrow, or anytime in the future, it’s better. Then the other thing that I would say, I keep going back to the whole W-4 withholding thing, is that you might be perfectly fine at your job and nothing has changed. When I say perfectly fine, status quo, right? You’re working the same job, standard raises every year, nothing crazy going on. But with the way the W-4 systems work now, if your spouse goes and gets a new job, and they update their W-4, but you don’t do anything on your end, that can mess things up. People don’t realize that. They’re thinking, “Hey. You go and claim the exemptions that you’ve always claimed in the past.” We have one kid, or two kids, or whatever it is, but that’s not the way it works anymore.

Even if it’s not you that’s had changes to your life, specifically, you have to think about your entire family and everybody who’s landing on that tax return at the end of the day. That’s one thing that definitely slipped some folks minds, I would say.

[0:18:05] TU: Great stuff. So just withholdings, I’m hearing you loud and clear, probably the most common thing that we see. It’s one of those things that big impact, but not a huge amount of work to be done to make this pivot. That’s a low hanging fruit. Talk us through other common examples where a mid-year projection can really help.

[0:18:24] SR: One good one is, this is another kind of, “Hey, this comes up every year with tax and filing is record keeping.” So we get to the end of the year, you purchased a rental property, and you’re excited about it, you’re getting some cash and everything. And now it’s time to file taxes. Instead of just your typical, “Hey, Sean, or Mr. CPA, here’s my W-2, and here’s my 10-99, and I’m good to go.” You have a rental property now. There’s a lot of things that need to go into something like that. You might not be thinking about some of the ins and outs that happen with that. I mean, if you have improvements to your property, those are treated differently than if you have electricity costs that go into your property. There’s a lot of different things that people don’t think about.

It’s not even that people don’t think about it, you don’t want to be scrambling at the end of the year to say, “Ah, I got to go get all those receipts, and get all my finances together and all that stuff, and try to get pulled all together when everybody’s trying to all do the same thing.” The extent you can get ahead of that now is great, obviously from a getting your ducks in a row and helping your CPA out at the end of the year. But also, going back to this whole idea of what am I going to owe at the end of the year? If you’re able to come to me or whoever you’re working with and say, “Hey, here’s the settlement statement for the house that I just bought. Here’s all the details. Here are all the closing costs and everything. Can you build that into my projection?”

The answer is absolutely yes. I’ll run that through and see what your rental is going to look like for the year or anything. It doesn’t have to be a rental property. You can be starting a side business, or doing anything like that. But just having this stuff together gets you ready for the end of the year, but also allows us to be able to, again, do those calculations to say, “Hey, you know, that rental that you built, or that you just bought, and you just did that big addition on? Well, that’s going to save you in depreciation this year, so you’re going to get a refund back. Let’s redeploy that cash.” Maybe you put it back into the rental property, I don’t know. But now we have the opportunity to do something with it.

[0:20:27] TU: I’m so glad you mentioned this one, because we are seeing a larger and larger part of our community that’s jumping into real estate investing. We’re seeing a larger percentage of our community that’s jumping into a side hustle or a business. Just so important, and we’ll talk about other things for business owners here in a moment to consider. But what we’re trying to avoid – not that this ever happened, Sean. But we’re trying to avoid is, hey, we get to tax filing, and you ask for the information come February and March. It’s like, “Oh, yes. By the way, I bought a rental property eight months ago. Can you figure this out right for me tomorrow?” Again, proactive planning.

[0:21:05] SR: Now, that example, “Hey, I bought a rental property last year, I forgot to mention it to you.” People might be rolling their eyes saying, “Okay. Well, if you work with an accountant, who is not going to tell their account about their rental property?” Sure, that’s totally – that might be unrealistic to some folks, I get it. But we’ve seen plenty of circumstances where folks have been, say, living in their house for 20 years. They decide, I’m going to rent out a couple rooms in the house this time for the first time. Hey, that’s awesome. Get some side income, be able to write off some of the expenses. It’s great. You’ve been living in this house for 20 years. We need to start taking depreciation on this house for rental, we need all the costs for the last 20 years that you put into that thing.

I mean, I know now some people might be sweating saying, oh, boy, that’s a lot of look back, right? But it’s something that’s going to need to get done anyway, so we rather get ahead of it now or have me looking for that in April, right?

[0:21:55] TU: Yes, good stuff.

[0:21:56] SR: A little bit of a different example there. But hopefully trying to get some people thinking about things.

[0:22:01] TU: Yes. I think, just a proactive, when people are starting, I’m thinking about a lot of individuals in our community that are new real estate investors, first property. So I’m not sure, number one thing on their mind, especially if they’re not yet working with an accountant would be thinking about a lot of the record keeping and get ahead of the proactive tax planning. Now, if they’ve worked with an accountant, or they are multiple properties in, different situation, the trigger goes off. Similar if you’ve been in business for a while, the light bulbs go off more often, like, “Oh, yes. I got to talk to the accountant about this.”

What about opportunities for tax optimization? One of the things I think about with a mid-year projection is, “Hey, we’ve got an opportunity.” Again, proactive not reactive, to really look ahead and say, “Hey, there are the things that we can be doing to pay our fair share, but no more, and optimize their overall tax situation.” Tell us more here.

[0:22:51] SR: Yes, and this one’s good, because it applies to everybody in a very broad spectrum of things, depending on what you have going on in your financial life. That could be something where it’s as simple as, “Hey, I’m working a W-2 job, my spouse is working a W-2 job, we don’t have any kids, nothing else really going on. What can we do to optimize our taxes given our situation?” That’s a perfect example of where it’s an awesome time for your accountant and your financial planner to sort of work together. Because there’s always the idea of, “Hey, we want to maximize our tax savings, but we have a life. We need to be able to have cash to pay our bills and do other things too.” It’s a very delicate balancing act of, “I want to maximize my tax savings, but at the same time, have enough cash to do all the things that I need to do.” It’s a perfect time to work with both your accountant and financial planner to say, “Hey, should I put more money into my HSA? Should I put money into a 529 plan? What kind of thing should I be doing with my extra cash? That opportunity cost of $1?”

But you can also have more, I say, more fun examples, because it’s the ones where you can really think about different opportunities that are out there, and how to take advantage of these laws. An example of that would be, say you have a side business, and you need to buy a new vehicle. There’s so many different things that you can do with that. I could spend an hour maybe. We’ll have a separate podcast on buying a vehicle in the active locations of doing so. I mean, get side business. Hey, how much are you going to be using this thing for business? Are we able to take a section 179 deduction? Is it a type of vehicle that would qualify for something like that?

We have all these new EV credits with the inflation Reduction Act. Are we going to be able to take advantage of all those? What if we use it for business? Can we still take the credits and everything? That might be a little bit of a nuanced example to some folks, but it’s a perfect example in my mind of how something that is, maybe on a day-to-day thing that happens. But something that purchase that folks are going to need to make in their life, most likely. You can really use that as an opportunity to say, “Hey, I got to do this anyway.” How can I also maximize my tax savings at the end of the day, when you’re sitting in a car dealership, and the people are trying to sell you on all these different tools, and upgrades, and everything. You’re probably not thinking, “Hmm. I wonder if I can save my taxes with this purchase?” But it’s always possible.

[0:25:15] TU: I’m going to give credit to our community. I think they are asking that question, Sean.

[0:25:18] SR: They are, for sure. I’m getting that one a lot. In fact, I would be – I challenge you to find another community that’s as interested in the EV craze right now, which is awesome, I have to say. Really, folks should be looking more and more into that, because of those credits I just mentioned. They’re just every year getting better. But yes, I love it. I mean, every year I’m seeing more folks buying EVs, or buying used EVs and getting the credit now. It’s good stuff.

[0:25:46] TU: So, as we continue talking about some of these common examples where mid-year projection can help the other one that I think about, Sean, that we’re seeing a lot more of is, business owners, especially new business owners, right? Maybe they are thinking about tax considerations, withholdings, making sure they’re making quarterly estimated payments if they have to. What’s the opportunities here with the business owners as it relates to the mid-year?

[0:26:11] SR: Well, this is where I say, take all the examples I was just giving you, and throw them out the window. Not exactly, but when I was talking about how adjusting your withholdings is such an important part of this entire thing – I shouldn’t say throw out the window, because they do definitely go hand in hand. But if you’re a business owner, you have a side gig, you’re making money doing that, you’re almost certainly not getting W-2 income from that job. Or I shouldn’t say, you’re almost certainly not, but there’s a good chance you’re getting income from that business that is not having taxes withheld on it.

That is probably the number two or number one and a half blunder that we see where folks have these businesses. They’re not setting aside cash. They get to the end of the year, and are excited to give me the P&L that shows, “Hey, look at all this money I made.” Then I say, “That’s awesome. You owe some money in taxes, do you have that ready to go?” And it’s like, “Oh, I wasn’t thinking about that.” It goes hand in hand with the withholding, but it’s really just hey, let’s look at the business right now. Where are we mid-year? What’s your P&L look like to date? What kind of expenses do we have coming up for the rest of the year?

I talked about these EVs and things. How can we think about maximizing your savings there to reduce your business income, and be able to say, “All right. Well, at the end of the year, we’re expecting that we’re going to have $10,000 in business income.” Being able to say that now, and make your estimated payments up to the IRS is not only a good thing, it’s actually what you’re required to do per the law, right? That’s where I would say that a projection isn’t a nice to have, but an absolute necessity if you’re a business owner. It’s something where you can’t really say, “Hey, I’ll think about this later, or let’s just hope the chips fall in a good spot.” You really need to be doing a projection now to say, “What am I going to owe? Do I need to pay estimated taxes now? Should I have been making estimated quarterly payments up until now? Maybe I need to do a little catch up to hopefully not have a penalty at the end of the year at this point?” But again, to any extent you’re able to get ahead of that now, when I’m looking at the calendar, it says July versus December, January, April, it’s always better.

[0:28:25] TU: Yes. Especially, Sean, think about those new business owners again. Where, often, there’s excitement around the growth, there’s a reinvesting of any of the profits that tried to continue to grow the business. If we can identify some of this mid-year, sometimes that even inform some of the business strategy of like, “Hey, are we charging appropriately? What’s the service model look like?” And making sure that accounting for taxes as I look at the bottom line, and making sure we’ve got cash on hand to do these other things, and of course, not being caught off guard as you mentioned, as well.

[0:28:59] SR: Yes. To give – I don’t want to say a very specific example, because it’s something that we see very, very often. It might seem specific to some folks, but I think a lot of people here will resonate with this. But big one is, business owners, especially first-time business owners paying themselves. A lot of folks will do that, and then they’re maintaining their records and saying, “Hey, my net income is going to be pretty low at the end of the year, so I don’t have to worry about estimated taxes or anything like that.”

Then, we get to the end of the year, you provide your P&L, and I say – actually those $10,000 that you paid yourself, it’s not really a salary expense of the business, because it’s just a sole proprietorship. It’s actually just taxable income to you whether you took the cash or not. That can be very eye opening in a bad way for a lot of folks at the end of the year. It’s not entirely intuitive to think of it that way. You might be thinking, “Well, I worked with the business, I’m paying myself. Isn’t that an expense?” In the eyes of the IRS, depending on the way you’re set your setup, it may or may not be right. Getting ahead of that now and having your accountant maybe give you that bad news of, “Hey, that money is actually something you’d have to pay taxes on the end of the year now so you can plan ahead.” — Is always better than getting that during your tax review meeting in April or May

[0:30:14] TU: Yes, and I get it. For the small business owners, we were there several years ago. For the small business owners that are just getting started, you’re looking at working with a CPA, it’s another expense in the business. I get it, right, but it’s going to pay dividends when you talk about making sure you’ve got the right entity set up classification, separate conversation for a separate day. Making sure we’re withholding correctly, getting financial statements set up correctly, making sure that we’ve got the books in good order. These are all going to be critical components to building a healthy business. You’re not going to get all of it right as you’re getting started, and that’s okay. I think some of that is natural. But making that investment, and building that in as an expense of the business from Jump Street as a part of just doing business to make sure you’ve got all of that in order is going to be really, really important.

[0:31:05] SR: Right. It’s not just a nice to have, like I said, it’s something where that should be part of your plan from the get go, and you’re building this out. People might be thinking about, well, “Hey, isn’t this podcast supposed to be about doing a mid-year projection? Why are we talking about what my business looks like? That’s kind of different than my taxes, right?” But like I said in the beginning when I was explaining what a projection is, you’re really just basically doing your tax return for the end of the year with the information that you have on hand. One of the lines right there is, “Hey, what’s your business income?” If you want to do a correct projection for your taxes, you’re going to actually have to do a projection for your business as well. Even though it might seem like it’s going a little bit too far, or you might not be able to connect those dots there, it’s something that it’s absolutely intertwined and something that you need to do for sure.

[0:31:51] TU: Last but certainly not least on our list. What would be a YFP episode if we didn’t talk about student loans? We’ve got student loans coming back online here in a couple months. A lot of questions that are coming up related to the restart of those payments. We’ve talked at length before about how tax and student loans can certainly be intertwined, depending on one’s loan repayment strategy. What is the value or potential value here, Sean, for someone that’s optimizing, or looking to optimize your student loan repayment strategy, and where the mid-year projection can play a role?

[0:32:24] SR: Yes, I can’t take any paternity leave anymore. Because when I do, it seems like they announced all these student loan changes, and everybody’s all excited and wants to talk to their CPA, and I’m sleeping on the couch with the kids and everything. So lesson learned there. But yes, absolutely. This is another example that I would say is a perfect example of where mirroring your tax strategy and working with a financial planner, or whoever manages the finances in your household and does the budgeting and everything is absolutely instrumental in making all this work together.

Yes. I mean, with student loans, there’s a lot of different things that can happen there. People have been asking me about, “Hey, so I’ve heard that you can file separately, or file jointly, or do these different things to maximize, or I should say, maximize savings, minimize my loan payments, or my spouse’s loan payments.” Yes. I mean, that is something that you can make that decision when you’re doing taxes to say, “Hey, am I going to file separately or am I going to file jointly?” But it all goes back to that idea of withholding and making sure that you were know how that works. Most of our clients who aren’t doing the student loan thing that are married, generally, are filing jointly. That’s what you’re told from the get go, right? “Hey, you get married, you file jointly, you get all the benefits of doing it, it’s the best way to do things.”

For someone to come and tell you, “Hey, actually, going forward, filing separately might be better for you.” Not only is that shocking for some folks to hear or like a complete change of what they’ve been told throughout the course of their life, but it also changes how they need to do withholdings and how they need to think about credits that they might have, whose return is that going to land on, and just one spouse withholds a little extra and recognize at the end of the year, they might get a refund that offsets their spouses tax bill or something like that.

There’s a lot of things that you want to make sure that again, even though you think that might be something you can make that call at the end of the year, just given all the different stuff going on with the loans, being on top of that now, and trying to minimize those surprises is always a better thing to do. To the extent you can mirror your tax strategy with your financial plan, it’s always just the best way to do things.

[0:34:31] TU: Great stuff. As always, Sean, as we wrap up this episode talking about the mid-year projection and the role it can play in some of the areas where it can effectively be utilized. Let me encourage folks to check out the resources and services that we have available, yfptax.com. We’ll link to that in the show notes. We have individual year-round tax planning led by Sean. As well as for those that do own a business, bookkeeping to fractional CFO, as well as some of the business tax planning that’s associated with that. Again, yfptax.com, you can learn more, you can schedule a call with Sean as a discovery call to learn more about that service, and whether or not that’s a good fit. Sean, thanks so much. Appreciate it.

[0:35:13] SR: Thanks, Tim. Talk to you soon.

[END OF INTERVIEW]

[0:35:15] 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 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 317: YFP Planning Case Study #7: Balancing Student Loans, a Wedding, Home Buying, & Saving for Retirement

Posted on 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 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 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 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.

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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.

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 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 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 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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