Financial Planning / Podcast

YFP 273: Alphabet Soup of Retirement Accounts (Retirement Planning)

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Alphabet Soup of Retirement Accounts (Retirement Planning)

On this episode, sponsored by Insuring Income, Tim Ulbrich, PharmD, sits down with Tim Baker, CFP®, RLP®, for the second part of the four-part series on retirement planning. Together they discuss the alphabet soup of retirement accounts including commonly used vehicles for accruing a nest egg.

Episode Summary

YFP Co-founders Tim Ulbrich, PharmD, and Tim Baker, CFP®, RLP®, discuss the alphabet soup of retirement accounts in this episode, the second part of the four-part series on retirement planning. Tim and Tim know that planning for retirement and building a nest egg can be overwhelming with so much to consider. In this episode, they break down common vehicles for building a nest egg into two main buckets. Tim Baker differentiates between tax-advantaged accounts administered by the employer and those administered by the individual. Tim and Tim spend time discussing how each tax-advantaged account works, including the contribution limits, catch-up provisions, and phase-outs where applicable. They get specific on how not all “buckets” are equal in terms of what you, as the investor or retiree, will receive. Due to the nature of retirement accounts and their relationship to the financial and tax plans, Tim and Tim share the importance of marrying the retirement plan to tax planning for the most benefit to the investor. Lastly, Tim and Tim explain that there are many factors to consider when determining the priority of saving among different tax-advantaged accounts, reference resources for listeners on prioritizing investments, and mention the services provided by YFP Planning and the YFP Tax team for pharmacists.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] 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.

On this week’s episode, Tim Baker and I continue with the second of our four-part series on retirement planning. Last week on Episode 272, we discuss, determining how much is enough for retirement. This week, we take a step forward by talking about the alphabet soup of retirement accounts including commonly used vehicles when occurring a nest egg. Highlights from the show include differentiating tax advantaged accounts into those that are administered by the employer, and those that are administered by you the individual, how each tax advantaged account works, including contribution limits and ketchup provisions, and why not all buckets are created equal, and factors to consider when determining the priority of saving among different tax advantaged retirement accounts.

Now before we jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 270 households in 40 plus states. YFP Planning offers fi only, high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfplanning.com. Whether or not YFP Planning, financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor, and then a jump into my conversation with certified financial planner, Tim Baker.

[SPONSOR MESSAGE]

[00:01:39] TU: This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term, life insurance and own occupation, disability Insurance. Insuring Income has a relationship with America’s top rated term Life Insurance and Disability Insurance Company, so pharmacists like you, can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage. Supports clients in all 50 states and make sure all of your questions get answered.

To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics. Visit insuringincome.com/yourfinancialpharmacist. Again that’s insuringincome.com/yourfinancialpharmacist.

[INTERVIEW]

[00:02:31] TU: Tim Baker, welcome back.

[00:02:33] TB: Yeah, good to be back, Tim. Looking forward to part two of this series.

[00:02:37] TU: Yes, this is our second part of the four part series we’re doing on retirement planning. Last week, we talked about, How to Determine How Much is Enough? We ran through some mistakes scenarios and calculations to determine that number. This week, we’re going to start to get into more of the X’s and O’s on how to get there. As I mentioned, as we wrapped up last week’s episode, often when we begin to wrap our mind around, okay, this 3 million, this 4 million, this 5 million number and we begin to accept what that is and what we need to be saving each month to get there.

The next natural question is, all right, where do I actually invest the money? What are the vehicles and options that are available? That’s what we’re going to talk about this week, some of the variety of investment vehicles and we’re primarily going to focus on tax advantaged retirement accounts, but certainly acknowledge that there are a variety of ways to build a nest egg outside of just the accounts that we’re going to talk about. So that could be real estate, that could be digital currency and assets, business ownership collectibles, and knowing many individuals are building a base that comes from, maybe not exclusively includes, but comes from traditional retirement accounts. We’re going to focus our time there.

Another important distinction I want to make is that for our small business owners that are listening, we know there are several you out there. We will cover not in detail on this episode, but certainly there are other options from a business standpoint, SEP IRA, simple IRA, solo 401K. We’re not going to focus on those in this episode, but certainly, those are a valuable option to get us to our goal, as well.

Tim, we throw these terms around all the time in pharmacy as notorious for throwing around acronyms. We put together pharmacy and financial planning. I feel like it gets worse. So we throw around term 401K, 457, TSPs, traditional IRAs, Roth IRAs, HSAs. This is often when we’re speaking with a group of pharmacists where we start to see the eyes gloss over. Okay, I understand there’s options I need to take advantage of, especially from a tax standpoint, but there’s a lot to consider, this can be overwhelming. We’re going to break this down into two buckets to give ourselves a framework.

Those tax advantage accounts that are administered by the employer. Then the second bucket is those tax advantage accounts that are administered by you as the individual. So this distinction I think will help us begin to organize and have a framework for how we can think about different options that we have to save. Tim, let’s start with the accounts that are administered by the employer. Give us a rundown of the accounts that are available here and some of the distinctions between them.

[00:05:10] TB: The ones that are typically administered by the employer are going to be the 401K, the 403B, the TSP, those are the three primary ones. Then sometimes you run into things like the 457 plan, which is typically a bonus plan. Sometimes you see 401As, which are like 401Ks, except the participants aren’t making contributions to them. The one that we’ll talk about, synonymous with all the other ones is a 401K. The 401K, is the most popular profit sharing plan. Essentially, how it works is when you are hired by an employer. They’re going to say, “Hey, welcome to the team. As part of a benefit to working on our team, we have this 401K that we’ve set up through fidelity or whatever, whoever the custodian is. These basically are funded through salary deferrals from your paycheck.”

Back in the day, you had to basically make that election yourself, but the Obama administration, I think, smartly made it, so you have to opt out. A lot of these plans, now you’re auto enrolled at a certain percentage into the plan, I think, based on your age into a target date fund. The backdrop of this, Tim is back in the day, when our dads were starting the career, the most prevalent retirement plan was a defined benefit plan, a pension. What happened over really started in the 80s and 90s, employers were starting to see how big of a burden that was on their own balance sheets, because they were basically carrying the lion’s share of saving for the employees retirement. The 401k was introduced, which is a defined contribution plan and that means that that risk of having enough save for retirement has shifted from the employer to the employee.

Now it is up to the employee to figure out how much they need to be different from their paycheck, where to invest it, and then how to distribute it tax efficiently in retirement. The problem is that we just aren’t necessarily good at that. The 401K has really taken off and now defined contributions will outpace pensions, as many of us know that do not have pensions. Participants make elective salary deferrals and for anything that doesn’t have Roth in front of it, contributions are not tax until they’re withdrawn. What this means is that, I’m a pharmacist, and I’m making $120,000 a year, and I put 20,000, just for round numbers, the maximum you can put in is 20,500, but let’s say, I put $20,000 into my 401K. The IRS taxes me as if I made $100,000. It goes in pre-tax.

Now the money is actually, it’s only going to be taxed either going in or going out. That traditional 401K, that $100,000 is going to grow and grow and grow. Then when we pour it out in retirement, that’s when it’s going to be taxed. If we think about this, say I’m going to 25% tax bracket at age, we’ll say 40, it’s not taxed at 25%. It goes in tax free. Now let’s say I’m at age 65, I’m retiring. I’m at a 25% tax bracket. If that $100,000, let’s say, it grows, but that’s going to be taxed at 25%. Your benefit, there’s really no benefit either way. The benefit comes if your tax bracket is actually lower. If you’re at a 20% tax bracket, that’s when you see some of the statements. That’s for the traditional. Now if you are age 50 and older, Tim you can make a $6,500 catch up.

Now all of these things are the same for a 403B, which is typically 401K you typically see for profit 403B, you typically see for a non-profit or hospital that type of thing. The 403B has an additional catch up and it says typically if you are a certain age and you have a certain years of service, you can put in as typically 15 years you can put an additional $3,000. So you get your 20,500 Plus the 6,500 regular catch up plus another 3000. So that’s just a funky thing with 403Bs. TSPs are very similar to all of them they have the catch-up, not like a 403B, but a regular catch-up. Their matches the same across, so TSPs is the Thrift Savings Plan, typically for military government workers, their match is 5%. The big benefit for the TSP is that they’re in basically five funds that are super low costs, which is not necessarily the case with the 401K or the 403B.

The appropriate use for these, Tim are typically when If the employer wants to provide a quality retirement benefit, without being required to make ongoing employee contributions. So you can have, you can have an employer that offers a 401K, but doesn’t put any match or anything into it, that’s up to the employer to do that. A lot of employers are doing this to incentivize their employees to save, but also as a retention, because you can have vesting schedules attached to it, which means if you leave after a certain amount of time, you don’t get that match. It’s a great vehicle if you have a young workforce, because you can accumulate savings over a long period of time. But the basically the risk is on the employee to do what they need to do to get to have an adequate retirement.

A lot of 401Ks allow for insert with withdrawals for hardships, you can take loans against it. Most 401K’s these days, same thing with the TSP and the and the 403B have a Roth component. The big disadvantage here, Tim, is that oftentimes a 401K can be expensive. So typically, the rule of thumb is, the smaller the employer, the more expensive the 401K is to that individual participant. I’ve seen it, where all in cost on a 401K is almost 2%. So think of that, I have $100,000 in a 401K, $2,000 per years coming out either to pay an advisor expense ratio or things like that. Whereas something a TSP, it’s like, three basis points, which is $30, compared to 2000.

Then the other disadvantage is that, it’s not going to guarantee an adequate retirement benefit as a pension would. Oftentimes, again, smaller 401K is the investment selection won’t be great. That’s the main one. Again, all of those, the TSP, the 403B are going to be very, very similar to that without with some minor nuance. The 457 plan, which some people will see is a non-qualified tax advantage, deferred compensation retirement plan. This is typically for people who work in state government, local government, even some nonprofits. This is often another bucket that you can put up to $20,500 into. It’s the same thing they’re typically not taxed until it was withdrawn, but often those are available to the creditors of that. If you work for a local government that goes bankrupt, then you could potentially lose that money, which is problematic. That’s a big thing that some people will see as a 457. So typically, work on the 401K, the 403B first and look at a 457 after you’re maxing that out already.

[00:12:37] TU: Tim, correct me if I’m wrong. When I was at one university, we had the 457 available with a 403B and a 401A, but the 457 amounts was on top of in addition to –

[00:12:49] TB: Correct. Completely separate bucket, yeah. Sometimes we get that – we’re going to talk about those administered at individual levels, some people say, “Well, if I put 20,500 into my 401K, can I also put money into an IRA?” So they’re separate buckets, just like the 457 is a separate bucket that’s available to you.

[00:13:07] TU: Great synopsis. That was covering our first bucket, which is those that are administered by the employer, as Tim articulated, really looking at those interchangeable 401K, 403B, TSP, typically for profit, not for profit, those that work for a federal government agency organization. He talked about the contribution limits per years, some of the catch-up provisions after the age of 50. Then the additional one for the 403B. Then making sure we’re not confusing, a Roth 401K, Roth 403B with a Roth IRA, which we’ll talk about here in a moment. I think as we see the Roth employer sponsored accounts grow in popularity, there’s some confusion among okay, I’m contributing to a Roth 401K, can I also contribute to a Roth IRA?

The answer to that is yes, there are some considerations there, but totally separate. One administer by the employer when administered by the individual. Let’s shift gears, Tim to that second bucket. Those administered by the individual. Two, subcategories here that I want to talk about would be the IRA accounts, both the traditional and the Roth IRA. Then the second would be an individual that wants to invest in a brokerage accounts. Let’s start with the IRAs differentiate the traditional IRA, the Roth IRA, some of the income limits and considerations for pharmacists that would contribute here.

[00:14:22] TB: Yeah. So same thing, when you see traditional or no precursor at all just IRA, you’re going to think pre-tax, when you see something Roth, you’re going to think after tax. The traditional IRA is a retirement account. It’s the traditional individual retirement account. It is an account that you either set up yourself so you go to something like Fidelity, a Vanguard, TD Ameritrade, a Betterment and you basically open it up or you can work with an advisor and they’ll basically open one up to advise for your benefit.

The traditional IRA is funded with pre-taxed dollars. Again, this is a separate bucket away from the 401KL, the TSP, etc. you can contribute up to $6,000 per year, plus $1,000 per year catch up if you’re age 50 or older. Now, anybody essentially with earned income can contribute to a traditional IRA. It’s subject to phase out deductions. So what does that mean? If you are a single individual, and you make anywhere from 68,000, to $78,000 like AGI Adjusted Gross Income, then once you get to $78,001, you can no longer take a deduction for your IRA. I’ll give you example on the other side, so if you make less than $68,000, so $67,999, you can deduct 100% of your say $6,000 deduction or contribution. It phases out, which means that once you get to that midpoint, so 68,000, to 78,000 the midpoint is 73,000.

If you put $6,000 in you can deduct 3000, but then you can’t, which is half of it and you can’t deduct the other 3000. This is really good for people that are listening to the podcasts that might be fellows or residents or maybe they’re in school, and they’re working and they’re trying to save some for retirement, typically, pharmacists are not going to be allowed to make a deductible contribution. So just to give you an example, if I’m out there, and I make $60,000, which is below that, and I’m single, and I make below that threshold, and I put $6,000 into my traditional IRA. The government, the IRS looks at me as if I made 54,000. So similar example, as I used before.

Now, the difference between the IRA and the 401K is the 401K is coming out of your paycheck. It’s not basically hitting your bank account. This is typically funded where it hits your bank account and you’re technically contributed into that with after tax dollars, but you’re just deducting it on your 1040 when you go to file. That’s a little bit of the nuance. The phase out, if you’re married filing jointly is 109 to 129, which again, typically for a lot of pharmacists if they’re dual income, they’re going to be above that that threshold. The same thing as, so that $6,000 goes in pre-tax, it gets invested, it grows tax free. Then when we pour that out in retirement, when we withdraw it in retirement, that’s when it’s taxed. Again, it’s either tax going in or going out.

The Roth is the one that’s tax going in. The Roth IRA is an account that’s fun it with after tax dollars and it stays after taxes. You’re not going to take a deduction. So basically, it’s the same thing, you can contribute up to $6,000 plus $1,000 after age 50. Now, and this is an aggregate, if you were to contribute $4,000 a year to your traditional you can only contribute $2,000 to your your Roth IRA. This is subjected to phase outs to actually contribute. So what that means is that once you make as a single person, once you make the phase out is 129 to 144,000. Tim, once you make $144,001 the door slams shut, and you can no longer make a contribution to the Roth IRA. For married filing jointly that ranges 204,000 to 214,000. So if you’re a couple and you make more than 214,000, you can’t directly put money into the Roth IRA, which then gets into that, you fund a traditional IRA, you got to go through all those rules that we talked about and then you can do a backdoor Roth IRA, again easier to explain, harder in actual concept.

To just reiterate, if I make, we’ll use the same example. Let’s say I make $60,000. I put $6,000 into a Roth IRA. Now, the government looks at me as if I made $60,000 that $6,000 that goes in, it grows tax free. Then when I pour it out in retirement, because it’s already been taxed, that $6,000 is all mine, or whatever it grows to. That’s the big thing that we often talk about is like, if you have a million dollars in your traditional IRA at the end of the rainbow, when you’re going to retire, you don’t have a million dollars. If you’re in a 25% tax bracket, you actually have $750,000 and the government has 250,000. If there’s a million dollars in a Roth IRA or Roth TSP or a Roth 401K, that money is yours. That’s super important to remember. I think I hit everything with Roth.

[00:19:34] TU: Yeah. Then again, Tim, just to zoom out for a moment so in the first segment, we talked about the big security number, what do we need at the end of the rainbow at the nest like three, $4 million. We back that into, okay, what do we need to be saving per month based on a set of assumptions, asset allocation, risk tolerance, all those things? Maybe that number is 800 1200, 1500, whatever it is per month. Now we’re talking about where does that go, right? So we started with employer counts. Is that a 401K, for profit 403, not for profit TSP federal government? Or and or are there individual options, traditional, perhaps maybe not a deductible option there for many pharmacists based on income or a direct Roth or backdoor Roth, depending on income limits for pharmacists.

If you put these two together, and where we see many pharmacists beginning to build their foundation, again, not the only place that we’re going to be investing 20,500, certainly more than that, for those that are listening, that are in that catch up age, older than 50. Then on the individual side $6,000 per year, so 26,500 per year between the two of those and that 20,500, Tim is not including any employer match as well, right? That’s employee –

[00:20:46] TB: Yeah. If you include the employer match, and anything else they give you, I think the number can go all the way up to 61,000. As long as the employee and the employer match doesn’t exceed, 61,000 you’re good to go, which that’d be nice if you got that much in a match.

[00:21:02] TU: We put the two of these together. Again, not investment advice, but we put the two of these together, and we’re now north of $2,000 per month towards our savings goal. Is this the only way we can invest? Absolutely not, but these two tax advantage accounts, and there’s a lot of strategy and consideration here. Tim, you mentioned it a few moments ago, tax bracket today, tax brackets in the future, what else is going on in terms of the tax situation, another great example where we need to marry the tax plan with the financial plan, but a really good place to begin to think about the foundation for our investing.

[00:21:33] TB: Yeah. That’s a common question that we have, is like, should we put in Roth, we put it in traditional, should we be putting it in taxable, which we haven’t talked about, the brokerage account, which we can talk about here in a sec. The answer is yes, all of them. Because what we do when we try to build a retirement paycheck, we’re trying to get that money out of those tax advantaged accounts at the lowest tax rate possible. The other thing at the sprinkle in is oftentimes what use the brokerage account for, so often you use a brokerage account for an early retirement or to delay claiming Social Security as long as possible. So you increase that percentage of a known income stream from the government that’s inflation protected, and that is a bigger part of your percentage of income, that’s huge and a lot of people will not do that correctly.

Before we get to the Brokerage account, the last thing I’ll say about all these accounts that we talked about, so far, the 401K, TSP 403B, Roth traditional IRA, the other one that’s often synonymous with a traditional IRA is a rollover IRA, that’s typically, when you’ll see that’s also pre-tax. Worth mentioning for all of these accounts is that if you take non-qualified withdrawals, which that’s typically when you take money out before you’re 59 and a half years old, you’re subject to a 10% penalty along with paying the tax. That’s basically discouraging you to rob that account for a car, or a home downpayment or things like that. There’s exceptions to that rule, but that 10% penalty it’s a good way for you to keep that money in there.

Again, we talked about gratification, sometimes it’s really hard for us to lock that money away and not use it until the future. So the brokerage account, Tim, is the last account that we can talk about, and the brokerage account is, it’s a taxable account. It’s an account that you can set up through any of those custodians that I mentioned. It’s funded using after tax dollars. This can either be set up as an individual account, so in your name, just like all your retirement accounts or a joint account with a spouse or a partner. The contributions to this are unlimited. With all these other accounts, we’re saying, “Oh, you can only put $20,000, 500 or $6,000.” Here’s have at it, if you if you get an inheritance, or you’re maxing everything out, and you can put five grand a month or whatever into an account, you can do that.

You typically use this when you’ve exhausted your retirement contributions previously mentioned. The other one that we of course, always mentioned is the HSA, it’s another bucket, that’s good. You typically use this account when you’ve exhausted those things or if you’re doing something else like, we often use this account for a tax bomb for a non-PSLF strategy. It could be for something that –

[00:24:23] TU: Early retirement.

[00:24:24] TB: Yeah. It could be something that’s an early retirement. So if I’m going to retire at age 55 and I’m not going to be, I can’t collect on my other accounts until I’m age 59 and a half, you would use it for that or if you’re saying okay, I’m going to retire it 62 or 65. I’m going to delay to claim Social Security to age 70. I’ll use that account from that as well. Those are typically or the last one, which is not necessarily retirement related. You might say, “Hey, Tim, I want to basically buy a piece of real estate investment in 10 years.” I’m like, “Well, that’s probably long enough time horizon where we probably should do something other than a CD or high yield savings account.” So let’s build a balanced portfolio or something along those lines that we can get a little bit more return for a little bit more risk.

The advantage to the brokerage account is the greatest flexibility, there’s no penalty to withdraw, as I mentioned from the other accounts do, you can recognize losses to offset gains, that’s called tax loss harvesting. That’s one of the big disadvantages that when you put in will use the $6,000. Tim, I put $6,000 into my Roth account or my traditional. When we say it grows tax free, what that means is when you buy mutual fund ABC at $100 per share, when you sell it and withdraw the account and say it’s $300 per share in the future, there is a gain of $200 for that investment.

Inside of a Roth inside of a Roth IRA, a 401K, a traditional IRA, you don’t have to pay tax on that $200 per share gain, in a taxable or a brokerage account you do so what that means is that you’ve contributed after tax dollars, you made the investment, you have a 200 per share gain, you have to pay either long term capital gains on that, which is typically 0%, 15%, or 20%, most pharmacists are probably going to be in the 15% bracket, or short term capital gains tax, which means you’ve held it for a year or less, that’s typically ordinary income, which is 24% tax bracket plus whatever, in your state. So that’s the big disadvantage that you’re taxed multiple times on that investment, but it allows you flexibility to do what you need, move money in and out. The investment selection is yours and there’s typically less fees, because you don’t have that big administrator typically hanging over it like you do in a 401k or even an IRA.

We often see these, Tim with employee stock purchase programs, so if you’re in an ESPP with your employee, employer, they’ll put those dollars in a taxable account, typically RSUs are granted and they’ll put those dollars or shares and investment accounts, ISOs, that type of thing, as well. There are specific scenarios where you’ll use this, but the brokerage account, again, is often one that we don’t talk about enough for retirement purposes. Sometimes I don’t like to use it especially the further away you are for retirement, because you could say, “Hey, Tim, this is for retirement.” But it’s like, just kidding. Five years later we’re going to use it for something else.

Now that $50,000 that I accounted for in your nest egg calculation is gone, right? That can be problematic. That 10% penalty, although it stinks, it can be a good firewall for you not to take that money out, but this is another important account to utilize as we’re growing our assets to then disperse in retirement, and we want to make sure that we pick efficiently from a tax perspective from each of these buckets year over year.

[00:28:00] TU: Tim, when you teach this topic, and I think you teach it so effectively, you mentioned earlier that not all buckets are created equal, right? If you have a million dollars in a Roth, a million dollars in a traditional, a million dollars in an HAS, a million in a 401K, a million in a brokerage account, you don’t really have $5 million. I mean, I guess you do on paper, but there’s going to be tax implications that are different. The visual you give for the brokerage is it’s got holes in the bucket, right, because we’re putting money in after tax, and then we’re going to incur either short or long term capital gains doesn’t mean it doesn’t have value, you gave several examples where it could in terms of bridging to delay Social Security, it could be a short or mid-term type of purchase five, 10 years if you want to get some growth momentum for the market, don’t want that sitting in our checking account. So there’s value there, but we also want to make sure we’re looking at the right priority of how we’re investing.

I think one of the common mistakes that we are seeing, I think in part, just because of the availability in marketing around brokerage accounts is, are we putting money in a brokerage account and perhaps not taking advantage of some of the tax favored accounts we talked about. Is that intentionally the choice we’re making or are we not considering the tax implications by doing that?

[00:29:09] TB: Yeah. That’s one thing we talked about, it’s a prioritization. We see pharmacists that come in, they have 1000s of dollars in a brokerage account, but they’re not really taking full advantage of match or, and I get it, Tim. I’m not a hater. I get it, because a lot of times we’re marketed to by said company that says “Hey, buy this and invest and you’ll get free bitcoin or ETFs or stock.” I understand the want to scratch the itch and get in and try to make money and invest, but if you think about it, and again, it’s not a bad thing, because you can offset losses, but if I’m being taxed already on if I’m in a 24% tax bracket for that money goes in, and then I’m taxed another 10 or 15% when it from capital gains, but then you can defer that tax or in a pre-tax account or pay it after it comes out. I think that there’s a lot of meat on the bone with regard to efficiency, right? That’s one of the things we preach is just being efficient.

[00:30:14] TU: Yeah.

[00:30:14] TB: All of these have a place, particularly when talking about the in this retirement series, and there should be attention paid in a strategy and an allocation for each, just asking these questions if you’re listening to this, look at your balance sheet. Always comes back to the balance sheet and the goals. Look at the balance sheet, how much do you have in an after tax? How much do you have in taxable? How much you haven’t pre-tax? And take stock of where you’re at.

Once you know where you’re at, then you can outline where you want to go. Yeah, I think, it’s really important to look at the priority. Again, I don’t hate on anyone in that, who is doing that. It’s just a matter of focusing and say, “Okay, what is important, what’s not important? Sometimes if we want to do some stock picking and things like that in a brokerage account, let’s just keep it minimum 5% of the overall portfolio, and then we can go from there. I’m a big believer in keep it simple and keep fees low and set the right asset allocation, and then go from there.

[00:31:11] TU: While we’re talking about priority, we’re not going to dig in depth on this episode, because we’ve done it on many others, ruling to 165 is one example, but we can’t omit the HSA when we’re talking about priority of investing. Back to my visual of your brokerage account with the holes in it, the HSA is the bulletproof account, right? Depending on how we’re using that account, we have an opportunity to avoid taxes throughout. Obviously, if we have healthcare expenses that we need to fund, we can, of course, use it for that and have some tax advantages.

Got to be working for an employer, we have a high deductible health plan that dollars aren’t as big in terms of contributions that we’re going to see in a 401K or 403B, so 3650 for an individual 7300 for family in 2022. Some catch up provisions are again, but another tax optimization strategy that want to be considering. I hope we’re hitting that point home, intentionally is that I think one of the things our planning team does so well and a shout out to the integration between the planning and the tax team is, are those two things in sync? Are we are we planning with a tax mindset? Are we also thinking about the tax implications, but also building the financial plan around that as well?

Tim, I probably should have mentioned this earlier, but we’ve thrown around a ton of numbers in terms of contribution amounts, we’ve talked about phase outs and AGI limits, and maybe some folks are trying to scratch those down. Hopefully they weren’t doing that when they’re driving, but we have all these numbers available for use, you don’t need to memorize any of those. We’ve got a sheet that has 2022 important numbers, even beyond just what we’re talking about here and investing savings, you can go to yourfinancialpharmacist.com/2022numbers, again, yourfinancialpharmacist.com/2022numbers and get that information.

Again, this is our second part in a four part series on retirement planning. Next week, we’re going to come back to risk tolerance versus risk capacity, a very important distinction between those and how we begin to determine within these accounts we talked about in this episode, where we actually start to invest the money. Then finally, we’ll wrap up in our fourth part about how to build the retirement paycheck. The team at YFP Planning is ready, whether you’re new practitioner, mid-career pharmacist, someone who is approaching retirement, our fee only financial planning team of five certified financial planners and an in-house tax team, including a CPA and an IRS Enrolled Agent, ready to work with you to help build your retirement plan among your other financial goals as well.

If you want to learn more about the one-on-one fee only comprehensive financial planning services that are offered by YFP Planning, you can visit yfpplanning.com to book a free discovery call. Thanks for listening. We’ll see you next week as we continue the series on retirement planning.

[SPONSOR MESSAGE]

[00:33:50] TU: Before we wrap up today’s show, let’s hear an important message from our sponsor Insuring Income. If you are in the market to add own occupation, disability insurance, term life insurance, or both, Insuring Income would love to be a resource. Insuring Income has relationships with all of the high quality disability insurance and life insurance carriers you should be considering and can help you design coverage to best protect you and your family.

Head over to insuringincome.com/yourfinancialpharmacist or click on the link in the show notes to request quotes, ask a question or start down your own path of learning more about this necessary protection.

[OUTRO]

[00:34:27] TU: As we conclude this week’s podcast, an important reminder that the content on the 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 which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacists podcast. Have a great rest of your week.

[END]

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YFP 272: How Much Is Enough? (Retirement Planning)

Posted on by yfpadmin

How Much Is Enough? (Retirement Planning)

On today’s episode, sponsored by APhA, Tim Ulbrich, PharmD, sits down with Tim Baker, CFP®, RLP®, to discuss how much you need for retirement in part one of the four-part series focused on retirement planning.

Episode Summary

Tim Ulbrich, PharmD, sits down with Tim Baker, CFP®, RLP®, to discuss how much is enough when it comes to retirement planning in part one of the four-part series focused on retirement planning. In this discussion, Tim and Tim cover finding a balance between saving for the future and living a rich life along the way, factors to consider including determining how much is needed when building a nest egg, what the 4% rule is and why it is commonly used as a safe withdrawal rate during retirement, and why time in the market and savings rate matter more than the rate of return on investments. Tim Baker shares his opinion on financial planning as an exercise in goal setting for the long term while balancing experiencing life in the present and how financial planning and even minor changes in your investment portfolio can have a significant impact on your total retirement amount. They dive into what many folks consider a safe savings rate and considerations for increasing that savings rate dependent on numerous factors in the financial plan. Tim and Tim explain the rule of 25, which is popularly used in the FIRE (Financial Independence Retire Early) community as a guideline for retirement savings, how it works, and how it compares to the 4% rule. They close with general calculations and formulas for determining the nest egg for retirement and tease next week’s episode on the “alphabet soup” of retirement accounts.

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.

On this week’s episode, Tim Baker and I kick off a four-part retirement planning series by discussing how to determine how much is enough when it comes to saving for retirement. Highlights from the show include finding a balance of saving for the future, while also living a rich life along the way, as Tim Baker says, “It can’t be just about the ones and zeros in the bank account.” Factors to consider when building a nest egg and determining how much is needed. What the 4% rule is and why it is commonly used as a safe withdrawal rate during retirement. And why time in the market and savings rate matters more than rate of return. Before we jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does, and working one on one with more than 270 households in 40 Plus states.

YFP Planning offers fee only, high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about how working one on one with a certified financial planner, who may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning financial planning services are a good fit for, know that we appreciate your support of this podcast and our mission pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor, and then jump into my conversation with certified financial planner, Tim Baker.

[SPONSOR MESSAGE]

[00:01:33] TU: Today’s episode Your Financial Pharmacist Podcast is brought to you by The American Pharmacists Association. APhA has partnered with Your Financial Pharmacist to deliver personalized financial education benefits for APHA members. Throughout the year, APhA will be hosting a number of exclusive webinars covering topics like student loan debt, payoff strategies, home buying, investing, insurance needs, and much more. Join APhA now to gain premier access to these educational resources and to receive discounts on YFP products and services. You can join APhA at a 25% discount by visiting pharmacist.com/join, and using the coupon code YFP. Again, that’s pharmacist.com/join, and using the coupon code, YFP.

[INTERVIEW]

[00:02:19] TU: Tim Baker, welcome back on the show.

[00:02:21] TB: Thanks, Tim. Yeah, good to be back.

[00:02:23] TU: It’s been a while. I mean, you’ve done some case studies with the planning team, which have been awesome. But we haven’t been back on the show together in some time, so I’m looking forward to this series that we’re going to be doing on retirement planning. We’ve got a four-part series plan, all about retirement planning, starting with determining how much is enough, what do we need as we look at preparing towards retirement, and ending with strategies and considerations for actually building that retirement paycheck. And a topic that’s often overlooked, we’ll talk about that in detail when we get to that fourth and final part.

I believe we’ve constructed this, Tim, in a way that whether it’s a new practitioner who’s just getting started wondering what’s this big scary number for off in the future, or someone who’s mid-career checking in to see if they’re on track, or pre-retiree thinking about, “Hey, this is coming up, and are there some tweaks that I need to make, or adjustments or perhaps confirmation that I’m on track.” I think this topic is relevant, regardless of where someone is at, at their career.

So, we’re going to get into the dollars and cents. We’re going to nerd out on the nest egg and some of the X’s and O’s. But first, I think it’s valuable that we consider what is the purpose, what’s the vision for what we’re trying to do before we start thinking about, is it 3 million? Is it 4 million? Is it 5 million? So, Tim, talk to us about number one, why is this so important before we actually determine how much is enough, and then how are we going to get there? And how do we practically begin to accomplish defining the vision that we have when we think about retirement, and what that life will look like?

[00:03:57] TB: Yeah, so comprehensive financial planning, to me, it really boils down to the idea of how do I best go about living a wealthy life today, say in my 20s, 30s, 40s, 50s, and a wealthy life tomorrow. We typically think of tomorrow, more in terms of like the long-term horizon of in my, 60s, 70s, 80s, 90s through retirement. It can be really difficult for us, Tim, to kind of conceptualize time, or like, feel time. So, the further, when we kind of talked to clients, and we say like, what does success look like a year out, two years out, three years out, five years out, those conversations are a lot easier to have. But as that time horizon becomes more and more, we kind of lose sight of how to even like think in decades.

So, to me, that’s what comprehensive financial planning, is about is kind of coming up with solutions where you feel good about what you’re doing today and then what you’re planning for the long tomorrow. And I think what often happens is that individuals, kind of swing one way or the other. So, like in our household, I’m thinking about, “Oh, man, are we saving enough for retirement? Are we doing everything from the long term?” Whereas my wife is like, “Bro, we have two young kids, we need to make sure that we’re doing things with them while they’re young, and they’re still under our roof and all that kind of stuff.”

I actually think some people think that that’s like not a good thing, if you have two partners that are kind of diametrically opposed. I think it’s good, because I think it leads to balance and leads to address some of those conversations. So, if you’re all one way, then sometimes it’s really hard. If you’re like, save, save, save, it’s really hard for you to open up your hand and spend. But the other thing, sometimes people are afraid to talk about a planner is like, “I’m very spendthrifty. I’m not saving enough for the future, because I can’t see two feet in front of my face”, or just, “I grew up in an environment where we didn’t really save. We just kind of live for today and hope for the best.”

So, to me, this whole thing of like, how much is enough? It’s kind of an exercise in that and projecting out, okay, what is a reasonable number that we should be shooting for? And are we doing what we need to do to get there? I think the disconnect with this is, oftentimes, you’ll get a statement, Tim, or you’ll talk to a financial planner, and it’s like, “Oh, you need $4 million to retire.” It’s like, that’s such a big number and I look at what’s in my account, and I’m like, “Yeah, right.” It doesn’t even calculate or compute. So then, it’s almost like you give up, right?

But the problem is, is that the number for a lot of our listeners, it’s going to be multi millions that they’re not going to need to save more than likely. And we’ll get into things like, where does security play a role? And if that’ll be there, and all that kind of stuff? But to me, that’s really the exercise. Are we doing what we need to do today? And then are we doing what we need to do to ensure that we’re good to go for tomorrow. I think it’s about as simple as that, and I think when you talk about retirement planning, you’re looking at the full breadth of the timeline, and making sure that – because it just gets – the longer that you wait, I kind of look at it as, if you started in your 20s, you’re climbing like a steady grade. If you start in your 60s, its Mount Everest, because you literally can’t save enough to kind of overcome that, and the alternative is just a huge cut in your lifestyle, and what you’re going to be able to afford when you do turn off that W-2 or income that’s coming in every two weeks.

[00:07:47] TU: Yeah, and I think so many people, as you mentioned, feel defeated by and we’ll talk about the nest egg numbers and kind of how we get there. I think for many folks, maybe there’s confirmation of, “Hey, I am on track.” And for others, they’re like, they hit the stop button, because they’re like, “No way this is going to happen for me in the future.” Because of, it’s hard to really believe in trust the process and time value of money and compound interest and growth, and that’s a future thing. That’s a tomorrow thing. And as you mentioned, it’s hard to see and imagine our future selves, especially when we’ve got things right in front of us today. And so, this is where the balance comes in. We’re going to go through this exercise of how much is enough. But as we talked about over and over and over again on the show, like an investing retirement plan is another great example of that, we can’t look at any one of these in a silo because for many, if not everyone listening, this is not the only thing they’re worried about, right?

[00:08:39] TB: Yeah. And just to go back to that, like in terms of the numbers, basically, I was doing some research for the case study that we recently recorded with Kelly and Robert, and I was trying to construct, what was the reasonable purchase price for a home in Portland, Oregon. The average, I think, was something like $88,000, or something like that in the late ‘80s. So, think about that, like those numbers. And again, when I typically talk about investments, and I talk about the secret ninja, the termite that is inflation, I always say that, what is it, that $4 latte at Starbucks in 30 years is going to cost north of 10. Or my dad will say, “A nickel would buy the whole candy store.” Now, a nickel doesn’t buy anything. When he’s grown up, he’s growing up in the ‘40s and ‘50s.

So, yeah, and to your point like, it is one – the investment and the retirement piece is one of many, many things that you have to consider. Just the overall risk to your wealth and planning for a catastrophic event is huge. Things like taxes, which are so overlooked, and how to pay your fair share, but then mitigate how much your – there’s so many things that kind of go into this, and a lot of it, we will talk about today, it’s not even about the rate of return or anything like that. It’s just about putting money in bucket.

[00:10:00] TU: Time and money.

[00:10:01] TB: Yeah, and it’s more about the savings rate, then the rate of return. So, even those mechanics and like the behavioral finance, that kind of bleeds into everything, it’s just so imperative that we’re looking at this and examining it. And unfortunately, because either it’s a boring topic, or it’s a painful topic, or we have head trash related to it with our upbringing, or name a number of reasons why we don’t necessarily want to look at this or work on it, it just becomes harder and harder as we go.

To give you some numbers, Tim. So, if you look at a pharmacist with medium pay, and they’re saving about 15% of income with an average annual rate of 6%, which is about what the market returns. So, that’s a fairly aggressive portfolio. If you started at age 25, by the time that you reach age 60, you have a portfolio of $2.6 million. Now, if you’re at age 25, and you’re saving 15%, and you’re an aggressive, that’s pretty good. The fact of the matter is, is that you’re probably not doing – a lot of people are not saving 15%, right off the bat.

At 30, when you get to – so you have 30 years now of accumulation, it goes to 1.8 million. So, a pretty big drop. At 35, just five years later, so 35 to 60, 1.2. If you start to the ripe age of 40, turning 40 this year, Tim, to age 60, so just 20 years, now, you’re not even crossing that million dollars. You’re at 822,000. So, a lot of this is just the mechanics of it’s better than what it was in the past. In the past, if you had a 401(k), you actually had to like sign up. Now, a lot of them will auto enroll you, so you are getting out of the way. But what I would encourage people if they’re not thinking about this, is add that 1% or that 2% every year, so you can get to that 15% or 16%.

During one of my recent courses, they were looking at what is the – everyone talks about the safe withdrawal rate. We’ll talk about that, the 4%. But what’s the safe savings rate? And the number that I remember is about 16%. So, if you are enrolled in your 401(k) and auto enrolled you at five, you are ways away. So, then the flip side of that is for you to make up, you’re going to have to be saving 20%, 25%, 30% later in your career to kind of make up for that. So, these are all things to kind of be mindful of as you’re navigating this minefield, so to speak.

[00:12:24] TU: Yeah. I think we’ve all had a parent, grandparent, friend, mentor, colleague. Somebody has told us, you got to start saving as early as you possibly can. And the numbers you just gave highlight that. If you start at 25, instead of 30, you’re adding about a million dollars. If you started 25 instead of 35, 1.5 extra, and that’s just simple math savings calculator, time value of money. And those numbers are hard to believe. But it becomes at a point where you see the exponential growth of those funds, but it feels like a grind for that first 10, 12 years, and you start to see the time value of money work, it’s magic. It really is 76ers style, trust the process long-term.

[00:13:03] TB: Trust the process, Jojo.

[00:13:04] TU: It’s hard, though, right? Because what did we talk about in this show? Homebuying with student loans, all these competing priorities. We got to have an emergency fund, we’ve got to be – we know folks are working hard to save for kid’s college while they’re also caring for elderly parents. We want to travel. I mean, all of these competing priorities, and pharmacists make a great income. But at the end of the day, there’s only so much to go around. And so, we’re not suggesting that this is an easy drop in the bucket, but something that we need to be intentional and consider with the rest of the plan.

[00:13:34] TB: I’ll say like, in our household, I’m always like, “Hey, can we increase your 401(k)?” “No.” It’s a battle in my household. And I’m like, “I do this for a living. Trust me.” But it’s that pool again. So, I’m like, “Okay. But if that’s taken away from what’s actually in our bank account, and then funding some of these other goals.” So, it’s a struggle. I mean, it’s a struggle in our household. And again, I probably am too diligent on the future, and not so much on the present, although I think some of the things that we’ve done in our financial plan is kind of said otherwise. But this is – it’s such a human thing, right? Because it’s that delayed gratification. But it is one of those things that if you can understand how to tweak it now, potentially early in your career, or even to say, even later in your career, knowing what to do for the final 5 to 10 years of your career can make all the difference.

The other side of that is, things like, what is your asset allocation when you’re in your 50s, if you’re trying to retire at 60? What do you what are you doing from a Social Security claiming strategy? Is there a way to lock an income through like an – there’s a ton of things that you can do to shore up your prospects, that just like what we see with student loans is kind of, sometimes you just follow the crowd. “Oh, my co-worker is doing this, so I’m doing that.” That never go goes away. “My brother in law is doing this, so I’m going to claim here.”

So, to me, it’s what I often say is like, you don’t have the same goals or the same balance sheet as whoever that is. But it’s hard to basically discern, “Hey, this is my situation. This is what I’m trying to do.” And wave through all of the stuff that’s out there to say, “Okay, this is the right – this is a clear path.” It’s just tough, and there’s so many variables that go into it.

[00:15:27] TU: Tim, one thing I want to share, and you’ve done a good job of opening my eyes to this, and we see this with clients over and over again, before we get into the numbers in the weeds is that we often talk about saving for retirement from a scarcity standpoint, as a, “Hey, I might not have enough, or are we going to fall short.” But we see many instances where you could argue like, is someone saving too much? And I think the value of this exercise, as you mentioned, is we have to find this balance between taking care of our future self and living a rich life today.

So, if we have a quick start in our retirement, we run the nest egg, and we see we’re not running a monthly deficit, perhaps there’s a surplus there, that begs the question of like, are we living the rich life today? So, just like an opportunity cost, of having too much in the emergency fund, there could be an opportunity cost of too much in a retirement account. Maybe a good problem to have, but it’s a problem, nonetheless. So, we’re going to talk about the balance of that, and I think that side gets overlooked often when we talk about retirement planning.

[00:16:24] TB: Yeah, I mean, we’ve definitely had clients that come in, where we actually do the analysis and it’s like, “You’re going to be fine.” So, we can afford to dial this back. And it’s not just retirement accounts, it’s education, especially if we kind of reframe what is the goal around education? What is the goal around retirement? A lot of the times, Tim, especially if you’re on the younger end of things, we’re planning as if so security’s not going to be there. So, you’re shouldering this all yourself. But the fact is, is that there’s a stat that says today, about 50% of people have Social Security makes up 40% of their income, or it’s flipped, the other way around. So, that’s not going to zero. It might be 25, it might be 30, and we can talk about Social Security more in detail. But if you think about that, and we say, okay, for every $10 that you’re going to spend on Social Security, or every $10 in your paycheck, $4 of that is going to come from Social Security. And if you claim right, that number gets bigger and bigger. If you kind of go through a proper claiming strategy, that’s huge.

So, we kind of plan as if like the worst-case scenario, that’s not going to be there. But if we can kind of back some of those numbers. If we use today’s averages, or maybe even like, on the low end, it really lends itself to saying, “Hey, this is not so bad. Again, if you have a lot of time.” Now, if you’re up against it, there’s a lot less wiggle room. It’s almost like you’re trying to steer the Titanic away from the iceberg. The closer that you are, the harder it is just to get around it. If you have miles, like a lot of younger pharmacists do, a few tweaks here and there just makes all the difference. And that could just be from again, the contribution rate, the allocation, or even just doing it and saying like, where am I tracking to like where we’re currently contributing, and then maybe back that off to then enjoy more today. Which I think is something that’s very unusual, because I feel like most financial planners will say, as much as you can, save. Because the more money you have, the more options you have.

But my view is, you can do that, and I kind of look at it as you can stick your head and run through the rose bushes to get your soccer ball. But you’re not really enjoying yourself on the way through. So, I think that’s where that balance comes through. I remember having conversations with clients about this very early when we were going through this of like, we back this off, we buy the home sooner, maybe we start our family sooner because of what this analysis shows us.

[00:19:03] TU: Start the business.

[00:19:05] TB: Yeah, exactly. Exactly, right. And to me, that is power. That’s options, right? So, that’s why I’m just a big believer in a plan and planning. It’s a dynamic thing.

[00:19:15] TU: Yeah. And I bring that up, because again, I think we don’t talk about much of that side of it, and it is more from that scarcity mindset. But I just heard from a client yesterday, it said, one of the greatest values I’ve gotten from the planning team is the permission to spend in an area that they have determined as richest in their own lives. And that was around hosting and welcoming people into their home. And obviously, there’s costs that come with hosting. But at the end of the day, if you’ve got 3.2 versus 4.1, but you’re going to look back on all those memories of friends and people in your home. What are you going to remember, right? I mean, it’s an obvious – so yeah, we got to take care of the future self, but also are we making sure that we’re living a rich life today.

Let’s talk dollars and cents. How much is needed? How much is enough? And there’s different ways of doing this. I want to start him kind of back of napkin math. Disclaimer here is that, this is certainly not the advice of, “Hey, I run some numbers. I punch some things in a calculator, and I know exactly what I need for retirement.” So, we’re going to plant some seeds. But there’s obviously a lot of in-depth analysis that goes into this. But I want to start with the rule of 25, which is a common quick math that’s used in the Financial Independence Retire Early Community, the FIRE Community, which says take 25 times your annual expenses, and that’s roughly the estimated amount that you’ll need to achieve financial independence.

So, let’s say someone’s listening and they look at okay, if I had about $100,000 per year of annual expenses, 25 times 100,000, I need about $2.5 million to get to the point of financial independence. And what that is really referring to, is the amount that you would need to have invested in a conventional stock and bond portfolio. We’ll talk a little bit more about that throughout this series, to probably, keyword “probably”, consider yourself financially independent, that you could not depend upon work income and be able to draw from that portfolio without concern that you’re going to be running out of money sooner than would be desired. And that comes from, Tim, and I want you to break this down a little bit further. That rule of 25, the inverse of that comes from the 4% rule, which as you mentioned just a few moments ago is about this concept of safe withdrawal rate.

So, break that down a little bit more for us. We’ll talk about this in depth when we get to the retirement paycheck piece. But what is the 4% rule? And I know this has been debated, but why might this be a good starting point for us to think about what’s needed in a portfolio?

[00:21:38] TB: Yeah, so the safe withdrawal rate is based on the work by William Bengen. And what he did was he looked at all of the historical rates of return for a portfolio and I think he did like a 60/40, portfolio 60% in equities, 40% in bonds, and he used a time horizon of 30 years. Basically, what he was trying to figure out is, what is the amount of money that can draw from the worst 30-year period where at the end of that 30-year period, there would still be money left over? So, the money would not run out.

He did the analysis and basically came out with – and I forget what the year. I think it was like 1961 to 1991? Or maybe it was like –

[00:22:31] TU: Yeah, it sounds right.

[00:22:32] TB: Yeah, right around, I think it was like ‘60s and ;90s and 4% — so what that presumes is that all of the other roll on your peers, you could actually take out more, and still be okay. But the worst period in, I think, he did it since like the 1920s all the way up until I think 2012. The worst period of that 30-year period was from the ‘60s to the ‘90s, and the safe withdrawal rate where their money was not going to run out was 4%. Now, there’s been a ton of debate of whether that is. It disregards things like taxes, it disregards things like fees associated, so whether you’re working with other fees, it disregards, kind of adjusting portfolio as you go through those 30 years.

And then the other thing is that, one of the observations of late is that for a lot of retirees in this low interest rate environment, obviously, it’s ticked up here this year, and equities performing what they’re performing, maybe 4% is not necessarily a good role going forward. So, there’s a lot of debate about that, and can you set it for 4% and be good to go? Maybe. But that’s basically what it’s based on. It’s like, okay, what is the worst, and when they’ve tested it in other, say, like, Italy, it failed, where this basically was successful 100% of the time, in that same period, it failed 80% of the time in Italy. Not to say that we would have, but they were dealing with a lot of inflation and things like that.

So, that’s basically it. So, the inverse to your point is 25 times your annual expenses. The problem with the annual expenses, Tim, is that if you ask somebody like what’s your annual expenses, unless they’re a FIRE nerd, they’re not going to know. And even that, when you’re trying to back into building a retirement paycheck, I know some financial planners, they don’t even ask the client for their annual expenses. They just assume that everything on their W-2 is basically they’re going to spend.

[00:24:29] TU: Their income, yeah.

[00:24:29] TB: And there’s other ways that you can discount and things like that. But that’s kind of where you get to it. I wouldn’t say that rule, I like rules of thumbs because they’re easy to remember, right? We talk about rules of thumb and other parts of the financial plan. So, if it’s $100,000, 2.5 million, I don’t think that that’s necessarily something that is not a bad thing to at least have in your back of your mind to shoot for. But there’s a lot of gray and again, a lot of gray with the accumulation but then also the kind of withdrawal phase of like, “Okay, I have this pot of money where there’s 2.5 or 4 million. How do I actually turn that into a paycheck that’s going to sustain me for the rest of my life?” And that’s a difficult kind of thing to tackle.

[00:25:09] TU: Yeah, and we’re going to cover that in more depth in the retirement paycheck part of the series. And obviously, we’ll dig into that after that as well. But just to bring my example back here. So, 2.5 was the number that we determined. Again, 4%, inverse of the rule 25. So, 2.5, 4% of 2.5 would be $100,000. So, that would be the idea, and correct me if I’m wrong, Tim. But I think the 4% rule also suggests that you’re essentially bumping that up 3% per year for inflation. So, the 100 would become 103, and then you would continue that on into the future.

So, there are a lot of nuances in there. You mentioned tax is one. Obviously, what types of accounts do you have saved up. We’re in a time period like we’re in right now, where inflation is obviously a lot higher than 3%. That can have an impact. So, if folks want to just back up napkin, okay, maybe three, three and a half, well, three would be 33 times annual expenses, you can run some of these numbers and kind of see what they would shake out to be.

Tim, let’s get a layer deeper then, which is the nest egg calculation, something that our planning team and works with our clients a lot on, which is we’re trying to get more specific about the individual circumstances for that client, what they currently have, say, projected age of retirement, how long they might live, how does Social Security factor in. And then ultimately, I think one of the great outcomes of a nest egg calculation is getting out of this monopoly money state of mind of 3, 4, $5 million into the future that I can’t relate to, to what I actually need next month, and the month after, and making this tangible as a part of the monthly planning.

So, tell us a little bit, high level, about the nest egg calculation and what are some of the factors we’re considering to ultimately get to that? Are we on track? Or are we not on track for what it’s enough?

[00:26:58] TB: Yeah, so I feel like very early in my financial planning career, I looked at the different approaches to this particular question of like, do we have enough? There are other things like Monte Carlo analysis, which we can talk about, or bootstrapping, which we can talk about briefly after this. But I found that doing the nest egg calculation was really important. But when I did it in my last firm, we would basically stop at, “Hey, you need 3 million, Tim.” And then we would move on to, “This is what you need to do for insurance or your state plan or whatever.” It was, like you said, it was like monopoly money. Nothing about that connect it to the client, especially if the further away they were. I went out to reference that. If it’s like you have a million dollars and need 1.5, and you’re four or five or six years away, then that obviously connects.

So, what I basically did was, I was like, okay, I asked the question, how can we make this more digestible? I’ll walk through kind of high level of the nest egg, and then I kind of see how we pivot from there. What we do is we take a client, we take their current age, we take what their target retirement age, which for a lot of people, it’s like, I don’t know, 65, or maybe it’s full retirement age for a lot of – 67. And that gives us the work life expectancy. That’s basically the amount of time left that you have to work for the man. That’s your timeline, your career timeline.

And then we look at what their life expectancy is, which you can go on to socialsecurity.gov, right now, put in your birth date, your gender, and it’ll spit out the year and the month you’re going to die. So, for me, it’s like 86.8 years old. Now, what most financial planners will do is they’ll go a little bit beyond that. So, 90 to 100. A lot of like financial planning software will go to age 100. You just kind of pick what is a good timeline for you. If you take the number that you’re going to retire at 67, for an example, and then say, we’re going to die at 95, then you have 28 years of basically, retirement, senior unemployment. And that’s what makes us really hard, Tim, is that we’re trying to solve an equation without all the variables, right? We don’t know when we’re going to pass away. So, we just make some assumptions. And then we look at what do we currently have in retirement savings, so that’s all the 401(k)’s, IRA’s, all the alphabet soup that we’ll talk about in the series.

And then what is your current income? Now, we use current income because we use a discounted amount called your wage replacement ratio, to kind of figure out what the need is in retirement. So, a lot of planners will use 60% to 80%. You just kind of figure out what that is. The logic behind that is that, as you are leading up to retirement, a big part of your paycheck, 20%, 30% is going to be just saving for retirement, and then when you retire, you’re not going to be doing that anymore. Then you have to make assumptions about what your portfolio looks like, so that’s where we kind of go into like a 6%. That’s a pretty aggressive portfolio. And then what that would look like in terms of draw down, and that gets your total needs.

So, as an example, if we look at a pharmacist that makes $120,000, and has $40,000, in the retirement accounts. They’re age 30. They’re going to basically work to 67. That’s 37 years. So, we start with at $120,000, and say, the wage replacement is 70%. That means that we need to plan for, 84,000. So, that’s 70% of 120. Now, if we zero out Social Security, that means that we’re planning the whole need ourselves, that’s 84,000. Now, in 37 years, Tim, when I’m 67, that’s going to be equivalent to about a quarter million dollars. What that means is that every year from 67 to 95, when I die, I need a quarter million dollars to live, which that’s where that kind of gets wonky, because you’re saying, okay, 84,000 is the same as 250,000 in 37 years. And the answer is yes.

[00:30:59] TU: Yeah. Tim, that’s the piece, like, as we’ve talked to so many groups on this. And obviously, for those listening that are near retirement, again, the disconnect is not there, because you’re close to that dollar, and you understand what the inflation that’s happened over time. But when we’re speaking with a group that’s earlier in their career, this is where they see the 3, 4 or 5 million and they’re like, “You all are crazy. The numbers don’t add up. How much money you need?” It’s because we’re thinking about in terms of today’s dollars versus future dollars.

[00:31:27] TB: Right. Correct. So, if we look at that, and you’re like, “Okay, quarter million dollars”, what do I need in the portfolio to sustain a quarter million dollars, essentially, for 28 years between ‘67 and ‘95? And the answer is about 4.4 million. Now, we know that social security is going to be there. So, even if we use something like nominal, and we say that the annual Social Security benefit is going to be something like 30,000, that drops it down to 2.8. So, it is a huge thing, but again, we zero that out. So then, we say, okay, let’s go at 4.4. And you say, okay, Social Security is going to be there. But let’s plan this, we’re going to do it all by ourselves.

That means that for us to get to 4.4, if we assume that we have $40,000 saved already, it’s basically a thousand bucks that we need to invest monthly with that current $40,000. So, to me, this is like the special sauce where I’m like, “Okay, 4.4 doesn’t really mean anything to me. So, how do I make it mean something?” We basically discount it back to like, how will it mean for me today? So, if we basically make a payment, this is a time value money calculation of $40,000, and we assume certain return everything, it’s $1,000. So, then what we do is we say, “Okay, client, how much are you putting into your 401(k), 5%? Okay, so 5% of 120? What’s your max, 3%? Okay, 3% of 120. That’s actually $800. So, 1,000 minus 800, the deficit is about 200 bucks. That’s basically on a monthly basis, where we have about $200 per month drag to get to that 4.4 million.

[00:33:07] TU: But 4.4 just became tangible, all of a sudden, right?

[00:33:10] TB: Right. That doesn’t necessarily account for everything like, fees, and taxes and all that kind of stuff. We’re just going to drag. But the idea is that, then we can say, okay, well, what happens if we max out the IRA? Or what happens if this isn’t an 80/20 portfolio, which is more conservative than like the example that we gave? What happens if we take a little bit more risk? What happens if we do this or that? That, to me, is where you could say, “Wow, we’re actually a lot further along than we thought. We have more options here.”

So, to me, the nest egg calculation, it’s a time value money calculator, that usually gives you this big pot of money that you need. But I think, the special sauce is to kind of discount it back for it, actually means something to me today. And that’s where, I think, great planning can kind of come from there.

[00:33:58] TU: Yeah, and I think one of the things we hear a lot from prospective clients. I know Justin does when he’s talking with folks, and we certainly see the value of this coming to clarity in the planning process, is this is one of those topics for good reason that there’s a lot of anxiety and uneasiness, because it’s a, as we’ve talked about, big number. It’s out in the future. We get into the what if scenarios. What if I don’t have enough? What about this? Am I going to be able to care for my family? Do the things I want to do? And we underestimate, in my opinion, we underestimate the mental toll that that running conversation has in our head. Do I have enough? Will I have enough? What about this? Could we be doing more? And whether we like the numbers, whether we punch this number and we see a thousand, we’re like, “Tim, I’m never working with you again. Don’t show me this number again.” But we have a picture of what’s it going to take each month. And just like we talked about budget and other things, what do we need to do? What do we need to change? Or perhaps nothing to make this goal a reality. So, we’re bringing the unknown, big scary parts of the plan into reality, and something that we can address on a month by month basis, and begin to work a plan if we don’t have it yet in place, that allows us to hopefully make this goal a reality.

[00:35:09] TB: Yeah, it’s so true. And I think that’s why it can be such a cliff to get over, is because when you’re going through this process, you’re setting things up. But idea is that, once you get past the initial setup, life is going to change, and you’re always going to have challenges. But if you know, it’s kind of like what we were talking about, I think before we turned the mic on. If you know in the background, that you’re funding these goals, whether they’re near term or long term, it’s like, that can kind of create scarcity, because you are kind of being very deliberate with how you’re directed money. In the back of your mind, you still know that you’re doing the pay yourself first, or you’re putting those goals that are really important for you and your family at the forefront.

Whereas, if you just throw everything into a pot of money, you’re not clearly distinguishing what are we actually doing? So, to me, that’s super important. A lot of it is like for retirement is, in this case, jacking the employee contribution up 1% or 2%, fixes it, without doing anything else at all. The other thing you could do is just change the allocation to aggressive, and you’re 200 to the to the front side of it. You’re 200 to the good side of it. And that’s what we talk about when we speak about investment, and kind of aggressive Jane and conservative Jane, and kind of highlight in what little tweaks to your portfolio can do. It’s huge. And not doing that, is to your point, can cause that mental bandwidth and kind of caused you to not do anything at all, which is not necessarily good either.

[00:36:49] TU: Yeah, Tim, this is a great start to this series, and starting with a question of how much do I need? And even before that question of where am I going and why am I going in that direction? Right? So, we talked about living a rich life today, making sure we’re taking care of our future selves. And before we talk about, which we’re going to on the next episode, some of the actual X’s and O’s. What are the vehicles that we could use to be able to begin to build this portfolio? So, once we identify, we need three, we need four, we need four and a half, whatever that number is. The next natural question is, “Well, how do I get there? What do I do? What are the options that I have available?” So, we’re going to talk about that on the next episode, but this episode is really about laying the foundation around how much is enough? And what are some of the factors that I may use to begin to make that determination?

Of course, we’re biased, but the team at YFP Planning, whether you’re a new practitioner, whether you’re in the middle of your career, whether you’re nearing retirement, or maybe have already gotten to the point of retirement, our fee only financial planning team of five certified financial planners and our in-house tax team, including a CPA, and an IRS enrolled agent, they’re ready to work with you to build a retirement plan among other financial goals that you’re working on as well.

So, if you’re interested in learning more about our one on one comprehensive financial planning services, you can book a free discovery call. To learn more about that service, determine whether that’s a good fit, and you can do that by scheduling an appointment at yfpplanning.com. Again, that’s yfpplanning.com.

Tim, this wraps up our first four episodes, and we appreciate everyone listening and we’re going to pick back up next week, talking about some of the alphabet soup of retirement accounts.

[SPONSOR MESSAGE]

[00:38:28] TU: Before we wrap up today’s episode of Your Financial Pharmacist Podcast, I want to again thank our sponsor, the American Pharmacists Association. APhA is every pharmacists’ 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.

[OUTRO]

[00:39:08] 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 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 post and podcast is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analysis 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 270: YFP Planning Case Study #3: Financial and Life Considerations As Retirement Nears

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YFP Planning Case Study #3: Financial and Life Considerations As Retirement Nears

On this episode, sponsored by Insuring Income, YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Robert Lopez, CFP® to discuss a financial planning case study on financial and life considerations as retirement nears.

About Today’s Guests

Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®

Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® is a Lead Planner at YFP Planning. She enjoys time with her husband and two sons, riding her bike, running, and keeping after her pup ‘Fred Rogers.’ Kelly loves to cheer on her favorite team, plan travel, and ironically loves great food but does not enjoy cooking at all. She volunteers in her community as part of the Chambersburg Rotary. Kelly believes that there are no quick fixes to financial confidence, and no guarantees on investment returns, but there is value in seeking trusted advice to get where you want to go. Kelly’s mission is to help clients go confidently toward their happy place.

Robert Lopez, CFP®

Robert Lopez, CFP®, is a Lead Planner at YFP Planning. Along with his team members, Kimberly Bolton, CFP®, and Savannah Nichols, he helps YFP Planning clients on their financial journey to live their best lives. To go along with his CFP® designation, Robert has a B.S. in Finance and an M.S. in Family Financial Planning. Prior to his career in financial planning, Robert worked as an Explosive Ordnance Disposal Technician in the United States Air Force. Although no longer on active duty, he still participates as a member of the Air Force Reserves. When not working, Robert enjoys being outdoors, playing co-ed volleyball and kickball, catching a game of ultimate frisbee, or hiking with his wife Shirley, young son Spencer, and their dogs, Meeko and Willow.

Episode Summary

In this week’s episode, YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® and Robert Lopez, CFP® to walk through this financial planning case study featuring fictitious clients, The Kims, and their financial and life considerations as retirement nears. In this case study, Tim, Kelly, and Robert discuss Andrew and Courtney Kim and their current financial situation as they prepare for retirement in the next three to five years. As members of the “sandwich generation,” the Kims, in their early 60s, have concerns about caring for Andrew’s elderly mother and their adult son, in addition to a long list of financial goals, including saving for their grandchildren’s education. The team discusses how to best approach retirement by evaluating their investments, social security claiming strategies, and the budget to build their retirement paycheck. Robert shares insight on having open discussions with key players when planning for retirement and how Andrew’s mother and their adult son can factor into the timing and budget associated with their retirement. Kelly tackles some challenging questions surrounding long-term care insurance and whether or not having a policy will be a solid financial decision.

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TB: You’re listening to the Your Financial Pharmacist Podcast, a show all about inspiring you, the pharmacy professional on your path towards achieving financial freedom. Hi, I’m Tim Baker and today, I chat with YFP Planning Lead Planners, Kelly Reddy-Heffner and Robert Lopez, to walk through our third case study of a fictitious family, the Kims. The Kims are in their early 60s and are very interested in how to best approach retirement in the next three to five years.

We break down how to best approach retirement question by evaluating their investments, discussing social security’s claiming strategies and looking at their budget in order to approach building their retirement paycheck. We also discuss other issues such as caring for an adult child and an aging parent, and some questions around long-term care insurance. I hope you enjoy this episode. First, let’s hear from our sponsor, and then we’ll jump into the show.

[SPONSOR MESSAGE]

[00:00:50] ANNOUNCER: This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term, life insurance and own occupation disability insurance. Insuring Income has a relationship with America’s top-rated term life insurance and disability insurance companies, so pharmacists like you can easily find the best solutions for your personal situation.

To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage; supports clients in all 50 states and makes sure all of your questions get answered. To get quotes and apply for term life, or disability insurance, see sample contract from disability carriers, or learn more about these topics, visit insuringincome.com/yourfinancialpharmacist. Again, that’s insuringincome.com/yourfinancialpharmacist.

[EPISODE]

[00:01:41] TB: What’s up, everybody? Welcome back to our case study series. I’m here with Robert Lopez and Kelly Reddy-Heffner. We’re going to be talking about the Kims today. Now in the previous two case studies that we’ve had, we’ve talked about different stages of life, whether it’s a newer pharmacist, a pharmacist that has a younger family that’s trying to work through different issues with college funding.

Today, the Kims, they’re going to be more closer to those years of approaching retirement and really asking those questions about hey, do we have enough? Can we start winding our careers down and look at retirement and more seriously? Robert, Kelly, welcome back to this third installment of the case studies. How’s everything going?

[00:02:25] KRH: Going pretty well. How are you doing, Tim? Welcome back from your –

[00:02:27] TB: Awesome.

[00:02:28] KRH: – sabbatical.

[00:02:29] TB: Yeah, appreciate it. I’m back, energized. I enjoyed the time off. I’m happy to be back. Shaved my head, so I’m in this weird period of, should I shave it again, or not? Yeah, doing fun. How about Robert? How’s everything going with you?

[00:02:42] RL: It’s going pretty good over here. Football season is upon us, so it’s the good time of year.

[00:02:46] TB: Yeah, go Birds. Excited for that. I told my wife, Shay, that we’re back to that time, where Saturdays and Sundays are going to be a little rough in terms of getting anything done. Yeah, I’m excited for football season. It’s actually starting to cool down over the weekend here. We’re in these knees, highs of 70s. Yeah, fall is coming.

Yeah. So let’s jump into it guys. As you guys can see, if you’re watching on YouTube, we share the case study, the fact pattern. Robert is going to kick us off and go through who we’re talking about today. Kelly’s going to go through the goals and some of the debt and I’ll set up the rest of it. We’ll put in protection, some of the tech stuff and some of the facts of the case. Go ahead, Robert. Kick us off here.

[00:03:30] RL: Yeah. Today, we’re going to go over Andrew and Courtney Kim, who are 62 and 60, respectively. Andrew is an operations manager for a defense contractor. He makes $205,000 per year. Courtney is infectious disease pharmacist working for the VA. She makes a $150,000 a year. They file their taxes, married filing jointly. They have two sons, Peter and Logan. Peter is a software engineer, 32, married, two kids, living in San Francisco. Logan actually is living back at the house. He’s 30-years-old, but he recently lost his job and is staying with parents for now. They live in Portland, Oregon. They have a combined gross income of $355,000, which breaks down monthly to $29,583. Their net, which is after taxes and contributions to retirement plans and insurance is $11,795.

They have expenses that break down as $3,500 for fixed expenses, $2,600 for variable expenses, and about $5,600 going to savings, which is better than the 50-30-20 that we aim for, and it’s closer to a 30-22-47. They live in a four-bedroom single-family house they purchased back in ’86 for a $105,000, which is where it’s worth well more now. Is completely paid off. Andrew’s mother who’s 82 lives about an hour away, but that may be changing in the near future based on her health concerns.

[00:04:50] KRH: Of course, as they approach this next transition phase, thinking through some of their goals, so they both are interested in retiring in the next three to five years. Hey want to make sure that they have enough and also, see what their Social Security benefit will be as part of that retirement nest egg and what they have available. Thinking about downsizing. That’s a common conversation. Also, with Logan back in the house and not sure about where mom may need to be residing and what assistance she will need, that’s a consideration. They also have another son and grandchildren in California. Want to make sure insurance is squared away. There may be a time with a gap in health insurance. Understanding what that means before they can be on Medicare.

They want to focus on some more leisure and do the traveling, see the people, do the national parks. Then, they also want to make sure that they can take care of mom and that their children are in okay shape as well, and maybe save some money for the grandchildren’s education in the future. As we start looking at strategy, they also have some debt. They do not have mortgage debt, so that has been paid off in the last year as Robert mentioned. They do have a car note, the very fun Tesla, which has balance.

[00:06:15] RL: You know a little bit about that. Yeah.

[00:06:17] KRH: I do know a little bit about that. Yeah. That apparently, pre-retirement, you need to get the fun car and then have to take care of it. 35,000 left on that car note at 4.5% interest. Then, they took out some private loans for Logan’s education, currently at a 6.75% interest rate with four years left, and that balance is about $24,000.

[00:06:42] RL: Yeah. As we look at the wealth building stuff and be jumping back and forth between this and the net worth statement. Their cash in checking and savings is right about a $100,000, which is they’re probably a little bit over funded there, given the expenses that Robert laid that in 401k that he has with his defense contractor job, he’s putting in 13.2%, which is about $27,000, which is what he can put in $20,500. Then after age 50, you can put the extra 65 in it, $6,500 there. $27,000 is what he’s putting in, plus a 6% match that he gets from his employer. It’s right now invested in target date funds for 2035.

Courtney has a TSP from the VA. She’s has in the middle of the VA long, where we received in the last couple of years. Her pension stuff can probably be similar to what we see with a lot of our clients with regard to that. She’s putting in 18%, which is $27,000. Plus, she gets a 5% match. She’s in basically, 50% CE fund, and 50% iFund, so all equity. Common stock and international companies. She has an old 401k that she hasn’t looked at for a while that has about $165,000 that we have to figure out what to do with that.

Taxable account, joint taxable account has about a $135,000 that they’re putting in $500 a month. It’s currently with an advisor that they speak with infrequently. Mostly C-class mutual funds in an 80$-20% mix. Probably some expense there that we’re not seeing that might be eroding some of the gains. A joint savings account, like I said, that they’re putting $600. This was the $600 a month. This was the mortgage payment, minus some property taxes. IRA is hanging out there, Roth IRAs, 35,000 for Courtney, 85,000 for Andrew that’s managed by that advisor, all equity institutional funds. Probably being charge a fee on that.

All in all, between cash and the investments, and then the value of the house, about 2 million dollars in assets. 2.1 million dollars in assets, so it gives them a total – if you subtract about the $60,000 in liabilities, about 2.036 in net worth million. 2.03 6 million in net worth. In terms of the wealth protection, they both have a term policy use, $500,000, some group life insurance from their employers, both set to expire. They’re their own policies in three years, so at 65 for Andrew and 63 for Courtney. They have some short-term and long-term disability, own occupation through their employers.

Courtney carries a professional liability coverage. Then from the state perspective, they have a will, but it hasn’t been updated in a long time, 20 years. Living well and power of attorneys also need to be updated. There’s some concern about Andrew, mom, if she has the right documents and how that’s going to affect their financial plan. Taxes, they’re doing it themselves right now through TurboTax, concerned about gains on the house if it’s sold. They would like to pay a lot less property tax in the future, which is also one of the reasons that they’re looking to downsize. Concerned about taxes when they take money out of their traditional investment accounts. Just how to best spend down those accounts without being killed in taxes.

Some miscellaneous stuff. They’re both in good health. Andrew thinks that they should take security ASAP, because he doesn’t want to lose out. There’s this idea that I want to get everything, every nickel that I put back in, so it’s definitely a point of conversation that we need to have. Not sure if they should move out of the state, or to a retirement community. Obviously, with the concerns with Andrew’s mother close by, and then should they go to a different state with family in California? Should they phase into retirement? Tougher with the VA, but Andrew could consult, be a contractor with his employer. Then Courtney is very worried about running out of money. “We’d rather be safe than sorry. I would rather work two more years if needed to retire to make sure that the money doesn’t run out.”

That is the facts of the case here, guys. I guess, if we look at goal number one, they want to retire in the next three to five years. If the Kims were our clients, what is the best way? Kelly, I’ll start with you. What is the best way to start breaking down that question of, hey, are we on track to be able to retire comfortably and have the money last in the next three to five years?

[00:10:52] KRH: Usually, what we would do is start with a nest egg, just taking a quick look at what assets they have available, time interval for when they want to retire. You can get a Social Security statement from the Social Security website. It would be good for them to download that data, so that we can see what their monthly and annual amounts will be. There are differences in that amount, based on the timeframe when they take the Social Security. There’s a difference between taking it early, taking it out for retirement age.

I’m guessing with their age range, it’s 67 and some change would be for retirement age. There’s also estimates at age 70. Sometimes age 70 can be a lot more advantageous than even full retirement age. It’s good to run the numbers and take a look. The nest egg gives a good high-level, like, how do things look in terms of being prepared for retirement? Then we also use software with e-money to take a look at a little bit more granular detail spending data. That was one of the things that we had talked about previously in preparing for this is, if they spend a little bit less in retirement, make some changes, it really will have a big impact on overall what they can do. E-money allows us to model different spending scenarios and take a look at what the cashflow is.

[00:12:23] TB: Yeah. I think, the big thing is it’s obviously looking at what they have, their investments, but then also, what is the potential drawdown rate, or withdrawal rate? A lot of people are familiar with the 4% rule, which is a general rule of thumb that if you have a million-dollar portfolio, and you basically take 4% out every year, $40,000, a lot of the math says that that can support 30 years of living off of that. There’s a lot of different ways to do it.

I think, let’s talk a little bit more about the Social Security statement. You mentioned that and I think that’s one of the things that we see that can often be influenced by what you read in the news, what your maybe colleagues have done. Like, they go to retire. Robert, how do you approach the conversation of when, because a lot of the times, a client already has their mind made up about Social Security.

It’s interesting, Morningstar did a study. They said that and a good advisor can basically add something like 30% more to your income in retirement. 9% of that, the biggest chunk of that is proper social security claiming strategies. How would you broach that subject with a client, particularly if they have their mind made up, in this case, Andrew, is saying, “Hey, we need to claim as soon as possible.” Walk me through your approach with that.

[00:13:46] RL: I think, one of the biggest things that you can do for a client is really just showing them all the data. That Social Security statement that you can pull from ssa.gov that Kelly mentioned, really has all that laid out. Now, when we look at Andrew and Courtney here, they look like they’ve probably been maxing out Social Security. Meaning, they’re putting in the most amount that they can per year. In 2022, if he draws now, if you were to retire today and draw, maximum withdrawal at 62 is $2,364 a month. If you were to wait until age 70, that draw would increase to $4,194 a month.

Really showing that differentiator there of this is 1,800 additional dollars per month that you would get by waiting. Then, if he just waits until full retirement, age to 67, then that is $3,345. Nice, in the middle of difference. Really showing them how that would work. Now, for their case, specifically, if they already have their minds made up and say, “Hey, I want to do this.” He says, “Hey, I want to retire in three to five years. I want to draw as early as I can.” Well, just as early as I can mean he wants to draw today and continue working? Because then, we can show the tax consequences of those dollars. How much tax are we going to be paying on the Social Security dollars if he’s continuing to work?

If he’s not going to continue to work and we’re going to wait, say three years and draw at 65, which is still before his defined for retirement age, then we’re not going to be taxed on the majority that that amount as long as she’s not working either. We can show, does this math work, right? Their expenses are not as high as they may believe that they are, because they’re saving a lot of money. If we double up both their Social Security at age 65, maybe she worked for two years longer than he does, so they’re both retire at 65. That solves both of them.

He wants to draw as soon as possible. She wants to maybe work a few extra years to make sure that they get the value, then their social security draw would be the same, but you would need to understand that if something were to happen, they lose one of those securities, right? It’s not that you would get the other person’s. If we were to wait, and we can show this benefit of it for Andrew, we say, wait until age 70 and we’re getting that $4,194, if he were to pass away, then Courtney would take over his larger payment.

[00:15:47] TB: Correct. Yup.

[00:15:48] RL: That’s generally an argument that we can make is whoever was the highest earner, we want to wait the longest amount of time, so that we can get the benefit of those multipliers on the years after full retirement age. The highest amount would be age 70 at this point in time.

[00:16:01] TB: One of the biggest things that we’re trying to solve in retirement is making sure that the money doesn’t run out for the amount of years that we’re going to be alive, which we just don’t know what that is. It’s an educated guess. I think, one of the things that a lot of people and Andrew is showing this like, the sooner the better, because that’s when I get the paycheck. For someone like him who’s the higher earner in the fact pattern, he’s right now making $205,000, Courtney’s making a $150,000 as the infectious disease pharmacist, his Social Security is probably going to be higher at a baseline. It might make sense, although he might be the first to pass away.

I think, probably some questions about Andrew’s mother is alive. She’s 82. Some history of the family, when did Andrew’s father passed away might play a part in this. To your point, when one of the spouses pass away, you basically have the choice. You can either take Andrew, which is probably going to be higher. Or if it does, in fact, be the case that Courtney should just keep hers. At the same breath, you’re still losing the stream of income that you didn’t have. Most of the time, a lot of the time, your expenses don’t basically get chopped in half when the other person’s no longer living. You still have all those fixed expenses, maybe food and things go down like that.

To really combat against this mortality risk of okay, how do we prevent money from not basically being completely spent down, Social Security is going to be one of the biggest attributes for that. With this particular type of client, it’s going to be a smaller percentage of the income, just because they make more money, and Social Security’s going to be capped at a certain amount of income. It’s really important to make a smart claim and decision with regard to the Social Security.

To your point, pulling the Social Security statement, I think, probably I would make sure that they both go through and look at their work years, and the earnings tax for Social Security, to make sure that that is accurate. Sometimes that can be inaccurate. Just seeing what their current benefit is at, it basically outlines from 62 to full retirement age, because they’re both born after 1960. It’s going to be, basically, 67 is full retirement age. Then how does that change by percentage if we can lock in income if we wait to age 70? Then, it shows that in the benefit calculator estimate.

Social Security website is actually pretty good, and be able to basically pull down those statements in real-time, I think is going to be solid. The way that social security is calculated is it takes your 35 most-highest paid years to make that calculation, which is another reason why potentially phasing into retirement, or delaying retirement is going to be a big tool to make sure that, because we might log another year where they’re earning six figures, which maybe they didn’t do that early in the career.

We look at the nest egg. We might look at some of the spending. Kelly, how do you approach looking at this? Because unfortunately, it comes back to the B word, which is budget. How do you actually walk clients through that and try to project what they actually will need from their retirement accounts? What does that look like in practice?

[00:19:18] KRH: I mean, that’s a great question. The nest egg does an estimator. Do 70, 80, 90, 100. In this case, seeing that their expenses were lower, the nest egg worked estimating lower expenses. I guess, from there, the question would be, if you estimated 50% of expenses for each side, I lean towards having the numbers in place, so that people can see, this is actually what this looks like. We do have a spending budget template and then we also can do things again in e-money, where there is an expense section where you can add in different anticipated expenses.

We see some go away. They’re not going to be making retirement contributions, if they’re fully retired. In this case study, it will be interesting and would be a conversation with the client. Although, I suspect that they would ask it back to us, to answer with Logan and mom, what can they afford to do? It is an interesting time period and not all that uncommon for kids to be in an age where they still need a little bit of assistance in trying to define what that is and what you can afford to do for them and with them. The circumstances, unfortunate with Logan, but I think it is worth having the conversation about. It is still a private student loan on the balance sheet. It is him in their household, what is he contributing? How long? Have they set some parameters for what they’re willing to do, and then us helping them figure out what they can possibly afford to do, if they are interested in downsizing, which is on that goal list.

Mom is a whole another host of questions. Understanding what resources she has available. Then trying to figure out what really they could afford to help her to do. I mean, I think the actual numbers are pretty helpful to see, especially when you do have other family members involved and really be as detailed as you can about what the budget might look like.

[00:21:35] TB: Yeah. I think, it’s one thing to fill out a spreadsheet, it’s like, okay, I think this is what we pay for food, or this is what we pay for utilities, or travel. Then, I think if you actually link it to credit cards and debit cards and savings accounts, checking accounts, typically, there’s a lot more there that we don’t necessarily account for. I think, probably it’s a good exercise to do both, and then compare. I think, there’s some planners out there that they’ll look at, hey, how much money came in for year 2021. They basically say, “This is what I need to plan.”

I almost build a paycheck with just the same thing in mind, even going into retirement. A lot of what we typically do with the nest egg, is we discount it by a certain amount, because we’re not going to be saving, in this case, 13% for Andrew for his 401k, and 18% for Courtney’s TSP. There’s a discount just in that alone. It comes back to that. It’s like, it’s the building block of how we need to be able to disperse. Once we made that decision with Social Security, what’s the gap?

Obviously, it’s going to be in phases. If they do retire at 65, maybe we draw down the investment portfolio a lot more aggressively, until we get to a delayed Social Security at 68, 69, even 70. Then that picks up and we let the investments take a little bit of a breather for that. In terms of this idea of sandwich, the sandwich generation. That’s where there’s a household that’s basically, they’re taking care of themselves, or trying to, but then they’re also taking care of a parent, and then an adult child. Tough conversations, guys. Robert how do you begin to have that in terms of like, “Hey, we need to take care of number one, which is you, versus, hey, I know, this is really important to you.” Because the other thing is they’re also talking about education for their grandkids. How do we begin to dissect that part of their financial plan?

[00:23:32] RL: I want to start off by saying, I’ve never heard the term ‘sandwich generation’. Since Kelly’s a member of that generation, I think it’s very interesting.

[00:23:40] KRH: I’m not 60 yet.

[00:23:44] RL: Generational. Generational. No, I think having that conversation with Logan is the most important part, right? We don’t know what he’s professionalized in this scenario. He says, he lost his job recently and had to move back in with mom and dad. Is he an engineer like his brother? Is he a developer? Is he a starving artist? What’s going on here? How does that really work out? Laying it out.

We can’t be the centers of the universe forever. They’re parents, so they want to take care of their kids. They want to help the generation after them, but they can’t take care of everybody all at once. Really coming to terms with that. Letting the kids know. Logan might be very open to understanding of, “Hey, mom and dad want to retire in the next year or two. We really need you to be on your own. Hey, grandma is not doing so well. She’s going to need your room, bud. You’re 30-years-old. It’s time for you to figure it out.” Really laying it out, I think would do well.

Then having that conversation with Peter as well. Peter may already have retirement – I’m sorry. Education savings for his kids set up. Those kids may have another set of grandparents that are also trying to set up accounts and everything. Again, they don’t have to be the center of the universe. They need to be center of their own world and make sure that they’re taking care of themselves, numero uno.

[00:24:53] TB: Yeah, they might be like, again, we’re not trying to solve everything right away. If this listed as the number five, the last goal, it might be that, let’s get the – let’s figure out the debt, which the debt isn’t bad. I think, there’s a question of, do we just take some of the cash that we have, the $100,000 between checking and savings and apply that to the $59,000 that we have between the Tesla and the private loans, and private loans between the six and three quarters, the Tesla being 4.50%. Clear the board there.

Then we start looking at as we get the expense information in a little bit better, if 65 is the goal, which is what I would be pushing for, because that’s when Medicare starts. There’s not necessarily a gap in that regard from a healthcare perspective. Maybe it’s like, your, your will is actually set to bequeath some of that money to grandkids. Obviously, there’s in Oregon, you can get some tax advantages if you’re putting money into a 529 today. It’s minimal. I think those things are possible, but I think we take it in bite sizes.

I agree with you. I think it’s like, had that discussion with Logan, have that discussion with mom and see where she’s at in terms of – because that’s, a lot of moms do not want to move back in. That can be a struggle, just to make sure that they’re getting care, but there can be that loss of independence if they’re now living with you, or if they have to go live in assisted living, or things like that.

I think, it’s level setting those expectations. Like what we always say, even with the education piece, you can’t take retirement loans. You can take student loans and other things, but eventually, someone like Logan has to figure it out and do their thing. That can be a very strong pull on the financials.

In terms of this idea of long-term care insurance. I guess, what’s your guys take on that, as they’re right in that age, where the challenge here is time in, if and when to actually purchase these policies. The sweet spot is usually 60 to 65. Some people say 50. The problem is, if you purchase that 50, you could be paying these premiums that go up regularly for 30, 40 years, before you even have the – you make a claim. I guess, what’s your guys’s takes on the long-term care insurance question that they have in terms of looking at policies and purchasing them for in the event that they need some assistance in that regard? Kelly, what do you think?

[00:27:24] KRH: This is a hard question, I think with the long-term care insurance, I’m going to be honest.

[00:27:28] TB: I agree.

[00:27:30] KRH: On the one hand, right, if you’re going to pay premiums for a long time, it may add up that you have paid more in premiums than what you’re going to get out of it. Care is expensive. It does involve a little bit of personality and understanding what people’s expectations are, too.

If you have someone who is like, “I am never leaving my house. I don’t want people in my house helping me.” I mean that personality would be hard to justify a long-term care policy, because they are going to be very resistant to using what you would get from it. But the care costs are expensive. At some point, that certainly should be a conversation piece, like how much could be anticipated in that cost, with all insurance products. It’s a tradeoff between paying a premium to have somebody else cover an amount that you cannot pay for out of pocket for a recovery that you would like to have in the event that something happens. Or you’re paying out of pocket. Like, you have enough resources to take care of the care that you have in your mind, that you want to have happen.

In the e-money data, we do usually build in two years at the end of assuming some type of substantial care is needed in those last two years. That data can help answer this question to see like, what would that cost be? It’ll project it out in future dollars and give a very realistic, like this could be what you would have to face. I mean, certainly things happen where care is needed ahead of those last two years. It can be a combination. Certainly, the quality of the long-term care product would be a big piece. Can you get in-home care as part of it, if that is what is desirable? There’s a lot of nuances.

The person that helps give some quotes for some of the life and disability. They do some of the long-term care insurance as well, so we sometimes will talk to them about some of these questions and see scenarios where it makes sense. Again, personality, cost, what’s the alternative if you don’t have it? Sometimes it’s a completely opposite, which is spending down and trying to figure out a strategy to not have so many sources.

[00:30:02] TB: Medicaid, right? Yeah.

[00:30:03] KRH: Right. Then are you okay with what that care looks like in your area where you might be receiving care? Those are all very difficult questions to answer. If the cash flow is good, and it makes sense to do it, and it’s affordable and you’re in that sweet spot. If you’re on the conservative side, you might lean towards doing it. If you like more risk, or more adverse to accepting care, it might not be as big of a priority.

[00:30:37] TB: When we talk about long-term care, that’s really – it’s insurance that provides assistance, usually through assisted living, a nursing home care, home health care. Sometimes personal, or adult day care for individuals, 65 or older that have a chronic or disabling. This is typically people that are having trouble using the bathroom, dressing themselves, feeding themselves, that type of thing. They did a study in 2020 that the average cost, the current medium annual costs for assisted living is $51,600. For an in-home health aide is 50, almost $55,000. For a private room in a nursing home, it’s a $106,000, which obviously, can be a pretty big chunk of that investment portfolio.

However, about 80% of long-term care is provided at home by unpaid family members. That’s where you might say, “Hey, Peter. What’s the plan for this?” I know conversations with my parents, they don’t want us to have to really have to deal with that. They rather have some care by something that they’re paying for. I think, it’s just family-to-family. A lot of a lot of families, you’re it, and that might be the case with Andrew and his mom is that it’s more of a self-insured type of thing.

As we know with most things, the price of this type of care is going up and as are the premiums for these type of policies. That’s the challenge. I know, some of the people that we wrote policies at my last firm is that they would buy these policies, and then a couple years later, the premiums would go up 10%, 20%, and they would let them last. I’m just going to go at it on my own. It’s really a personal decision in terms of what your strategy is, and how you want to attack it, but it’s definitely something that I think we as fiduciaries need to see what comes back from the client in terms of their approach. It’s a tough one. I’m with you. How about Robert, do you have anything to add to that?

[00:32:39] RL: No. I think you guys did a really good job on that one.

[00:32:42] TB: We talked about the insurance. Any other gaps and the protection? Obviously, I think one of the things, Robert, that we should be looking at is just the estate stuff, and making sure that that is all updated and good to go. Probably start to look at the mom stuff, too, right?

[00:32:57] RL: Definitely. Obviously, if you have an estate plan that was drawn up 20 years ago, there’s going to be some things that have shifted, or changed. In that meantime, your boys were 10 and 12. Best at that point, maybe you want one of them to be your power of attorney, or your health care proxy. Maybe you want a different family member to be that executor. Maybe you want to pass things along differently now that you have grandkids that you definitely didn’t even imagine at that point in time when your kids were in middle school.

Then definitely, mom, we really want to understand what mom has going on. Is she independently wealthy, and she’s never going to live with us by choice? Does she have a bunch of heirlooms that she wants to pass along? Does she have her wishes laid out in order? Or do you know them? Because Andrew is going to be in charge of those decision-making questions. When the doctors ask, what does she want in this situation? You’re going to have to know the answer or you’re going to have to have that document to provide.

Really having those conversations, or those legal discussions would be really valuable ahead of time. Most people, when we think about estate planning, it’s because we don’t want to become a burden to our family. We don’t want to be troublesome in that situation. We want to lay out as much as we can, beforehand. She may have all that flushed out in a folder ready to go. She may have none of those documents, hopes and dreams that she’s going to live to 200. It’s really important to understand where everyone lies on that and have really honest and open conversations.

[00:34:14] TB: Yeah, I agree. I think that’s probably a big risk that can be easily mitigated by just now with an attorney and writing those things out and just keeping it fresh in that regard. Probably, the only other thing that I would address, I think, there was concern about gains on the house that they sell that. I know a lot of that gain is going to be excluded, probably half a million, if they’re filing their taxes together. There might be some gain that they will have to realize and plan for. If they basically downsize to a property, they might be able to exclude some of that as well. I think, probably working with a tax person as they’re approaching retirement would be good.

I think, the only other big concern here guys that I have, would be just looking at the overall investment allocation. We’re saying that a lot of it’s an equity. There’s probably not a lot in bonds, 80-20 in the taxable account. They’re approaching the eye of the storm with regard to the – if they’re looking to retire in three to five years, really, that’s probably the one time in their entire investment lies, where they probably need to be as conservative as they will ever be. What we’re really trying to mitigate here is sequence of return risk. This is basically where the market corrects, or we’re in a recession, it goes down 20%, or 30%, and then your withdrawal and $40,000 out of that. That typically leads to unsustainable and rates of failure with regard to pulling money from the portfolio.

As you’re approaching that eye of the storm, so to speak, instead of having an 80-20 or 100-0, we really need to be closer to maybe a 60-40, 50-50 to make sure that we’re protecting the things that we’ve grew over the course of their career. Then as we come out of the eyes of the storm when they’re in their 70s, and so on, maybe we get a little bit more aggressive, because we have it figured out and we’re looking more towards making sure it’s long-term. There’s lots of different ways to look at that, whether it’s a systemic withdrawal, a function approach, or something similar to that.

That probably would be to look at the investments in totality and making sure that for these last couple years, we’re looking more from a safety perspective, versus let’s try to get the portfolio as big as we can.

Guys, I think that’s probably a pretty good place to start. I think, for this one, more questions than answers. I think that’s a good thing. I appreciate the look at this case study with the Kims and looking forward to next time.

[00:36:45] RL: Sounds good. Looking forward to it.

[END OF EPISODE]

[00:36:47] ANNOUNCER: Before we wrap up today’s show, let’s hear an important message from our sponsor, Insuring Income.

If you are in the market to add own occupation, disability insurance, term life insurance, or both, Insuring Income would love to be a resource. Insuring Income has relationships with all of the high-quality disability insurance and life insurance carriers you should be considering and can help you design coverage to best protect you and your family.

Head over to insuringincome.com/yourfinancialpharmacist, or click on the link in the show notes to request quotes, ask a question, or start down your own path of learning more about this necessary protection.

[DISCLAIMER]

[00:37:23] ANNOUNCER: 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 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 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 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.

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YFP 261: YFP Planning Case Study #2: Planning for Retirement, Saving for Kids’ College, and Paying Off Debt

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YFP Planning Case Study #2: Planning for Retirement, Saving for Kids’ College, and Paying Off Debt

On this episode, sponsored by Insuring Income, YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Robert Lopez, CFP® to walk you through a financial planning case study on planning for retirement, saving for kids’ college, and paying off debt.

About Today’s Guests

Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®

Robert Lopez, CFP®

Episode Summary

What are your retirement goals, and do your investments align with your vision of the future? Welcome to another episode of Your Financial Pharmacist Podcast. YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®, and Robert Lopez, CFP®, to walk you through a financial planning case study on planning for retirement, saving for kids’ college, and paying off debt. This is our second case study, and this time we hone in on the lives of a fictitious couple, Fiona and Rob Anderson. We examine their financial portfolios, from salaries and debt to their investment accounts and insurance policies. Listeners will learn about Rob and Fiona’s retirement goals and whether they have invested in the right ways to achieve them. The problem of conflicting goals rises to the surface, and Kelly and Robert share how you can manage to prioritize your children’s college education with your own retirement plan. Kelly and Robert touch on innovative ways to spend less on college while giving us invaluable advice on making your investments work for you. Delaying your retirement and waiting to claim your Social Security are helpful methods in ensuring cash flow during retirement. Finally, we get a glimpse at what paying a mortgage during retirement is like, and whether there is reason to panic.

Key Points From This Episode

Getting to know Fiona and Rob Anderson.
The home, work, and financial portfolios of our case study couple.
Fiona and Rob’s investment accounts and insurance policies.
Diving into tax concerns.
Your children’s education versus building your retirement fund – conflicting goals.
How to prioritize conflicting goals.
Some innovative ways to lower the costs of college/university.
How to use 401Ks, RSUs, and other investment accounts wisely, for investing in your goals.
Delaying retirement and waiting to claim Social Security.
A closer look at whether their particular investment accounts work for their specific goals.
Unpacking the target date fund and traditional IRA.
What to consider when paying a mortgage in retirement.
Your age concerning your debt, and if there is reason to panic.

Highlights

“You can take out loans for school, but you can’t take out loans for your own retirement. So make sure you take care of yourself first.” —Robert Lopez, CFP® [0:08:20]

“It’s really like golden handcuffs. It’s a way for a company to make sure that you’re not going to want to leave, ‘Hey, here’s this money, but you have to stay here to get it.’” — Robert Lopez, CFP® [0:18:25]

“Taking those dollars that you feel are being wasted and putting them towards something that you actually feel pain over, is huge.” — Robert Lopez, CFP® [0:21:00]

“Things happen unexpectedly. So, having your documents in place is important, and it makes it a lot simpler and less chaotic.” — Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® [0:24:20]

“The emotional variable, I can’t calculate for.” —Robert Lopez, CFP® [0:32:12]

“‘Money is power.’ But money is not power. Options are power. Having the option to do different things, and having the ability to make different plans is powerful.” — Robert Lopez, CFP® [0:35:02]

“The best plan is one that works. As long as it works for them, then they made the right choice.” — Robert Lopez, CFP® [0:35:16]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TB: You’re listening to the Your Financial Pharmacist podcast, a show all about inspiring you, the pharmacy professional, on your path towards achieving financial freedom. Hi, I’m Tim Baker, and we’re back with the Case Studies, this time with the Andersons. I sit down with YFP Planning’s Lead Planners, Kelly Reddy-Heffner and Robert Lopez, to walk through this fictitious family and their financial plan.

Although the Anderson’s are not an actual couple we work with, they are really a composite of clients that we do work with in reality. The first part of the discussion, we lay the groundwork of the Anderson’s jobs and salary situations, where they live. We walk through their net worth and point out important elements of their financial situation. We also talk about their goals and what they’re trying to achieve.

We then talk back and forth about their financial situation. One of the big focuses being on education versus retirement planning and how to best use their investments going forward. This is a bit of the behind the scenes look at what goes on at YFP Planning. I hope you enjoy this episode, but first, let’s hear from our sponsor and we’ll jump into the show.

[SPONSOR MESSAGE]

[00:00:58] ANNOUNCER: This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term-life insurance and own-occupation disability Insurance. Insuring Income has a relationship with America’s top rated term Life Insurance and Disability Insurance Company. So pharmacists like you can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage, supports clients in all 50 states and makes sure all of your questions get answered.

[EPISODE]

[00:01:50] TB: What’s up, everybody? Welcome back to YFP Planning, case study number two. The last time, if we remember our first case study, which I thought was smooth, looked at the Joneses. This time, we’re looking at YFP Planning case study number two, the Anderson’s. The Anderson’s that are a little bit different stage of life, but I’m excited to jump in with my colleagues Robert Lopez and Kelly Reddy-Heffner. Guys ,what’s going on? How are things going where you’re at?

[00:02:15] KRH: Good.

[00:02:16] RL: Yeah. It’s 105 today, so—

[00:02:19] TB: 105 in Phoenix. Kelly, you are, I’m sure, all in on this case study, not imagining sitting on the beach next week.

[00:02:26] KRH: That’s right. I am totally all in. Not distracted at all, but excited to talk through people in mid-stage.

[00:02:34] TB: Awesome. All good. So, Robert, same as last time. Why don’t you set up and, for those listening on the podcast, we are releasing these on video, so you should be able to see us talk through our one page overview of the Anderson’s. Robert is going to set us up in terms of salaries and things like that. Kelly is going to get into goals and debt, and then I’ll take us home, and then we’ll open it up for discussion and go from there. So, Robert, why don’t you take us away?

[00:02:58] RL: Yeah. So, today we’re working with Fiona and Roy Anderson. Fiona is Field Medical Director. She’s 46 years old, making $155,000 a year. Roy is a Pharmacy Manager, 48 years old, making 135. They’re married, filing jointly. They have two sons, Michael and Paul, aged 16 and 14 respectively. They live in Jersey City, New Jersey. Their gross income works out to about $290,000 a year, which breaks down to around $24,000 monthly. Their net, or what they actually receive in their bank accounts, is about $12,000 a month. Their fixed expenses are $6,300, variable expenses of $2,200, and then about $3,300 of monthly savings. They live and own a three bedroom, a single family house. They purchased in 2008, which they got for $420,000 using a conventional 20 percent down at a 6 percent interest rate. Then, in 2015, they’re able to refinance to a 4 percent, 30 year fixed mortgage.

[00:03:56] KRH: Then they have a few goals that they want to accomplish while we’re working together, hypothetically. They want to pay for the four years of undergrad for Michael and Paul. They are making 529 contributions, which they recently increased. They have a pretty robust amount in the account baseline. They want to know if they’ll have enough to accomplish that. Concurrently, they want to try to retire in the next ten to 15 years. One thing to consider is, with the home that they currently own, they want to downsize and move to Florida. Then they are concerned about some of the debt that they still have, as well. So, that debt is listed out as a home equity line of credit that has a 5 percent interest rate.

They remodeled their kitchen and are paying $1,000 a month on that. They still have car loans. They pay a total of 750 interest rates between 3.5 and 4.25 when the two car notes. They still have their own student loans, which is always an interesting intersection with paying your own children’s college tuition as well. They refinance to a ten year private loan, 4.25 percent five years ago. Then, of course, they have the mortgage. So it’s a 30 year fixed 4 percent interest rate after that refi. They’re seven years in and they’re paying 2,500 a month.

[00:05:21] TB: Then, from the wealth building side, they have some cash in the bank, $20 grand in checking, $50 grand in savings, but in terms of their investments they’re looking at 401K, so they both currently have 401K that they’re contributing 4 percent each, plus a 4 percent employer match, so basically 8 percent in total. They’re both invested in the 2035 target date funds. Fiona has an old 401K, a small one at $15,000 that she hasn’t really looked at. They do have a 529 account that they’re increased their contributions lately to $1,0LL, so $500 for each son, so $12,000 a year to get to that goal. Unfortunately, they don’t get an income tax deduction, because in New Jersey if you make more than $200,000 it’s off the table.

They do have a taxable account which is basically Fiona’s RSU, so stock units as part of her compensation, which we see in a lot of Industry Pharmacists. We’ll get that as part of their comp. She has $125,000 that it’s currently sitting in there, all in the company stock, and then they have a joint savings account that they’re putting a hundred bucks a month in, to consider the rainy day.

Michael graduation trip, when you graduate high school, and then a traditional IRA that they’re funding for Fiona in a balanced fund. That is basically their investment accounts. Roy also has a Roth IRA that has about $36,000 in it that he’s not contributing to. It’s sitting there presently.

From a wealth protection, so this is typically where we talk about insurance, in a state, they each have a 20 year term, $1 million policy that they purchased five years ago, plus a little bit of group life insurance that basically matches their salaries, $150,000, $135,000 respectively. They both have short term and long term disability which has a benefit of 60 percent. That’s going occupation for two years, then any act after that. Roy carries his own professional liability policy. Then, they have a will that was done when Michael was born, so basically 15, 16 years ago. A living will or trust, power of attorney that needs to be updated.

From a tax perspective, they currently use an accountant, but they’re not sure they’re maximizing their deductions. They recognize that New Jersey state income tax and property taxes are killing them, which is why a lot of people from New Jersey moved to Florida. It’s not as bad. They typically owe taxes every year, so they’re basically reached in their pocket for that. One of the big tax concerns they have is that with Fiona’s RSUs, they’re worried about capital gains on that and not really sure what to use that for.

Some other things are conflicted about how much to put towards college versus their own retirement. Can they retire in 15 years? In retirement, they’re really looking to up their travel game a little bit more. So I guess, I’ll pose the question to the group here when you guys look at the Anderson’s, Fiona and Roy, what are some major things that stick out to you when you’re approaching them in terms of their financial plan?

[00:08:08] RL: Yeah. The first two goals that they have are conflicting here. So they want to pay for education for the boys, but they also want to make sure they’re setting themselves up for retirement. One of the phrases that you’ll hear a lot through financial conversations is, “You can take out loans for school, but you can’t take out loans for your own retirement. So make sure you take care of yourself first.” I think they’ve done a really good job with that so far. They’ve saved a lot in their 401K. They’ve set aside money for the boys at the same time, but now it’s really deciding on how to be important about that and how to be decisive.

The 4 percent that they’re doing into their retirement accounts, plus 4 percent of a match is good, but not where we’d like to be. Ideally, we want to meet at least 10 percent, and I think there are going to be some ways that we can get them to that point. I think that their savings in their 529, right now, is aggressive at $1,000 a month. That’s a pretty big chunk of their cash flow. I think that that’s actually going to be enough, depending on some scenarios we may discuss. But really deciding is the order that they gave it to us, to correct order that they have. Is the boy’s education more important than their own retirement? Are they willing to accept the opportunity cost or the change that would require? They may need to work longer to send the boys to college, and really flushing that out.

[00:09:14] TB: I think one of the things that is interesting about this case, because we hear it for a lot of new practitioners, is the age old question of, should I pay down my debt, i.e., my student loans or should I get going on my retirement, my investments? There’s that push and pull that I don’t think really ever goes away, because there’s just different things that are always competing against that berm investment game. So when you look at this, how would you walk them through or walk them down the path of getting down to the granular bits and pieces of the retirement versus the education? Is that something that you would look to model out? Is it really asking more clarifying questions with regard to their goals? Walk me through your thought process there.

[00:10:03] KRH: Sure. I agree with Robert that those are conflicting. So, talking through what’s important when individuals have their own student loan debt, they really do tend to lean towards creating scenarios where that doesn’t exist for their own children. We do a high level nest egg that popping some numbers in, based on this case study, they probably wouldn’t be able to retire in ten years, based on these numbers. So, Robert is correct about that, too. More contribution would be better. As far as the education, we can model out and take a look. Certain schools are going to be more cost effective. There are other things that students can do. Good grades. Robert gives a great talk on collect exams, which I love. My own children have listened to some of the conversation.

There are ways to make college funding more affordable and have those conversations. The kids are at an age at, especially at 16, really to start the conversation about what’s affordable, what makes the most sense, and the parents, setting some boundaries on what they’re comfortable with to not sacrifice their own retirement goals. Yeah, a combination of modeling would definitely answer some of the questions about that expected cost in the future, how much they’re going to be able to cover. What the shortfall is. Then I think Robert’s right too, about finding a better balance with the goals and how to prioritize them.

[00:11:40] TB: Robert, can you give us the cliff notes on the CLEP thing? Because I think that’s actually pretty powerful, if you’re a pharmacist that’s listening and then you have kids that are high school age looking at colleges. This is something that I think [inaudible 00:11:50].

[00:11:54] RL: Yeah, Tim. One of the big things that we like to talk about with clients is not necessarily just saving for college, but also ways to save on college and education expenses. There are a ton of ways to do that, whether it’s planning to go to a community college for the first couple of years or it’s maybe just ignoring traditional education and going to our trade schools. But one of the ways I like to do it is just getting credits out of the way, and everyone understands dual enrollment credits and everyone talks about AP courses, where they can test out of college classes, but a CLEP, a C-L-E-P is run by the College Board. It’s the same people that create the SAT.

What it is? Is it’s a test where you can sit down. Take a one-time test where it costs about 90 bucks on a bunch of general education classes. If they pass that course, then they get to skip it in college, they get automatic credits that will be accepted at the majority of universities. Now, every university in college has their own rubric that they request, and they say, “Hey, you have to get at least 65 on this class for it to count. They only accept these five classes. 65 different CLEPs, that different college will accept.

If you’re a math major and you don’t want to take English classes, take these two tests while you’re in high school, when you just learn English and never have to take it in college. Or if you’re an English major who doesn’t want to take mathematics, when you take a mathematics and high school that’s practicing for the test, you take a CLEP, you pass it, you never have to take it in college again. It’s a great way to either get a head start on college or get through the classes that are going to slow you down, and allow you due to the coursework that actually excites you and makes you want to go to college, rather than slogging through the first two years of Gen Ed before you can get to the stuff that you care about.

[00:13:20] TB: Yeah, I think it’s now really important to highlight all the tools that are available for students and parents to make a good decision. I feel like, if I get in the time machine and go back to when I was looking at schools, I didn’t have any. And I think because—I would have done very foolish things back in the day. I think that if there are things that we can do, whether scholarships or things like Test NL, going to put the price tag a little bit more affordable. I think probably one of the things that I would want to model out and what’s interesting about the Anderson’s is that they have a goal in place.

A lot of people, especially, I think if they have young kids, will ask, “What’s the goal for sending your kids to college?” It’s like, “I don’t know.” That’s what we talk about the one third rule, which we’ve talked about at length, where you can pay—basically the idea is that what you’re putting in 529 is one source of the tuition, and then another source would be when your child is 17 or 18 going into college, you’re basically paying that out of your paychecks, you’re sending a check to the college. Then the last third would be the scholarships and the student loans. Last but not least. We use that as a default, that there’s no idea what they want to do. With Fiona and Roy, the idea is put them through four years of undergrad.

Kelly, we know that not all schools are created equal, right? Whether they go to somewhere like Rutgers, which is in the state in New Jersey or somewhere like The University of Miami, which is a private school out of state in Florida, how do you advise parents to talk to their kids or just approach this with their kids, in terms of sensible decisions with regard—I know it’s hard at 17, 18 year old to go about approaching that question.

[00:15:07] KRH: Well, definitely when we started that conversation, it was talking about what our budget was, what we were going to be able to contribute. Then, looking when we would look up schools, understanding what the tuition is. There’s a number that pops up a lot on schools or websites. That’s an average cost, unfortunately, depending on your income and for many of our clients. That income is not going to reflect what that average cost is. So the average cost assumes 100 percent paid for, in some scenarios, all the way up to paying the full price tag. It’s really good to understand what your cost is likely to be, and at this income level for Fiona and Roy, it’s probably not a whole lot of financial aid.

I would assume no financial aid based on need. I do recommend having an understanding of what your cost might be. What schools are going to give those scholarships? There are certain schools that only give financial based need aid. There are schools that give grants for being a tuba player, the football player, great academics. So knowing your skills, what your talents are in a range. I would agree, we mentioned, Rutgers, a state school is going to be different than Princeton. What does that look like between the two? But I think people also discount private schools, and just seeing some of those schools have pretty nice endowment and a little better package. I would say I’d look at a nice handful.

We sometimes see kids are applying to 30 schools. You’re busting your budget, just on application fees. So, pick a few that makes sense. Have a few you can compare apples to apples, oranges to oranges and be like—you’re really looking for the best package and the best fit that’s financially viable for you and the student borrower, who’s going to take on any debt that you all can’t pay for if the savings is at capacity.

[00:17:14] TB: Yeah, I agree. I think one of the wildcards in this whole situation is we look at the taxable account. So, I don’t think I broke down what they have in their 401K. But Fiona has a 425 plus another 15 in an old 401K, Roy has 459. Then they have 365 and a Roth IRA and 195 – Ira. I think the wild card Robert, in this whole scenario in terms of the planning is what to do with the RSUs. These are a weird, because it’s compensation that comes in the form of stock that can grow over time. I’m a big proponent of like, “Okay, let’s tie this to something.” So, is this something that is for retirement? Is this something that they could apply towards the debt, towards the education? What’s your thought with regard to—how would you approach it? How to utilize that for the goals that the Andersons have?

[00:18:08] RL: Yeah. So restricted stock units, for those who aren’t aware, are a form of compensation when a company gives you stock, but you have to invest into it, right? Generally it comes in with the grant where it says, “Hey, you’re going to get this many shares.” Then, you’ll get a portion of it every year or quarter or month depending on the policy. It’s really like golden handcuffs. It’s a way for a company to make sure that you’re not going to want to leave. “Hey, here’s this money, but you have to stay here to get it.” Yeah, you may want to leave, but you have some invested RSU grants that you’re not going to be able to get if you leave right now. So you should probably just stay with us.

One of the things that I like to make sure clients understand is that these RSUs are just income, right? It’s taxed as income when you get it and you need to treat it as such. Although it looks like this big shiny object that we have to save and grow forever, it is just income and we can use it as such. So when we look at them, their big goals are, “Hey, I want to pay for college. Hey, I want to make sure we retire. Hey, I want to have less debt.” We want to help them, again, rack and stack those goals where sure, if we need that money for college, then it’s there, right? But if we can find out a plan for college, “Okay, cool. Let’s check that off, the boys understand what we have for them. The boys are going to come up with their own plan and it’s going to be financially settled.”

Okay, retirement. How can we use this money toward retirement? We could reorganize our cash flow, when we’re actually cashing out. Some of these are issues which would allow us to put more away in our retirement buckets. That’s a great way to use it. Another way is to solve that fourth goal. These are issues again. It’s just a taxable investment account. We have an unknown what the capital gains are, so we’re not sure, in this scenario, exactly how much of that is the grant itself and how much that is gained.

There will be some tax complications of this plan, but the $125,000 could, in reality, pay off all of their debt other than the mortgage. We can pay off the HELOC, which is $43,000 at 5 percent. We could pay off the cars at 3.5 and 4.5 percent. We could pay off the student loans at 4.5 percent. Then all they would have left is the mortgage that would free up $2,300 in cash flow on a monthly basis—

[00:20:04] TB: It is huge.

[00:20:05] RL: That’s huge, that’s a huge amount of money, okay. That could then turn around and immediately go towards extra savings, extra travel budget for that graduation trip they want to take in two years, extra 401K contributions. Right now, they’re doing 4 percent plus a 4 percent match. We could easily get that to ten or 12 percent without changing their life at all, only by reallocating those RSU dollars that are just sitting in a holding to this thing. We also know that she’s getting more RSUs, so this isn’t the end of her getting company stock. She’s going to get those refreshed, which is what happens when you get a new grant all the time. So as long as she’s still working, those grants are going to keep coming. We just want to make sure we’re using them appropriately.

They’re just sitting there, maybe they’re growing, they’re doing phenomenally, maybe they’re going down. We got to check the company trajectory, but using that to solve an immediate goal, like get out of debt and save for retirement would be a huge lift on somebody’s spirit. Having done that with clients in the past, taking those dollars that you feel are being wasted and putting them to something that you actually feel pain over, is huge.

[00:21:05] TB: Yeah. I think one of the things that I would want to unpack. I love all of the different avenues to go, potential pot of money, the RSUs, which is, like you said, another form of compensation. I think the other thing that I would really want to impact with the two of them is to retire in the next ten, 15 years. Is it closer to ten? Is it closer to 15? One of the things that’s going through my RICP coursework that I just thought was astounding was delaying retirement by three to six months is the equivalent of saving 1 percent more for the course of your 30 year career.

Another way to look at is delaying retirement by one month is the equivalent of saving 1 percent more for the final ten years before retirement. One of the big things that I think people get wrong in retirement is when to claim Social Security. Obviously, if you can delay that, you have an income stream for life that follows inflation that’s super valuable. So, are there ways to potentially increase that retirement paycheck? Now, they could look us and we know that this is true, guys. In pharmacies, I only got ten more years left. I’m burning out, I’m not good. Maybe there is the ability to work part time or things like that.

I think to Robert, to your point, being able to model out and move those pieces around to say, “We could use this pot of money and clear all that debt that frees up that cash” is a beautiful thing. But they could also say, “We feel bullish on the company that we want to let it ride and we won’t have the certainty there of cashing out and retiring those debts. Maybe we’ll let it ride for greater upside, but we know that there’s risk there as well.” Super fascinating. The nice thing about this is there are pieces to move here and there’s different scenarios to run. I guess, one question I would have with regard to the protection of the plan. Kelly, what are some things where their insurance related or a state plan and related that you see has some areas of exposure for them?

[00:22:59] KRH: I mean, in general, the insurance looks pretty good. The term 20 years, they just purchased it five years ago. So they’re going to get the kids through college. I know we had talked about this the last time. What amounts make sense of the disability policies? The amount looks reasonable with the 60 percent of income replaced. I would say the own-occupation for two years is a little bit of a question mark or sometimes we see the policies follow an income amount. So is it the income amount? Or is it that owning your own or any occupation? That’s probably something, I’d look at a little further, because we know just with the actuarial data that that can be a bigger problem than [inaudible 00:23:42]. But things look reasonable.

I would say, I would get the estate planning documents updated. So I would get the will double checked and updated, some other things probably have changed, as well over the last six years. I am a fan of having advanced medical directives in place, in terms of retirement. I think one of the statistics in our slide deck is that things happen sooner than we think they might happen at times. On the positive side, if you have an opportunity to retire, great. But sometimes health events, issues, things happen unexpectedly. So having your documents in place is important, and it makes it a lot simpler and less chaotic, especially at this phase. The kids aren’t really old enough to be making decisions, so you do still need to have things in place for sure.

[00:24:38] TB: Yeah. I think obviously that’s one of the often overlooked parts of the financial plan. Unless you’re military, where they force you to do wills and things like that, that’s where you typically see it more frequently. But just making sure that that’s buttoned up and there’s a plan in place for that. I think the other thing that I would probably circle back on. Robert, I would love to hear your thoughts on, is just the overall allocation. Do you think l balance funds—I see that we’re funding the traditional IRA, which see— were in 2035 target date funds, which are in that time frame. Ten to 15 years is still a pretty long time to go, so I’d want to dig deeper into that in terms of what they’re actually invested in.

We know, as we talked over at length in the past, that the allocation console of a lot of things, because if you’re looking at ten years, 20 years-time, typically the stock market, will take care of you. So, how would you look at their investments, particularly with the traditional IRA and maybe some of the allocations that you’re seeing?

[00:25:35] KRH: Yeah. One of the things on the traditional IRA that we need to double check on is, how are these dollars even going in there? Based on the fact that she has a 401K and they make so much money, shouldn’t be qualified for deductible contributions. So we want to make sure that these contributions have been going in undeductable, that they’re not trying to take a deduction on it. Beyond that, having them in a balanced fund doesn’t sound bad.

Most people in the world will believe that balanced means 50/50, but in the finance world it means 60/40, because why would we make sense? So a 60/40 fund on that account isn’t terrible for their age range, but it’s probably a little conservative. To go along with that, the target date 2035 funds, which are just mutual funds aged for a use at 2035, so they decrease in risk over time. Those are probably about the same right now, so about 60/40 at this point in time. I think that that should be probably extended. If they’re going to stay at a target date fund which is not necessarily a bad thing, I’d probably want to extend it closer to that 2045 timeframe to line up more with a normalized retirement.

You don’t actually aim for the year you’re planning to retire. It’s more so you aim for 65 and then that stretches out over your lifetime. It’ll never go to 0 percent investments. It’ll always have something in the market, because if we’re going to live to 100, we can’t just put it all into cash the day we retire. We need to have some risk in there. I think they still need to have a little bit more risk going on. So we want to look at what options they have, what the fees are, what the expenses are, how complex we can make it, but at the very minimum, I’d to maybe take that up to about 80/20 from a risk perspective. We obviously talk to them and make sure that they’re comfortable with that amount, but with their current time horizon, I think that that would still work.

[00:27:10] TB: Yeah, I think it’s asking a clarifying question and maybe digging into – because I think, even all target date funds in this, they aren’t created the same. There’s different allocations that are associated, depending on the year. I think the other thing that I would probably want to look at, just to make sure, is that you could have a balanced fund for the 529, which might be good for Michael’s accounts, but maybe not for Paul’s. Maybe it is Paul’s 14, so he has a couple more years, maybe just looking at that.

As Michael is going to college, we’re not overexposed in equities and we see a crash and then not as much dollars are there. One question, and then we wrap this up, guys. I think one question that I would ask related to the mortgage. They’re 46 and 48, respectively. Based on their refi that happened after what was that? That was in 2015, so we’ll say seven years ago, they had 23 years left on the mortgage.

Kelly, you recently relocated, so maybe get your take on this. Your thoughts on you—whenever says like, we have too much debt. I think Robert did an excellent job of outlining the path, or basically, we can redeploy some of the assets to basically wipe all the debt out, except for the mortgage. My question is this. If I’m mid to late 40s, or 50s, and I have a mortgage that’s going to take me well beyond retirement age, should I be freaking out about that, or what’s your thought? How do you talk clients off the bar to that part?

Because of debt, obviously, this is something that can be a detriment to your retirement paycheck in the future. Walk me through what you guys think in terms of that. It’s like, now I’m 46, I’m 48, we have 23 years left in the mortgage, or that [inaudible 00:28:54].

[00:28:56] KRH: Oh, my gosh. I love this question, because I think it really could be all over the place. I think, well, I feel like, there could be a point-counterpoint, point-counterpoint about this. It is interesting. Off the top of my head, when we do the nest egg, we’re like, okay, the wage replacement ratio, 70 percent of what you’re living on now, because you’re debt-free, you’re not paying into retirement. They’ve said that they want to move. It will be interesting to see if you are downsizing and you’re going to sell the house. Anyhow, that current mortgage debt is not going to be as big of an issue.

I would say, if they’re not moving, ideally, you’d probably like to see it paid off, but it really does come down to cash flow. When we run modeling and looking at retirement and potential for success to reach a very pleasant age of 95, or a 100 and still have resources, it really always comes down to cash flow and budget. What you’re living on per year has a big impact on that. Is the mortgage affordable to make the plan work? It really does depend. It would go in the modeling and scenarios and again, comfort.

I guess, I would lean towards wanting the debt paid off if I wasn’t moving before retirement. Then, we just have that conversation in my house and my spouse is like, “I could live with pain for a couple years, and then we sell it, and we become expats on a Caribbean island.”

It depends, but I do think it does a little bit. Wherever they go with it, Robert, I will love to hear what you add in, too. Before I turn it over to Robert, I would say, too, the other thing about wealth protection, at this stage, this is often when our parents are having stuff going on, too, if their parents are still alive and they have a relationship with some understanding about that. That relationship, hope and expectation is definitely a key part of protection. I’m often surprised at what an overwhelming time that can be. The kids are in college, but the parents have some type of health issue, and that can be stressful as well.

[00:31:20] TB: Which is important to bring up, because it’s not necessarily that Fiona or Roy’s parents would be our clients, but their parents situation can affect the financial plan of our clients. It’s good to get in front of that before—have those hard conversations about who is doing what or providing care, or if they have policies that not left the—cover down on that. Yeah, that’s a huge important point. How about you, Robert, in terms of the debt? 23 years left. I’m in my mid to late 40s. Should I be freaking out about that, or is it depends?

[00:31:51] RL: Specifically for the mortgage, I think, to Kelly’s point there, that two of them in our own household have different vibes on that. That’s one of the key things when we’re talking about this with clients is, mathematically, I can tell you the right answer. Mathematically, it’s interest rate arbitrage. We’re paying 4 percent of the mortgage. We can get 8.50 percent, 80-20 portfolio. We should just put it in the retirement accounts. The emotional variable, I can’t calculate for.

If someone has a money script that tells them that they have to have no mortgage when they retire, because they saw their parents or their grandparents have issues in their life because they had a mortgage tying them down, then that’s something we have to attack. If they’re going to downsize, doesn’t necessarily mean that their mortgage is going to go down. In Florida, are they going to leave a single-family home in New Jersey and move to a very swanky condo, 50s plus condo in Florida where they’re playing shuffleboard with movie stars? Maybe they’re going to be paying more even with less space. Those are some things to work out.

Having that conversation of 4 percent interest rate, although it may have sounded extremely large a year and a half ago, or even six months ago, is really a good rate historically. It’s not going to be the end of the world. It’s a securitized debt, so it’s tied to their house. I would be more worried about the other loans.

[00:33:05] TB: I was going to say the same thing. Probably, even the student loans that have probably just been kicked down the road a bit, I would almost—and this is probably an emotional thing, because I’m sure the—well, we said that the student loans are four and a quarter. Then not much more. I think, and this is more an emotional thing, this is a bias of mine, I’m like, “Let’s retire those loans before we start sending Michael to school,” would be my thought.

It’s a great point is, what is the plan in the future? It’s that arbitrage. Do we emotionally make that extra payment on a 4 percent mortgage, which historically over a 30-year mortgage reduces that by seven years, if you pay that extra payment, or do you put that extra payment more towards the retirement, get a better rate of return over the long-term and secure that?

I don’t know. That’s also another thing that, as Kelly mentioned, in her household, it’s different. It’s different in our household, too. I don’t think it really even registers with, where I’m I in my mind want to have the mortgage paid off as I retire, which in my mind is 70, but I could lose my marbles before that and have to retire sooner. That could be a thing. That’s another thing that people sometimes discount, is that you’re not always in control of when you actually retire, either because of career stuff, or health stuff.

Yeah. I think these are fascinating questions that we’re talking about this on a vacuum, but really go back and ask Fiona, ask Roy, the fake clients that we’re talking about, some clarifying questions about the debt, about the investments, the education and with the retirement picture, I think would be really important to then proceed with the plan.

Again, as we always say, it’s not about necessarily the plan. It’s about planning, because we know the next time we talk, there’s going to be a wrench in the system that’s going to potentially have a zig and zag as we get further along the plan. Guys, anything else to add?

[00:34:52] KRH: No.

[00:34:51] RL: No. I think they’re in a great spot. I think that Fiona and Roy have done a really good job of setting themselves up for success. People always like to say, and I use this phrase all the time, “Money is power.” But money is not power. Options are power. Having the option to do different things, and having the ability to make different plans is powerful. They have put themselves in a place where they have a lot of options going forward, and they can choose what they believe is the best path. The best plan is one that works. As long as it works for them, then they made the right choice.

[00:35:19] TB: Totally agree.

[00:35:20] KRH: If they use the RSUs to buy an RV, we’ll see.

[00:35:24] TB: Don’t do it. Don’t do it. I was talking to the team last night, on our happy hour, that I said $800 RV. It’s actually $1,100. Yeah, they’re a money pit All right. Robert, Kelly, thanks again for talking about the Andersons on our case study here. Looking forward to doing the next one here, in the next couple of months. Yeah, we’ll do it again soon.

[00:35:45] RL: Toodles.

[MESSAGE]

[00:35:47] ANNOUNCER: Before we wrap up today’s show, let’s hear an important message from our sponsor, Insuring Income. If you are in the market to add own-occupation disability insurance, term-life insurance or both, Insuring Income would love to be a resource. Insuring Income has relationships with all of the high-quality disability insurance and life insurance carriers you should be considering, and can help you design coverage to best protect you and your family.

Head over to insuringincome.com/yourfinancialpharmacist, or click on their link in the show notes to request quotes, ask a question, or start down your own path of learning more about this necessary protection.

[DISCLAIMER]

[00:36:23] ANNOUNCER: 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 that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

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

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YFP 256: Why YFP Planning’s Lead Financial Planners Are All CFPs®

Posted on by yfpadmin

Why YFP Planning’s Lead Financial Planners Are All CFPs®

On today’s episode, sponsored by Splash Financial, YFP Planning Financial Planner, Kimberly Bolton, CFP® discusses why the CFP® designation is the most valuable credential when providing comprehensive financial planning, why the term financial planner in and of itself doesn’t mean a whole lot, what questions you can ask to find a planner who is a good fit for you, and what someone can expect when working with a financial planner.

About Today’s Guest

Kimberly Bolton, CFP®, is a Financial Planner at YFP Planning. Along with her team members, Robert Lopez, CFP®, and Savannah Nichols, she strives to help YFP Planning clients on their financial journey to living their best lives. To go along with her CFP® designation, Kim has a B.S. in Consumer Sciences with a concentration in Family Financial Planning and Counseling. When not working, Kim enjoys being in the sunshine, hitting the gym, hiking, traveling, taking her dogs Nugget and Toot on adventures, being a food enthusiast with her husband Allen, and spending time with her bonus kids Brianna and Brady.

Episode Summary

This week, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with YFP Planning Financial Planner, Kimberly Bolton, CFP®, to discuss why all of the lead financial planners at YFP Planning are CFPs®. In their discussion, Tim and Kim cover why Your Financial Pharmacist believes the CFP®, CERTIFIED FINANCIAL PLANNER, designation is the most valuable credential when providing comprehensive financial planning. Kim shares her personal story of becoming a CFP®, the rigorous education and experience requirements to become a CFP®, the comprehensive nature of the CFP® exam, the ethical standards associated with the credential, and why the CFP® is considered the most prestigious financial designation in the industry. She digs into why the term financial planner, or financial advisor, in and of itself doesn’t mean a whole lot, what specific questions you can ask to find a planner that is a good fit for you, and what someone can expect when working with a financial planner. Kim also explains common fee structures in the financial planning industry and why YFP Planning uses a fee-only structure. Tim shares a little bit of his own experience as a YFP Planning client himself, echoing Kim’s sentiment that the partnership between planner and client is an intimate one and that as a client, feeling comfortable with your planner will make an incredible difference in your experience. Kim closes with an awesome client success story, sharing how one couple was able to make their home-owning dreams come true years earlier than planned.

Key Points From This Episode

Background on Kim’s professional journey to becoming a CFP®.
What inspired her to pursue a career in financial planning.
We find out about the work that Kim is currently involved with at YFP Planning.
Why the YFP team believe so much in the CFP® designation.
Some examples of how comprehensive the CFP® training is.
How working with a certified CFP® is beneficial for the client.
Kim tells us what is required to enter the CFP® course.
What people taking the CFP® board exam can expect.
Learn about the experience requirement needed after passing the exam.
The expected ethical standards once you are certified.
Differences in the types of CFP® planners in terms of fees and services.
A brief breakdown of the different fee structures associated with CFP® planners.
Examples of good questions to ask a financial planner to ensure they are the right fit for you.
Kim shares a success story about working with a CFP®.

Highlights

“If you do any research on it, you’ll see that [being a Certified Financial Planner] is titled the most prestigious financial designation that you can have within the industry.” — Kimberly Bolton, CFP® [0:10:02]

“Here at YFP, it’s really important to us that our clients are comfortable with our recommendations. We want the clients to feel that the recommendations we make are made because it is in the client’s best interest.” — Kimberly Bolton, CFP® [0:11:58]

“Talking about your finances is a very intimate conversation. You want to make sure you are comfortable with your financial planner, because you’re going to have some intimate talks about your finances!” — Kimberly Bolton, CFP® [0:22:33]

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 had a chance to welcome YFP Planning financial planner, Kim Bolton, onto the show. We discuss why we believe the CFP, Certified Financial Planner, designation is the most valuable credential when providing comprehensive financial planning. We also discuss why the term financial planner or financial advisor in and of itself doesn’t mean a whole lot, what questions you can ask to find a planner that is a good fit for you, and what someone can expect when working with a financial planner.

Now, before we hear from today’s sponsor and then jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 240 households in 45 states. YFP Planning offers fee-only high-touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor, and then we’ll jump into my conversation with YFP Planning financial planner, Kim Bolton. This episode of the Your Financial Pharmacist Podcast is sponsored by Splash Financial. With interest rates on the rise, it’s a good time to evaluate the refinancing of your student loans. If you’ve ever considered refinancing your loans, check your rate now through Splash Financial. If you qualify, refinancing could help you get a lower monthly payment on your student loans or get a lower interest rate. Splash helps you shop and compare loan refinancing offers across lenders nationwide.

Browsing rates through Splash Financial is fast, free, and won’t impact your credit until you complete a full application. Now, when you successfully refinance $50,000 or more, Splash Financial will give you an extra $500 in cash bonus using our link, splashfinancial.com/yfp. So check your rate today and see what you might be able to save at splashfinancial.com/yfp.

[INTERVIEW]

[00:02:21] TU: Kim, welcome to the show.

[00:02:22] KB: Thanks. Thanks for having me. I’m really excited to be here.

[00:02:25] TU: Well, this has been a long time in the making. We just celebrated your two-year anniversary here with YFP. So Kim is one of our financial planners that works with the team at YFP Planning. Today, we’re going to be talking all about why our financial planners are all CFP, certified financial planners, and why we believe so much in the CFP designation. The reason we’re putting Kim on the hot seat to talk about this topic is Kim just completed all of the components of the CFP to be able to use those marks. So, Kim, congratulations officially. Exciting to see that to the finish line.

[00:02:57] KB: Yeah, thanks. Thanks so much. It was a long journey. It took me – If you counted like my school and everything, it was about a six-year journey that it took to have the three little letters put behind my name.

[00:03:11] TU: We’ll talk about why that takes so long and why those three letters are so important. But before we jump into learning about the CFP requirements, a certified financial planner requirement, tell us more about your career journey leading up to and including the work that you’re doing with YFP Planning.

[00:03:26] KB: Yeah. So my career journey in the financial planning industry actually began with YFP. YFP is the first financial firm that I have ever worked for. Before Tim found me, I had applied and interviewed with a couple of big corporate financial firms, and I had just realized like that’s not really where I want to be. Like that didn’t feel like home to me. Prior to the financial planning industry, I actually worked for the University of Alabama. I was an office administrator in their maintenance department. So I kind of already had experience with like the customer service piece and like invoicing and paperwork and the admin part of the job.

[00:04:03] TU: Where did that interest come from, Kim, in terms of that pursuit of a career in financial planning?

[00:04:08] KB: So I was actually four months from graduating from college with an English major when I realized I want to be a financial planner, not an English major. So it started way back probably when I was like 16 and first started working. So I learned at a pretty young age how to semi-manage my finances since I had a car payment and insurance and things like that. Then I went through college thinking I was going to be an English major, and I realized in my thesis analysis class that that’s not where I wanted to be.

So I went and talked with my college advisor. Just through like brainstorming different jobs that I could have, I had kind of come up with the idea of a finance major. A finance major and a financial planning major are – It’s similar, but they’re very different. The finance major is more broad than the financial planning major. So you get pretty like concentrated when you do just a financial planning major. So when I had first mentioned finance to my advisor, we were going through the different jobs that I could have with that degree and everything, and we eventually just realized that I wanted to help people with their finances, and I wanted to help people be able to retire and live a financial-free life.

Then that’s when we decided that financial planning is what I wanted to do. So four months before graduating, I changed my degree to be financial planning. It added a year and a half onto my schooling, but it was completely worth it, and now here I am, being a financial planner.

[00:05:39] TU: I think for those, Kim, that have not worked with a planner, it can be hard to understand, like what do I expect? What is actually involved in that relationship? What does it look like? One of the things we’re going to talk about is how different this service can be. Certainly, that term financial planner, that term financial advisor, wealth manager, lots of terms that are used, it does not mean that all things are created equal. So there’s a variety of ways that it can be done.

But I think for folks that have not worked with a planner, it can even just be hard to wrap your arms around what does this actually look like. So as it relates to your work with YFP Planning and working alongside lead planner, Robert Lopez, give us a sneak peek into what your day-to-day, what your week-to-week looks like, as you help support the financial planning process for over 100 pharmacist households.

[00:06:23] KB: Right. So day-to-day, we’re pretty much in the nitty-gritty financial planning. So day-to-day, I’m helping Robert get prepared for meetings, making the presentations for him. So if you are a client of YFP and you’ve ever seen any kind of slideshow or slide deck, that is definitely me and Savannah, working behind the scenes to kind of put that together for him. Working with Robert to help make any kind of recommendations, usually like the two of us brainstorm together to make the best recommendation for the client based on their certain situation.

Then from a week-to-week perspective, that’s kind of when you get a bigger picture, and you have like more projects coming in. So right at this moment, it looks like transitioning our clients into like a quarterly meeting schedule and kind of what that looks like for them, what that involves from us from like a workflow perspective, and really kind of catapulting that into existence and moving clients into a quarterly schedule.

Overall, I directly support Robert and just make sure he’s prepared to give the client the recommendation, and I help him do any kind of research that is needed so that we can make sure we’re making the right call on different financial scenarios.

[00:07:37] TU: Robert, for folks that have not heard him on the podcast before, Robert Lopez is one of our lead financial planners, along with Kelly Reddy-Heffner. We had Robert on the podcast most recently on episode 248, where he talked about some public service loan forgiveness, PSLF, success story. So if folks are wondering, “Who is Robert,” that is who Robert is.

I think you highlighted well, Kim, that there’s a lot of work that goes on behind the scenes. I think about as we bring on a new client into YFP Planning, there’s a lot of work involved in terms of the onboarding, making sure we have all the information and then, of course, in the ongoing basis, preparing for meetings, following up for meetings. There could be transactions that need to happen, tasks that we need to make sure that we follow up on.

Even as one example, myself that you help, so I’m a client of YFP Planning, and Tim Baker is my financial planner. As I made the transition from Ohio State to working full time at YFP about a year ago, I had to do a rollover of my 401(a). So I had some questions as I looked at those forums. I wanted to make sure I did it right. I wanted to make sure there was no implications in terms of taxes or penalties. So you helped me execute that transition and that rollover. Lots of things that are happening that people may not see at face value, even for those that are engaged with the planning, where they jump onto an hour meeting or so with the lead planner.

Kim, one of the things we’ve touched on in the past is the importance of understanding, as I mentioned just a few moments ago, that not all financial planners are created equal. So they can have varied educational experiences. They can carry different designations. They can be regulated in different ways. They can charge in a variety of ways. We’re going to link to in the show notes an important resource that we have available to download for free, and that is the nuts and bolts of hiring a financial planner that I would encourage listeners to check out.

In that resource, we cover what are the different types of planners, how do they get paid, what are some questions that folks may consider asking when they hire a planner. Again, that’s the nuts and bolts to hiring planner. You can get that and download that at yourfinancialpharmacist.com/nutsandbolts, and we’ll link to that in the show notes as well.

So we’re going to focus our time on the CFP designation, the certified financial planners. We believe that that is the credential that’s an important criteria to do comprehensive financial planning and to do it well. We’re proud to have five CFPs on the YFP Planning team that collectively serve over 250 pharmacist households for one-on-one planning. Kim, let me punt this to you since you’re the most recent designee of the CFP on the YFP Planning team. Why does YFP believe so much in the CFP designation?

[00:10:10] KB: So the CFP designation, if you do any kind of research on it, you’ll see that it’s kind of titled the most prestigious financial designation that you can have within the industry. I really think that YFP believes in the CFP designation the way that we do, simply because when you have the CFP designation or you’re working towards that designation, you’re really proving to yourself and you’re proving to others how high of standards you have for yourself. So when someone is either in the process or has a designation, they are being extensively tested and quizzed on their knowledge of financial planning.

The questions and the coursework that you go through, it really digs deep and it makes you apply those financial planning concepts to real-life scenarios. So even though like you may be answering a multiple choice question when you’re being tested or when you’re doing like practice quizzes and everything, if you don’t understand how to apply the concept to a real-life scenario, then chances are you’re not going to be able to answer that question correctly. So the CFP designation really just sets you aside from everybody and shows how serious you are about your career in the financial planning world.

Another part to that is CFP designation requires that you be a fiduciary, which in short means you put the client’s interest above your own, even if that recommendation doesn’t necessarily benefit you. It just benefits the client. This would come into play, for example, like if a financial planner had recommended that somebody go out and get like a $1 million life insurance policy. There are scenarios where if you’re not a fiduciary, you could be recommending that to that client because it’s in your best interest, because you possibly get a commission off of that.

Here at YFP, it’s really important to us that our clients are comfortable with our recommendations. We want the clients to feel that the recommendations we make are made because it is in the client’s best interest. We don’t want that client to think like, “Hey, are they just making this recommendation because it benefits them, not because it benefits me?” So that’s really the big picture why I think YFP takes the CFP designation and so serious, is because it gives our clients that peace of mind. It gives them that level of comfort with us that we are working in their best interest, and we are doing what’s going to benefit them more than what’s going to benefit us.

[00:12:35] TU: Yeah. That was a great explanation, Kim, the fiduciary piece. We’re actually going to link that in the show notes. If people want to learn more about what the fiduciary standard is, why it matters, how it’s different from what’s known as the suitability standard, John Oliver has a great segment on this topic, and we’ll link to that in the show notes. Kim, you explained it well. So I think the highlights there would be the fiduciary piece, the rigors we’ll talk about in a moment, what makes up the CFP designation.

As Tim Baker often says, “The bar of entry into financial advising and hanging a shingle to be a financial adviser is fairly low.” So being able to have some rigor, some documented evidence of the work that’s been put in, the seriousness of that training, and obviously being prepared to then provide comprehensive financial planning, that’s something we see often that traditional financial planning services might not necessarily be serving at folks in all different phases of life. Are they well-versed in things from retirement planning to debt management and everything in between? I think if you look at the CFP curriculum, very intense but also very comprehensive.

So to that point, in terms of the rigor and the intensity, Kim you mentioned several years it took you to obtain that designation. So talk to us about the requirements that one must go through in order to be able to use those three letters by their name.

[00:13:52] KB: Right. So there’s a couple of different ways that you can be qualified for the CFP exam. The most common is for someone to go through the CFP board’s coursework. In my situation, my college degree qualified me for the CFP exam. So you either have to have a bachelor’s degree that qualifies you for the exam, or you have to go through the CFP board’s coursework. Then once you have completed the education piece, you were then allowed to sit for the exam. The exam is 170 questions. They give you a six-hour limit, and it’s broken into three-hour segments. So three hours and then they let you leave for 30 minutes, and then you come back for the remaining three hours. Yeah, it’s pretty brutal.

When I was taking mine, the lady that was working the front desk at the testing center when I left or when I was leaving, she told me, she said, “You’ve been here a long time today.” I’m like, “Yes, I just took a really long test.” Then once you pass that exam, which again during that exam, you’re tested on the ability to apply financial planning to real-life scenarios, and then you’re given a few different case studies where you have to dig through. It’s like a multiple answer question that you have to really look at.

Then once you have passed the exam, you are then required to fulfill an experience requirement. So if you are working directly underneath another CFP, which in my case, I was working directly under Robert and Tim Baker, so working underneath them, I was required to get 4,000 hours of experience, which comes in at almost two years of work in the financial planning industry. Once all that is complete, then you basically sign your life away, saying you will be a fiduciary from here on out, and you will uphold to the CFP board’s like ethical standards and their standards of conduct.

Then every year, we have some CE courses that we have to do. It sounds simple, but it’s really complex. After you’ve done all that, so the education, the exam, the experience, and then once you agree to the ethical requirements, you become a CFP.

[00:16:02] TU: Yeah. So I think pharmacists, they can relate to this, right? You described an educational component, you described an examination, and then you described what I would consider like an experiential component. So you mentioned 4,000 hours of practical experience and not until all of those have been completed and plus the acknowledgement that you’re going to uphold the fiduciary standard. Then at that point, you can use the certified financial planner marks.

We think about pharmacy education. You’ve got the doctor pharmacy program. You’ve got the experiential rotations, which are typically throughout school, and then the final year of pharmacy school. Then we have the licensure examination. So we have a NAPLEX exam, and then we have a state law examination. However, what I’ll point out here is that I won’t say the NAPLEX is easy, but the pass rate of the CFP is much lower than the NAPLEX. I’m looking at the March 2022 examination of the CFP, and the pass rate was only 65 percent, so a very rigorous exam.

Typically, we see board pass rates in pharmacy – I think the last I looked at it, we’re closer to 85 to 90 percent, so very rigorous exam. Then to my comment earlier, it’s a great benchmark, certainly not the only thing folks should be looking at as they’re shopping for a planner, but a good indicator that someone has gone through a rigorous process, educational component, examination, and an experiential piece that demonstrates their ability to do planning.

Kim, I mentioned this briefly earlier, but I want to talk more about it in this concept of are all CFPs created equal in terms of types of services and how fees are assessed. Really, when you get the CFP marks, you have demonstrated that you’ve gone through all the things that you just talked to, but that may not mean that all CFPs are operating in the same way in terms of the services that they offer or as well as in the fees that they’re charging, correct?

[00:17:44] KB: Yeah, that’s right. So it’s really a wide range of like different services and different fee structures that you can have. Kind of to be brief with it and not go down a rabbit hole, you can have CFPs that are comprehensive planners. So that’s like us here at YFP, where we go from one end of the spectrum to the other. We can help you buy a house, we can help you invest your 401(k), or we can help you improve your credit score, anything along the lines. So it’s really everything under that financial planning umbrella.

Or you can have CFPs that strictly do just investment management. This is going to be CFPs that worked directly with your investments, so like that employer retirement plan or that traditional IRA or Roth IRA that you may have. Just another different spectrum that you could be on is you could simply work at an insurance company, and you could be the financial planner that is selling the insurance, whether it’d be life insurance, disability, umbrella insurance. It’s a big world out there, and so your options are kind of limitless on what kind of services you provide.

Then as far as fees go, so really the three most common that most people have probably heard is a fee-based, commission-based, or a fee-only. So fee-only is what we are here at YFP. I’m sure we’ve mentioned it a few times on the podcast but fee-only basically. When you come on board with us, and we quote you your price to work with us, that is the price. That is what we are paid. We don’t get any kind of commissions or any kind of kickbacks or anything like that. Whereas with commission-based fees, that planner is going to work strictly off of the commissions that they make from selling you products.

Then fee-based gets a little sticky because it is where it can be a flat fee, but then you also receive kickbacks off of people’s investments or insurance policies or things like that. So fees and services can get a little bit sticky and can be a tad complicated, but that is in short are like the major ones that are the most common.

[00:19:44] TU: Yeah. As you described, Kim, it really is the Wild Wild West in terms of how services are constructed, how often you meet with a planner, what to expect, what they’re managing, what they’re doing, as well as the fees, and how those fees are assessed and charged. So that really means there’s due diligence on the client side to be asking the right questions as they’re conducting that search. We talked about this in detail in episode 54. Several other resources we have as well available at yfpplanning.com. Folks can look for more information there. But it really talks more about the model that we do at YFP Planning, as well as the concept of fee-only.

I want to just for a moment give an example, Kim, of fee-only and why we believe that matters. So you gave the definition of it. Let’s say you’re working with a client, Kim, and you determine that there’s a need for, let’s just say, long-term disability insurance on top of some employer coverage they may have. Well, under the fiduciary standard, under the fee-only model, as you work with that client to determine what the benefit need is, you’re not selling the insurance policy, number one, and you’re not getting any direct kickback for the recommendation of any specific product that you would be recommending.

In that case, you can really help evaluate objectively what does the client need, what does the client not need, and then help look at a variety of different options as they shop those policies around. So I think that many pharmacists that will resonate with them in terms of wanting to have unbiased recommendations as possible. To that point that I made that it’s important, we’re asking good questions to understand what do people do in terms of services and how do they charge. What are some questions that you would recommend, Kim, folks ask as they’re looking for a planner that is hopefully a good fit for them?

[00:21:25] KB: Yeah. So I think the first question you should ask is are you a fiduciary? Because simply, you want somebody that is going to give you advice based on your best interest, not the planner’s best interest. The second big one is like what qualifications do you have. You want to make sure that your planner is qualified to actually be giving you financial advice, and it’s not just somebody like posing as a financial planner. Then how are you paid is going to be another big one. So that’s going to tell you like, “Do they receive commission off of me like. Is this a fee-only relationship?” So how are you paid is a big one.

Then another one would be like how is our relationship going to work. So you want to make sure that you and the financial planner are on the same page about how the relationship will work between the two of you. So like how often will you meet? Like how will you manage my assets? How do you plan to help me buy a house? Like kind of what does the relationship look like? Other than those big questions, I would simply just make sure that you jive with that financial planner.

Talking about your finances is a very intimate conversation, so you want to make sure like you are comfortable with that financial planner because you’re going to have some intimate talks about your finances. So you want to make sure that you’re comfortable opening up with that person and that your personalities kind of go together. In that way, you feel comfortable talking to them, and you feel comfortable sharing details about your finances, and you don’t feel like you have to hold back because either personalities clash or because you’re not really comfortable opening up with them.

[00:23:03] TU: Great overview. As we always say, shout out to Justin here who does our business development and our discovery calls on the front end, it has to be a good fit from both ends, right? If you as a client are going to make an investment of time and money, and our planning time is going to make an investment in that relationship as well, there has to be a good fit, and that starts with expectations in terms of folks being on the same page. I think that starts with making sure you’re comfortable what that relationship looks like and by asking some good questions, as Kim just highlighted there.

Kim, do you have an anonymous success story or two that you can share of clients of YFP Planning that really highlights the impact that a CFP can have and that the planning team can also have at large?

[00:23:46] KB: Yeah. I actually have a really good example. I had even mentioned it to Robert to make sure he was okay with me sharing. When I told him the example that I was going to use, he was completely on board with it, so I’m excited. But we had these long-term clients. They’ve been around with YFP I think longer than I have, but they had gone through residency. The wife had already graduated, and she was in her career. But the husband was still in residency. It was cool to be able to watch him finish his residency program.

Then once he had finished, they moved states to be closer to where he had received a job. They were living in a townhome, and they had done a couple of budgeting meetings with us, make sure they were saving correctly and make sure that they were saving enough for retirement. Then the question came about. They were like, “Well, we want to buy a house.” Behind the scenes, they had done all the math to figure out how long they needed to save in order to have that 20 percent down payment that we always hear about when it comes to home buying.

They had figured out that it was going to take them five years to save a 20 percent down payment, and they were really in the dumps about it. Like they enjoyed where they live, but they also wanted to be homeowners. They wanted to get that next chapter in their life started. So we had a call with them. We could kind of tell that they were down in the dumps about it being five more years before they could even really begin to seriously look at houses and put in offers and everything. Then we made the recommendation to them. We told them like, “You are eligible for a doctor loan, which with the doctor loan, you don’t have to have the 20 percent down payment.” So we went through the whole process of educating them on what a doctor loan is and what those terms look like and like why they don’t need the 20 percent down payment.

Then it was literally like 30 days to the mark after that conversation. They were closing on their first house without a 20 percent down payment. At this point, they’ve probably moved in. I haven’t talked to them lately, though. But it was awesome to be able to help them realize like, “Hey, we don’t have to wait five years to buy a house. We can buy a house now.” So they were over the moon, they had found a home and that the home ownership chapter was beginning. It was awesome to watch, and it also just made me realize, and they even mentioned it. Like without the YFP Planning team, like who knows if they would have ever even known what a doctor loan was, and that it could have been five more years before they actually got in the home. So it was awesome to be able to help them make that transition into the next chapter of their life.

[00:26:24] TU: I love that story. Thanks for sharing. What I love about that too is when we think about the pharmacists home loan, doctor loan products, we’ve talked about them on the podcast before, one of the I think challenges that can be there is if folks aren’t really evaluating that home purchase in the context of the rest of the financial plan, is that home-buying can be exciting. It can be emotional. It can be stressful. We can easily find ourselves down a path of the home purchase that may not jive with the rest of the financial plan.

You are here. Robert is with a client and not only being able to open up a new avenue that maybe wasn’t considered to make this home purchase a reality, but also considering and evaluating that and the rest of the financial plan. So how does a home purchase fit with also making sure we’re progressing for retirement and with other financial goals as well? So really cool story to share, and I think one of the things that you and the planning team do so well is striking this balance between taking care of our future selves but also living a rich life today. Both are really important, and that’s a great story and example of why it is.

Kim, thank you so much for taking time, number one, to come on the show, and excited to get you in front of the YFP community, if folks don’t know who you are, aren’t familiar with you yet. Again, congratulations on all the hard work that went into getting the CFP. I would remind folks that we’ve got a great guide an overview of the nuts and bolts to hiring a financial planner. You can download that for free at yourfinancialpharmacist.com/nutsandbolts.

Then for folks that are hearing this and saying, “Hey, I’d love to learn more about the planning services offered by Kim and the rest of the team at YFP Planning,” you can book a free discovery call with Justin Woods, our Director of Business Development. You can do that by going to yfpplanning.com. So, Kim, again, thank you so much.

[00:28:11] KB: Yeah, thank you for having me.

[END OF INTERVIEW]

[00:28:13] TU: Before we wrap up today’s episode of the Your Financial Pharmacist Podcast, I want to, again, thank our sponsor, Splash Financial. If you’ve ever considered refinancing your loans, check your rate now through Splash Financial. If you qualify, refinancing could help get you a lower monthly payment on your student loans or get a lower interest rate. Splash helps you shop and compare loan refinancing offers across lenders nationwide. Browsing rates through Splash Financial is fast, free, and won’t impact your credit until you complete a full application.

Now, when you successfully refinance $50,000 or more, Splash Financial will give you an extra $500 in cash bonus using our link, splashfinancial.com/yfp. So check your rate today and see what you might be able to save at splashfinancial.com/yfp.

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 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 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 date 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.

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YFP 253: YFP Planning Case Study #1: Growing a Family, Paying Off Student Loans, and Buying a House

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YFP Planning Case Study #1: Growing a Family, Paying Off Student Loans, and Buying a House

On this episode, sponsored by Insuring Income, YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® and Robert Lopez, CFP® to walk you through a financial planning case study on growing a family, paying off student loans, and buying a house.

About Today’s Guests

Kelly Reddy-Heffner, CFP®, CSLP®, CDFA®

Robert Lopez, CFP®

Episode Summary

Welcome to our very first YFP Planning case study. In this episode, YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® is joined by YFP Planning Lead Planners, YFP Planning Lead Financial Planner, Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® and Robert Lopez, CFP® to walk through a case study featuring fictitious clients facing real-life scenarios like growing their family, paying off student loans, and buying a home. While the Jones family may be made-up clients, their financial scenarios, facts, and goals resemble common areas of focus and concern for many long-term YFP Planning clients. Kelly and Robert detail the various options and information pertaining to the financial plan of our fictitious clients, the Jones family, laying out all of the case study client earnings, expenses, debt, and goals. The team discusses potential client considerations for the financial plan regarding student loan repayment and their growing family. Kelly and Robert touch on everything from PSLF to wealth protection, speculating the necessity of a whole life policy, and the advantages of a joint credit card. This behind-the-scenes look at YFP Planning will provide insight and understanding of what goes on at YFP Planning, plus a comprehensive analysis and education on the financial picture for the Jones family.

Key Points From This Episode

Introducing YFP Lead Planners, Kelly Reddy-Heffner and Robert Lopez.
Describing the fictitious family of today’s case study: Jason and Lauren Jones.
The Joneses’ earnings, expenses, and debt.
Their goals and concerns.
How their cash position fits in the context of their goals and debt.
The question of whether or not to go the PSLF route.
The tendency to get caught up emotionally without considering the mathematics.
How the Joneses should tackle the wealth-protection aspect of their financial planning.
Speculation of whether a whole life policy is necessary.
The benefits of having one joint credit card per family.
What the Joneses should consider with regards to the mortgage conversation.
The power of financial planning.
The wealth-building opportunities for the Joneses’ emergency fund.
The ideal amount to put aside as an emergency fund.
Investment options and recommendations.
How to approach college education funds.
The future prospects of a supplemental income for the Joneses.

Highlights

“[PSLF] is a huge conversation both emotionally and mathematically to work through.” — Robert Lopez, CFP® [0:13:39]

“There are very rare circumstances where a whole life policy is cost-effective and really necessary in the planning process.” — Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® [0:19:32]

“The power of financial planning is that process of planning.” — Robert Lopez, CFP® [0:23:44]

“Tying in a specific amount to a specific goal is very important.” — Kelly Reddy-Heffner, CFP®, CSLP®, CDFA® [0:26:47]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] TB: You’re listening to your Financial Pharmacist podcast, a show all about inspiring you, the pharmacy professional, on your path towards achieving financial freedom. Hi, I’m Tim Baker. Today we’re changing things up with a new type of episode. I sit down with YFP Lead Planners, Kelly Reddy-Heffner and Robert Lopez, to walk through a case study of a fictitious family, the Joneses.

Although the Joneses are not an actual couple we work with, they’re really a composite of clients we do work within reality. The first part of the discussion we lay the groundwork of the Jones’ jobs, salary situation, and where they live. We walk through their net worth and point out important elements of their financial situation. We also talk about their goals and what they’re trying to achieve.

We then talk through, how we would approach the Jones’ financial plan as if they were real clients. This is a bit of a behind-the-scenes look at what goes on at YFP planning. I hope you enjoy this episode, but first, let’s hear from our sponsor, and then we’ll jump in at the show.

[00:00:57] ANNOUNCER: This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term life insurance and own occupation-disability insurance. Insuring Income has a relationship with America’s top-rated term life insurance and disability insurance companies so that pharmacists like you can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage, supports clients in all 50 states, and makes sure all of your questions get answered. To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics, visit insuringincome.com/yourfinancialpharmacist. Again, that’s insuringincome.com/yourfinancialpharmacist.

[INTERVIEW]

[00:01:48] TB: What’s up, everybody? Welcome to our first YFP planning case study. This is a new concept that the team at YFP planning is going to test out. We want to launch these, I think at least once per quarter and the idea behind this concept for both the podcast and video that will be shown on YouTube is to give you a look behind the scenes of a fictitious client that we are going to work through and look at, various information regarding to their financial plan, their goals.

The idea is to give you a behind the scenes of how we would handle these fictitious clients in terms of giving them some thoughts and ideas behind their financial plan. Today I am joined by our two lead planners, Kelly Reddy-Heffner and Robert Lopez and in a second here, we’re going to go through the fact pattern on our first case, the Joneses. It’ll take us a little bit of time to go through all the different facts of the case and then we’re basically going to have an open table discussion of how we would approach this particular client. We’ll do — this client is fictitious, but it’s based on a group of clients that we worked with over the years in terms of some of the planning challenges that they face. We’re going to have a variety of type of clients that we’ll talk with as we roll out this series. Hey, guys, welcome to our first case study. How is things going in your neck of the woods, Kelly?

[00:03:12] KRH: It’s going well. It’s good to be back to doing some planning after the tax season. So happy to be talking about a case study.

[00:03:20] TB: Yes. Yes. Tax season is behind us. I guess we can say that at least the deadline is. It was an eventful tax season, no doubt. How about you, Robert? How have things going on, your end of things?

[00:03:31] RL: Well, we’re already in the nineties out here in Arizona, so we’re doing our best to make sure the AC doesn’t die on us.

[00:03:37] TB: Yeah, please. Especially with Spencer, make sure he’s nice and cool. It’s funny, we were just talking about this yesterday, 45 degrees in Columbus, Ohio, yesterday. I think this weekend is going to be 85, so that is the weather of the season. All right, so I’m going to share my screen here and for those of you on the podcast, you won’t be able to actually see us. We’re going to talk through this. If you’re watching the video, obviously, you’ll be able to follow along. Robert is going to kick us off on the high-level facts. Then I will get into the network statement and then Kelly is going to finish us off and talk about goals and some of the other miscellaneous. Robert, the screen is shared, why don’t you kick us off here?

[00:04:15] RL: Yeah. Just waiting for that screen to load up on my page. Today we’re going to be talking about the Joneses, and so to try to keep up here is Lauren and Jason Jones. They’re both 33 years old. Lauren is a clinical pharmacist working at a public hospital. Jason is an Electrical Engineer. Then six months ago, they welcomed their daughter Lucy into the world.

Lauren earns $118,000 at her main job and then has a side hustle with supplements where she does $10,000 regularly. Jason is getting 112,000 from the Electrical Engineering Firm. He filed the taxes, married filing jointly. They are living in wonderful Dallas, Texas. Their gross income combined is $240,000. That breaks down to about $20,000 a month. Then after their taxes and contributions to the cafeteria plan or retirement savings and insurance, now they bring home about $14,200 a month and then they get chopped up in their expenses.

They have fixed expenses of roughly $7500, variable expenses that can change from month to month or above $3600. Then their savings target right now is about $2700 a month. They’re living in a three-bedroom single-family house that they bought a few years ago in 2018. They used an FHA loan to put 3.5% down on $295,000 home. They have a 4.25% interest rate.

[00:05:36] TB: Awesome. If you look at their net worth statement, we’re going to start on the asset side. Between checking and savings, they have about 35,000 in a joint account, 85,000 in a savings account. Then Lauren also has a CD of $10,000 that will mature in a year. When we take a look at their investments in their Roth IRA, both Lauren and Jason have Roth IRAs. She has 25,000, Jason has 15. They’re not currently contributing to this. This is an IRA, a Roth IRA that was set up with a financial advisor when Lauren was in Pharmacy School, definitely hanging out there.

403(b) Lauren has one 85,000 that she’s contributing 5% with a 3% employer match. She thinks it’s primarily in target-date funds that has about 85,000. Jason has a 401K with 55. He’s contributing 7% with a 3% match. He also has a Roth 401K or basically, he contributes into the Roth side of things and he’s in an A 20 allocation. Then he also has an old 401K from a previous employer with about 15,000. He doesn’t really know what to do with. Then Lauren has $5,000 in an HSA that she’s contributing 36.50 which is the max for a single person for the year and just sitting in cash, right now. They have the primary home that Robert talked about and they think it’s worth about 355,000 now that they own jointly.

Then if you look at the liability side of things, they do have a credit card balance of 2000 that they pay off every month. They basically use it for points for travel. They have a personal loan of 6000. It’s Lauren’s debt that’s to the bank of mom and dad, that they basically pay 0% interest and I think they put about $1,000 towards that, if I have the note right. Then in terms of long-term debt, they both have car note. Lauren has a car that has a 15,000 balance dated as 23,000. The total payment per month between the two of them was about 825. Jason’s interest rate is five and a quarter, Lauren’s is 4%. The mortgage was 272,000 left on that.

Then Lauren, like a lot of pharmacies out there, has a good amount of student loans. She has a total 170, 145 of that is in the public program and then about 25,000 in private student loans with an interest rate of 7%. You put the total assets of 695 minus their total liabilities of 480,000. That equals their net worth, which is 207,000. Positive net worth, not too shabby, net 33. Some other things that they talked about is they’re filing jointly like Robert said, but they’re doing it themselves but feel like their situation is becoming more complex, potentially converting their house to a rental. Kelly will talk about that here in a second terms of goals.

The baby, Lucy being born six months ago and then potentially looking at PSLF, they think they’re missing out on some deductions and they typically owe money, two or $3,000 each year that they don’t necessarily have a plan to save for. Kelly, walk us through the Joneses, their goals, and any other miscellaneous things that they have going on.

[00:08:40] KRH: Yeah. After we get a good idea of net worth, which, Tim, you shared with us and some of those retirement contributions and other things that they’re doing. It’s really important to understand the goals, because that frames, what we’re doing the planning for. In this case, Lauren wants to aggressively pay off the student loans but has some concerns about PSLF. Jason is in disagreement. It’s something that’s on the list to talk about. They are thinking through adding an addition to their family over the next two years. They’d like to start saving for their daughter, Lucy’s college education, but unsure where to start. Thinking through housing and if they’re going to grow their family. What does that next house look like?

They’ve added an opportunity to maybe turn their current home into a rental property and yield some recurring revenue from that. Then Jason is thinking about some career exploration, not uncommon. Of course, we’ve seen a lot of that over the past year with job changes, transitions. So thinking that through and seeing what that will do to salary. Some of the other things to think about, which also contribute to the conversation and the one that we’ll have here today is Lauren believes that she could increase her supplemental income. She’s bringing in that 10,000 now, but believes she can grow that in the future.

Lauren is also thinking through the care of her mom with the children. Sometimes we’re also worrying about her parents. So she has that on her list to consider in the planning as well. They both like to travel, so having a budget for that is important. Although not a top priority, retirement age of 65 is on the list, as a consideration as well.

[00:10:29] TB: Awesome stuff, guys. Appreciate us setting that up. I guess what would be from a job when you guys look at this fact pattern, with this particular client, the Joneses. What are some things that jump out to you that you would want to focus on and dig in and see what we could do in terms of some help with their financial situation?

[00:10:47] RL: Kelly, why would you go first?

[00:10:48] KRH: Well, I certainly would think through the cash position and how that fits in the context of the goals and some of the debt that they currently have as well. That’s a common question is, we’ve accumulated quite a bit of cash, what do we do with it? I would say that would probably be a good starting point is where does it fit with their goals versus other things that they need to accomplish on this list here.

[00:11:18] TB: Yeah. I think for me, one of the areas and this is often true with a lot of our clients, especially in around this age is, what the heck are we doing with the student loans? Right? I think as the financial planning goes, as the student loan plan goes to the rest of the financial plan. So to me, I think having that discussion with Lauren and Jason about, to PSLF or not to PSLF, right? We recently, Robert, I listened to your episode here recently about PSLF and updates, and some of the success stories around PSLF. But I think probably having a conversation about this and then supporting in this with the math to determine, does it make sense to go this route or not. What’s your thought on that, Robert, as you would walk them through this particular part of their plan?

[00:12:09] RL: Yeah. I think, it will be really important to figure out what Lauren and Jason are disagreeing about when it comes to PSLF, though she not believe that the program is going to be valid or does she not believe that her ability to earn this, basically, is she going to work in the public sector for the remainder of those ten years.

[00:12:23] TB: Yeah.

[00:12:24] RL: She’s already got 30 payments as a part of that 20. If we’re saying that this is happening currently, all 30 of those payments are happening under no dollar payments and no interest, thanks to the COVID changes. We’re already a quarter of the way there. That gives us 75% more the way I think it’s going to be too hard to pass up on the value of that. So really just reiterating that this plan works, hey, I can point to specific YFP clients. I can point to specific numbers on how many people have earned this forgiveness. I can show how you are or are not on track for your own personal forgiveness to make sure that this is a valuable thing.

That really ties into a lot of the other goals here, right. As we decide to grow the family that can decrease our payments, as we decide to maybe take a step back from a career that Jason’s getting some burnout from, that can free up some cash flow for us to live month to month. I have to worry about making really aggressive student loan payments. That does allow us to be more aggressive towards the private side. If she wants to be aggressive towards new loans, let’s pay off that 7% aggressively as opposed to something that’s at 0% right now, and could be at 0% for still a little while.

Then show what the value of that forgiveness could look like, when we’re talking [inaudible 00:13:32] the way there, $80,000 of forgiveness easily depending on what their income is going to look like going forward. I think that’s a huge conversation both emotionally and mathematically to work through.

[00:13:43] TB: Yeah. I think sometimes, we get caught up in the emotion without actually taking a look at the math. I don’t think it’s out of the realm of possibility, especially in this day and age with the pandemic and some of the forbearance and the relief there that if you have three years, four years, five years of $0 payments, and then if you also have one or two years that is being calculated on a residency salary that you could pay, I don’t have the numbers in front me as supportive, but you could pay $60,000 in total and that could be on 170,000, 250,000, $300,000 of debt.

When you look at that total amount of forgiveness, the amount of being forgiven is not necessarily as important in PSLF, it’s more of the amount that you paid, but if you can then minimize that by looking at more of the pretax accounts, like the 403(b) the 401K. In this case with Jason, if we’re going that route, maybe, maybe he doesn’t do the Roth, but if they file separately, which they’re not doing right now, it doesn’t necessarily really matter. But then –

[00:14:49] RL: It would, it’s a community property state for Texas –

[00:14:51] TB: Oh, Texas, yeah. You’re right, could call out. So those are the things that as when I say as the student loan goes, the rest of the plan goes, because you would argue that, you would be able to save more for the long term, but then maybe even more for the short term, whether that’s a job transitions fund, a vacation fine or something like that, because right now, she’s paying, they’re paying $2100 in student loan payments which is probably on the high side, again, probably some meat on the bone with regard to how much they’re paying in interest.

Maybe the compromise is that they just pay off the private loans more aggressively or with the cash that they have on hand, maybe they just write a check, and the private loans are gone and then they pay the minimum on the public loans. I think to me one of the things that jumps out when the fact pattern is that the two of them disagree on that, I think is probably having them both come to the table and talk through some of the maybe the angst around that. To your point, Robert, it could be I don’t think I’m going to stay at this job very long and I want to move to the private sector. That’s a completely different conversation.

I think having more of those clarifying questions to determine, hey, is this a good mathematically it absolutely makes sense in most cases, but from a career perspective, from an emotional perspective, maybe not. One of the things that we didn’t, actually we skipped over when we were talking about, that I’ll go through quickly here, when we talk about the wealth protection, we typically talk about things like insurance estate planning. One of the things to mention is that they probably were okay insurance-wise before their daughter came. I typically say, especially with life insurance, that the two thing, or two of the things that you look at is, if you have a spouse, so check in this case, if you have a house, check. Then you have mouths to feed, typically want to make sure that you have enough insurance.

Right now, Lauren has $500,000 a term policy, a 30-year term policy that she bought through the financial advisor when she was in pharmacy school, along with one times group benefit that’s 118,000, so 600 plus thousand dollars in life insurance. Jason that’s 500,000 that he also bought and then a 50,000 flat amount through his employer. They also have a small life policy that is worth the death benefit, it’s 50,000 with a negligible cash value that paying about 70 bucks a month. Then from a short-term and long-term disability, pretty common. Lauren has a 60% benefit for short-term and long-term disability it isn’t an occupation. Jason does not have any short-term disability, but he does have a long-term disability that’s an occupation for two years and then switches to any occ, until Medicare age.

We’ve talked about this on the podcast in terms of how that works and maybe something to talk about a little bit more today. Lauren doesn’t have any professional liability outside of what her employer offers. Then from a wealth protection perspective, we typically look at the estate plan and right now they don’t have any documents in place, but they’re looking at Lauren’s employer. They have a legal benefit that they would work through. If I’m asking the question of what jumps out, this is probably one of the — outside of the student loan. This would probably be the one of the next things that I would look at in terms of the wealth protection, particularly with Lucy being born six months ago.

Kelly, what’s your thoughts as you look at more of the protection stuff, which is often not necessarily at the top of everyone’s mind, especially as they’re going through a lot of these life changes. Kelly, what’s your take in terms of how they should attack this part of their financial planning?

[00:18:28] KRH: Yeah. I would agree that this is often an area that is neglected. Even at annual reviews, we sometimes see estate planning documents still on the list. I think with Lucy for sure, getting a will in place, guardianship, very important, and having that taken care of would give them a lot of peace of mind, as well. As far as insurance coverage too, once you’re a parent, it would be highly unusual to probably be under $1,000,000. If you look at the goals that you have and some of the high-level calculations like, ten times income that would certainly put both of them well over $1,000,000 in terms of need.

I do like that it is purchased outside of their workplace that it is their own policy, but I guess it would be good to take a look at the details of the policies as well. As far as whole life, we have this conversation all the time. There is very rare circumstances where a whole life policy is cost-effective and really necessary in the planning process, so that would be one of the top priorities to look at that to see about surrender charges and use that money towards something better in the plan, perhaps the difference in increasing that term policy up to the amount that would be more adequate and of course, the disability as well.

Speaking of purchasing from outside, we recommend is the gold standard having your own disability policies, the 60% is reasonable, but Jason doesn’t have that short-term disability policy at all, so then you are looking at the emergency fund. Does that cover that or does he need his own policy as well? Just really looking at the fine print in the details and seeing, should they purchase that on their own as well.

[00:20:33] TB: Yeah. You can go out and purchase a short-term disability plan, but it probably it’s typically cost-prohibitive. I would probably just had the emergency fund. He’s covered from a long term disability, but he does have that wonky definition of two years on occupation and then any occ, after that, which is a little bit [inaudible 00:20:53] you should do there if you should go out and price a different policy and carry your own or just use what the employer has.

When you look at the debt, the outside of the of the student loans Robert, what are you seeing in terms of the personal loan, the credit card, the car note, the mortgage in general? Obviously, the conversation has changed a little bit in the last couple weeks and months with interest rates and where they’re going, but if you even assessment of where they’re [inaudible 00:21:19] debt perspective, what’s that look like to you?

[00:21:23] RL: Yeah. One credit card for a family these days is a little odd. I think it’s really awesome. We did just have a client come on board that they do just have the one joint card, using that for their monthly expenses to gain those points for travel. I love it. Having those points set aside for future travel points is really going to help them. The car notes 5.25% and 4% on those loans. Those would seem a little bit high in previous years, but it’s not too far out of bounds, right now. So I’m not sure they could refinance too much out of that.

Obviously, paying those off with the delta between what they’re getting on their savings accounts is a different conversation on, and it doesn’t make sense to carry those loans, yay or nay, but those are understandable loan amounts. Student loans at 7% interest, I think we can still maybe refinance those private loans down and probably get a better rate. There’s a bunch of tools that you can use online to find better rates between all the servicers and then the mortgage at 4.25%, yeah, for having this conversation six months ago we’re like let’s refinance, let’s get out of the FHA and do a conventional. We have at least 26% or 28% of equity in the home, so that wouldn’t have PMI on another loan. With the FHA, that PMI stays on for the life of the loan and if we were to refinance right now we’d end up with a worse rate.

The conversation with the mortgage would be how serious are we about getting another house? Are we going to be able to keep it as a rental? I think, the math doesn’t really work out too well for that, because there’s only about $200 of gap between what they’re paying on their mortgage right now. If we were to refinance that gap would even shrink. But how much is it going to cost to refinance from a funding fee or any points we have to pay? How much are we going to save on a monthly rate? Are we going to reset our amortization? We are going to start back at 30 or are we going to stay basically the 26 or 25 years that we have remaining on our loan since about 2018?

We can run those numbers and say, “If we keep this house for another five years, then it doesn’t make sense. Let’s just keep our 4.5 to 5%.” But if we know we’re going to leave within the next three years, because we’re going to grow our family farther and maybe we want to get into a better school district before we start getting Lucy towards that school age, which is a really common conversation, then maybe the math does start to work out well. We could still refi now get away from that PMI and then the math is going to flush out better. That’s really just a conversation that involves a bunch of steps of what are we really think we want to do with our life, what do we really think the math says, and what decisions does that lead us to. That’s really the power of financial planning is that process of planning.

[00:23:47] TB: Yeah, yeah. So much it’s not say about the plan, it’s about the act of planning. I think, it’s an interesting conversation to have, because in this particular case they think they can get $2800 a month as a rental, right now their mortgage is 2600, they’re paying that on a 30-year, four and a quarter. Probably when we wrote this out, four and a quarter was actually a higher rate, but if you can get that down and get rid of the PMI maybe you’re delta between what you can rent and what your mortgage would be, there’s a lot more. The other argument is because inventories are so low in a lot of different parts of the country, probably Dallas included, maybe the rent you can get is not 2800, maybe it’s 3032, I don’t know, but those would be some of the things that I want to dive a little bit deeper.

For some people, too, it’s like, “What’s the catalyst behind renting it out?” If it is from a wealth building perspective, maybe your point the math says, maybe sell it and roll it into your new home and minimize expenses on that. Maybe with Jason, maybe part of his idea in terms of shifting careers is more along the lines of supplement in his new career with real estate or something like that, and maybe an effort to diversify income. But to your point, I think it’s just like the PSLF discussion. I think it’s having a conversation that is supported with the emotional, but also the math in terms of what it looks like, and because things change, it seems like all the time with markets and interest rates and home values and rental, all that stuff, it constantly changes. I think having a little bit more of a clarifying discussion.

Kelly, if we assume that we’re going to go down the PSLF route and we’re really trying to make sure that the investments are buttoned up and really the cash is deployed in the most optimized sense, we’re looking at with this particular client would we say about $130,000 in cash between check in savings and the CD they have. So if we look at – we think would be in an emergency fund and how we would set up their investments. What are some opportunities for this excess of cash and what they can potentially do with that? What’s your take on that, if they’re asking, hey, because one of the things that we’re hearing from real clients is like, “Hey, with the forbearance we haven’t been paying towards our loans and we know that that’s good, but it’s also a bad thing because that cash is just sitting there not really doing anything.” If you’re looking at things travel or transition, or a mom fund, how would you approach the client in terms of trying to deconstruct what to do with this cash?

[00:26:23] KRH: I do think and I’m not sure if I’ll answer the question specifically, but I think it is indirectly related. It does really help to earmark those large portions of cash. So what is the emergency fund like we say six months, those necessary expenses, mortgage, student loan payment, car payments, from there, the travel budget really tying in a specific amount to a specific goal is very important. Then once you see what that looks like that is a much better view of what’s left. I guess in terms of debt, I would take a look at, is it paying off the private loan? We get asked that a lot. Invest versus private loan, I would see about a refi rate versus just paying it off directly.

In terms of the wealth-building, there are certainly a lot of opportunities if you’re pursuing a PSLF option to really look at how much is being contributed into the 403 B, it’s well under the limit of 20,500 for 2022. Jason’s going into the Roth side, he’s not at the maximum either, so looking at that contribution rate. Now with Lucy, I guess asking the question, is Lucy on Lauren’s health insurance or Jason’s? If she can be on Lauren’s, that HSA amount increases substantially as well to over $7,000.

Those would be the places where that’s always a great conversation with PSLF is, what else can you be doing? So not only are you not paying the student loan, you’re not having to put that money towards a payment amount, but then you’re also building wealth on the back end towards your savings capacity.

[00:28:14] TB: What do you guys typically see or what do you typically recommend in for an average client like this in terms of our emergency fund, are we saying emergency fund is 80,000 10,000? If you had to do a roundabout guess in terms of what you’re seeing in terms of an average emergency fund, what would you say you’re seeing?

[00:28:32] RL: Yeah. I like to break cash down to pure ratios. My checking accounts, I like to have a floor. Everybody resets their zero when they’re making it in life, right? When you’re in high school and college, maybe it’s zero, dollars is to zero. When you make a little bit of money, it’s a thousand bucks and it’s 10,000 bucks you want to have that feels like your real “Oh, no” moment. There we go. So I like to see 1.5 X, so one and a half times your monthly expenses in your checking account, that’s just to make sure you never overdraft, you never do anything crazy, from a savings account perspective, we always hear that 36 months for two people, if they’re both in very secure jobs, I think three months is going to be good enough. That’s generally going to be long enough for long-term disability to kick in depending on the plan, if it’s got a 90-day or 180-day exclusion period.

If we’re thinking that maybe there’s going to be some career change opportunity happening, then I’d like to be closer to six months of net expenses, I definitely want to be closer to that and you can decide if that’s just fixed expenses or if it’s all expenses. People are generally really bad at judging out what their expenses are for monthly basis, so I just take all expenses and make that our emergency savings. So for a client this, I think that we’re just going to need to have 60 grand kinda set aside. They’re spending about 10K a month between fixed and variable expenses. If we want six months, so that’s in 60K in an emergency savings wouldn’t be about right for them.

[00:29:50] TB: Yeah. That’s about half of what the cash that they have on hand, thereabouts. I think typically and it would probably be in a traditional case if Lauren and Jason were saying like, “Hey, we’re good with these jobs, more than likely they’re probably pretty secure. It might be half of that, but I think to account for some of the transition and give them some runway, if he does take a step back in salary, it makes a lot of sense.

I’m with you, Kelly. I personally like the idea of setting up a high-yield savings account that is called an emergency fund. Set in a high yield savings account or sub-accounts, that’s called travel. Our travel fund at Ally has sub-accounts that is like RV camping trips, Paris, which we just got back from our big trip this year, is Disney World, right? The idea is that we have goals for each of them, we turn that off and then we go on to the next thing. So we nerd out a little bit and get very granular with that and I think it does help, because it pushes the goals. Sometimes I think, if you have a big pot of money, you’re doing some of the earmarking already, but it’s a little bit more nebulous. Where it’s like, “Oh, okay. I think some of this is for X, some of this is for Y.

If you’re going to do that anyway, just actually do the accounting. That’s not everyone’s cup of tea, I get it. Sometimes it’s more percentages or things like that, but I think sometimes that’s one of the beauty of like a 401K or an IRA is that when you save money, do your 401K and all make that comes out of your paycheck, but for you to reach into that cookie jar and get that money out, there’s a lot of penalties, 10%, you pay taxes and things like that. At least from a savings perspective, we’re labeling it, and we have a goal set up that if I rob the Disney World account to go buy a Tesla, I’m going through that, at least mental barrier to do that.

I’m a proponent of building a savings plan and drawing those lines. Let’s talk about one thing that we haven’t talked about too much in depth is just the investments. When you look at are they saving enough right now, 5%, 7% for Lauren, and Jason respectively, they do get a match, target date funds 80-20 allocation for Lauren and Jason respectively. They have a taxable account, it’s a Robinhood account that he’s doing, individual stocks, ETFs. What’s your overall impression, Kelly, of the investment account? Then let’s talk about the retirement stuff and then we’ll pivot and we’ll talk about the education stuff. Kelly, what’s your take when you look at their investments?

[00:32:14] KRH: Right, I mean, sometimes target date funds are the best option in an employer-sponsored plan, but that would be the first place I would look to see what are the fees for the target date funds? Does it match Lauren’s risk tolerance and appropriate asset allocation and see if there’s a portfolio that can be developed that would be better? Again, sometimes that’s not the case.

As far as Jason, I guess I would be wondering if the 80-20 asset allocation was appropriate for his age and if maybe he should be taking on a little bit more risk now, of course, we’d be looking at his score and having that conversation from the risk tolerance as far as just in general with the taxable accounts too. I think one of the lessons from the tax season is just that these do have an impact on our tax liability, which can sometimes be a surprise at the end of the year. I think it’s always good to check in on just having that conversation, how does this fit with overall goals and what you want to accomplish and making sure just some high level facts.

The IRS is now having the conversation about cryptocurrencies, like, know what to expect, wash sales. All those pieces that individual investors really do need to take into account as they’re thinking through how they manage those. Would it be better somewhere else too.

[00:33:48] TB: Yeah. I mean, one of the things that I would call out here is in the fact, pattern. Jason’s doing $200 into his Robinhood account, so $2400. I would just ask a question like what’s it for? Sometimes the answer is like, “I don’t know, just to mess around.” Which is fine, but is that worth maybe deferring, should we earmark this for the transaction fund or for X, Y, or Z? The other thing that they’re probably doing that they don’t necessarily need to do, because they have the cash is they’re putting $500 into a joint account. They’re probably set there. Maybe we redeploy that into a travel fund or a mom fund or something like that, but I would agree with you, target date funds might be okay, might not be the most cost effective or align best with the risk tolerance.

You could argue with Jason being 33 in 80-20 allocation, 20% in bonds, might not be the best. Is there an opportunity to invest the HSA, right now it’s sitting on cash. She has 5,000, she’s contributing another 3,650, might be up to be to get that rolling and then maybe cash flow some health expenses. With a baby coming up maybe they don’t stay in a high-deductible health plan and maybe they switch over for that year, which turns off the HSA. All of these things I think are on the table. Robert, as you look at the education, so we see this a lot. Lauren and Jason are basically saying like, “We want to save for Lucy’s education, she’s six months old.” Sometimes people go behind even at six months old, but don’t know where to start. They’re in Dallas Texas. How would you start that conversation of how to approach the college savings conversation?

[00:35:23] RL: Yeah. Anybody who’s got student loans, wants to make sure that their children don’t have the same problems and issues that they have. So it’s a really common thing of, “What can we be doing and when should we be doing it.” With 529’s college savings accounts, those are probably going to be your best bet in most places, unless they’re both alumni of a particular school and that school has some prepaid credit options where you can actually pay for college credits now and they’ll be matched whatever they are in the future. That would be an option. But for the most part, 529 savings plans is where is at.

Now in other states you get a discount on your state taxes for that. Texas does not have any state taxes or income, so they can choose any 529. There’s some great ones out there. Some of my favorite ones actually have a feature that allows you to send a link to family, so then family can send money to the 529 as well. So that’s a great way to go about as well. Even if you just set that account up. I guarantee, I have a nine month old here in the house and they have way too many toys and people are going to start sending them more toys for the next six months, so instead of just sending out a 529 plan link to somebody that they can give $50 to the education savings account instead, which is better than having a little plastic drum in behind you in a video, so you can make noises or memes. That’s a great way to go about it, but really anything they do now is going to be beneficial.

We’re never sure what the college landscape’s going to look like in the future. Highly unlikely that it’s going to stay on the same trajectory that it’s at now, that would be completely untenable. But just getting something going and then allowing other family members to contribute so then, they can also feel like they’re involved in Lucy’s life. This maybe the first grandchild, this could be the first nephew, the first cousins to be the first of many or the first of only. We really want to make sure that everyone can be included.

[00:37:01] TB: Yeah, it’s so true. It’s like the war on plastic. I feel like Liam had so many cars and things like that. He doesn’t need any more of that stuff, so here’s a link and contribute to a gift that way. I think one of the places I would start even before get into that vehicle and to your point with them being in Texas where there is no state income tax, and you can do this in any state, but a lot of the time, if you’re a resident of Ohio, you’re going to contribute to Ohio’s. If you’re resident of Maryland, you’re going to contribute to Maryland’s, because they give tax benefit for that, but not all 529s are created equal. So you have different expenses and things like that. So you definitely want to make sure that you’re finding a plan that all things being equal has good investments, low cost, that type of thing.

I think probably one of the things that I would least start the conversation and sometimes it’s like, I don’t know, it’s like, what’s the goal? I’ve seen the spectrum, Robert, where it’s like, well, I’ve had to deal with my student loan, so my kid has to figure that out as well to like, what you said is I never want my kid to have to go through this. To me, it’s deconstructing, what is the goal? Most of the time when I feel when I ask that question of, what’s the goal with the planning for your kid’s education, it’s a shrug emoji, not really sure. But then sometimes we paint a little a picture of, so we talked about the one third rule in prior podcasts.

One third could be, you say even something like a 529, one third of tuition of this could be from when Lucy is 18 and you’re basically paying tuition out of your present paycheck. Then one third could be from things like grants, scholarships. Then last but not least, student loans. So you attack it that way. So if you’re trying to achieve a funding goal, 33% in your 529, you can work with an advisor and try to figure out what that is. But I think it’s having that conversation and get, I know some clients are like, I want to put my kid through four years of college, master’s, doctorate. Then that’s obviously a much bigger monthly amount that they have to save for, but. the earlier you do, the better because if not, if you’re still trying to achieve that, you’re paying that much, much more in future dollars without the benefit of it being able to invest in compound. I think it’s a worthy conversation is build out that part of the plan.

Any other call outs that you would say as you’re looking at this particular couple, the Joneses, is that either from a tax perspective, a cash, a debt, a wealth protection with insurance that you would say, “Hey, this is probably something that we really need to talk about.” I mean, I think probably the one that we didn’t dive too deep in is, what is the future prospects of a supplemental income?

She makes it seem here that she can increase it fairly substantially, but then also probably the other thing that I would want to talk more about is just what’s the situation with mom? What’s that timeline? What’s that look like? How are we going to prepare for that? Is that something that we’re looking at in terms of the next home purchase, which again is probably another point of conversation is, what’s the timeline for that? What’s your guys take on that?

[00:40:08] KRH: I mean, I think right, the housing we just had a recent conversation with a client about their next house. They were thinking through about having room for a parent or both sets of parents. I think when we do the estate planning conversation, it is always interesting how a lot of times it does come up about parents and their needs too, so making sure they have documents in place that are here and that you have a good understanding of expectations is really important, because it is a lot of work to take care of a child and a parent at the same time. The more clarity you can have, the better for sure. I would say that’s pretty important. Do they need long-term care insurance? Do they have it? What resources do they have available to help you help them in the process?

[00:41:01] TB: Yeah, absolutely. How about you, Robert, any other closing thoughts?

[00:41:04] RL: Yeah. I don’t know if we touched on the professional liability. I think that’s a big one. We’re getting that policy in place, the hospitals protecting her when she’s at work, but definitely not when she’s doing her supplemental income job. Even if the hospitals protecting her, they’re really protecting themselves, so it’s really important to have a policy of your own. These policies are very inexpensive relative to some other stuff for paying, so I think that that going out and getting professional liability policy would be easy and quick and a good solution.

[00:41:31] TB: Yeah. I mean, I think there’s some more to be done on the wealth protection stuff with the estate documents, probably be looking at some of the life insurance, maybe disability. Yeah, professional liability, low hanging fruit. I definitely probably in down the road if they are looking at a rental property and probably and one of the things that we haven’t called out here that we typically see with a lot of our clients, they have kids, they don’t take advantage of all the things available to them at IE like FSA for dependent care. If that’s something that we’re spending money on with Lucy, so probably some help with taxes in the future, perhaps, especially if they’re looking at a PSLF now you could argue with Texas, there’s no state income tax you really just need help with the federal.

As you’re looking at maybe a rental property and another baby PSLF and you feel you’re missing out on deductions and you’re owing that money, maybe some proactive planning around that as the financial situation becomes more complex is something that you might want to get a helping hand with. But yeah, good stuff, guys. We’ll leave it there. We really appreciate the conversation, looking forward to doing many more of these in the future. Yeah, thanks for doing this today.

[00:42:37] RL: Yeah, enjoy it Tim.

[00:42:38] KRH: All right, thanks, Tim.

[END OF EPISODE]

[00:42:41] ANNOUNCER: Before we wrap up today’s show, let’s hear an important message from our sponsor Insuring Income. If you are in the market to add own occupation disability insurance, term life insurance or both, Insuring Income would love to be your resource. Insuring Income has relationships with all of the high-quality disability insurance and life insurance carriers you should be considering and can help you design coverage to best protect you and your family. Head on over to insuranceincome.com/yourfinancialpharmacist or click on their link in the show notes to request quotes, ask a question, or start down your own path of learning more about this necessary protection.

As we conclude this week’s podcast and important reminder that the content on this show is provided to you for informational purposes only and is not intended provide and should not be relied on for investment or any other advice. Information to the podcasts 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 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 date publish. Such information may contain forward looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.

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

[END]

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YFP 250: 10 Takeaways from 50 Financial Conversations with Pharmacists

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10 Takeaways from 50 Financial Conversations with Pharmacists

On today’s episode, sponsored by Splash Financial, YFP Director of Business Development, Justin Woods, PharmD talks about 10 takeaways from more than 50 discovery calls he’s conducted, where he has had a close look at the financial goals and concerns of pharmacists across the country.

About Today’s Guest

Justin Woods, PharmD received his Doctor of Pharmacy degree from Albany College of Pharmacy and Health Sciences, completed two years of postgraduate residency training at The Ohio State University College of Pharmacy, and is currently in his final semester at the University of Nebraska at Omaha pursuing a Masters in Business Administration degree.

Justin has spent nearly 10 years as a practicing pharmacist in community and specialty pharmacy settings. Originally from Upstate New York, Justin met his wife, Sara, also a pharmacist, during residency in Columbus, OH. They lived in Omaha, NE for four years and currently reside in Richmond, VA.

Justin is looking forward to connecting with our community and communicating the value of YFP to help pharmacists on a similar path as himself toward achieving financial freedom.

Episode Summary

Knowing the steps to reach your financial goals can be overwhelming and confusing, particularly at the start. YFP Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with Justin Woods, PharmD, a fellow pharmacist and YFP Director of Business Development. Currently, Justin leads the discovery call process designed to help individuals determine whether or not the comprehensive financial planning services at YFP Planning comprehensive are a good fit for them. Since joining the YFP team in November 2021, Justin has conducted more than 50 of these discovery calls. Justin talks about ten takeaways he has had from these conversations. Justin shares his unique experience working at YFP and how he has gone from a fan of the podcast to the Director of Business Development. Justin explains how his prior experience as a YFP Planning client helps him conduct discovery calls, the benefits of discovery calls, what makes the YFP approach to financial planning different, and the best time to start your financial planning journey. Finally, Justin details why financial planning requires a substantial investment of time and money, why the transparency of the fees involved is so important, and addresses the most common question he hears, “What’s the return on investment?”

Key Points From This Episode

What YFP Planning has to offer clients and what discovery calls are.
Why people feel guilty about their financial situation when seeking advice.
The concerns clients have regarding saving up for retirement.
The prevalence of questions and interest that Justin experiences regarding real estate.
A brief outline of the concerns around repayment of student debt and the PSLF program.
Why YFP Planning services are suited for non-pharmacists as well.
The importance of involving both partners in the planning process.
When is the best time to begin the financial planning process.
Justin outlines some of the fees associated with the planning process.
An explanation of the “fee-only” model that YFP Planning uses.
Challenges around estimating the return on investment for clients.
The benefits of coupling your financial plan with a tax plan.

Highlights

“Generally speaking, if you have the motivation to book a discovery call, to find time in your busy schedule to prioritize your financial wellness, you’re making a big step and that should be acknowledged.” — Justin Woods, PharmD [0:11:24]

“In most models of financial planning, the more that you put money into an IRA, brokerage accounts, the more the advisor gets paid.” — Justin Woods, PharmD [0:16:34]

“We’re called Your Financial Pharmacist, but our planning services are technically for people of all income levels, all career backgrounds.” — Justin Woods, PharmD [0:21:47]

“Over time, investments are a tool to actually combat inflation and, with proper allocation, keeping expenses in your investment accounts low, your investments will grow with the market.” — Justin Woods, PharmD [0:30:13]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] 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 had a chance to welcome fellow pharmacist and YFP director of business development, Justin Woods on to the show. Justin leads our discovery call process designed to help individuals determine whether or not YFP Planning and its comprehensive financial planning services are a good fit for them. Since joining the YFP team in November 2021, Justin has conducted more than 50 of this discovery calls.

And on today’s show, we talk about 10 takeaways he has had from these conversations where he’s had a close look at the financial goals and concerns of pharmacists across the country. Some of my favorite moments from the show include hearing Justin talk about the various guilt individuals have when reaching out to a financial planner, whether that be about a previous mistake, join the club, feeling like they could be doing more or even as you’ll hear Justin say, having too much cash on hand.

Also, hearing Justin talk about determining when the timing is right to work with a planner and why there is a cost to not starting with the financial planner. Why planning requires a substantial investment of time and money and why the transparency of the fees involved is so important and how he answers the most common questions he gets, which is, “What’s the return on investment of the planning services?” Okay, let’s hear from today’s sponsor and then jump into my interview with Justin.

This episode of Your Financial Pharmacist Podcast is sponsored by Splash Financial. With interest rates on the rise, it’s a good time to evaluate the refinancing of your student loans. If you’ve ever considered refinancing your loans, check your rate now through Splash Financial.

Refinancing could help you get a lower monthly payment on your student loans or get a lower interest rate. Splash helps you shop and compare loan refinancing offers across lenders nationwide. Browsing rates through Splash Financial is fast, free and won’t impact your credit and now, when you successfully refinanced $50,000 or more, Splash Financial will give you an extra $500 in cash bonus, using our link at splashfinancial.com/yfp. Check your rate today and see what you might be able to save at splashfinancial.com/yfp.

[INTERVIEW]

[0:02:16.8] TU: Justin, welcome to the show.

[0:02:18.4] JW: Hey, Tim. Pleasure to join you. A bit surreal, actually, since I’ve been a long-time listener of the podcast since 2017 now, and now feature as a guest in addition to being part of the YFP team.

[0:02:29.0] TU: We are so glad, Justin, to have you as a part of the team. You and I have known each other for sometime on the pharmacy world, we completed residencies a few years apart of your house at University College of Pharmacy, had some great shared mentors there and are really excited to have you as a part of the YFP team.

[0:02:45.2] JW: Definitely. One quick point before we get started, I don’t want our listeners to think this podcast is having an issue buffering when I’m speaking. I do have a stutter or as I like to say, I speak with a remix. That is my one disclaimer for folks who might not know me since I’m human and you may hear a stutter periodically throughout this episode.

[0:03:06.1] TU: Appreciate that, Justin. So, here we are, episode 250, we just crossed a million downloads. Thank you so much to the YFP community, the support that you’ve provided us since launching the podcast in July of 2017. Really, a surreal moment for us and for folks that had been listening for a while, if you haven’t yet done so, if you could please do us a favor and leave us a rating and review on Apple Podcast, wherever you’re listening to the show, we’d really appreciate that and be a great way to help others find the show as well. Thank you so much for the ongoing support that everyone has provided.

Today, we’re going to be talking, Justin and I, about 10 takeaways that he has had in 50 plus conversations with pharmacist about t heir financial goals, about their financial plan, since he joined the YFP team in mid-November of 2021. These conversations come through the discovery call that we offer folks and Justin leads these efforts, these discovery calls are an opportunity to learn more about YFP Planning and comprehensive planning services and folks can learn more at yfpplanning.com.

Justin, before we jump into your story, before we talk more about the takeaways that you have had through these 50 plus conversations, give our listeners who may not be familiar with the planning services offered by YFP Planning, more insights into what the discovery call is, why it’s important and what they could expect?

[0:04:31.5] JW: To be honest, hiring a financial planner, it’s a big investment in time and dollars. With that said, our model is worth it for the right people and it’s wrong for some and that’s certainly okay. And through a discovery call, I seek to understand your specific financial needs and concerns. I meet with people who vary, in terms of their season of life.

Some folks are new practitioners building their careers while simultaneously tackling student loan debt, learning how to be efficient with their income, others are growing personally by starting a family or purchasing a home, some are mid-career, seeking to optimize their income, given more cashflow through being debt free here just no longer paying for daycare.

Then we have pharmacists who are near retirement and want to protect the assets that they worked so hard for. Typically, people share, they feel overwhelmed or concerned about their debt. Maybe even frustrated that they’re making a good income but are not progressing financially. I also hear some folks are unsure if they’re optimizing the income they’re making or even afraid that they won’t be financially secure in retirement.

And it is only through a discovery call process that we can uncover your financial why and understand if YFP has solutions that fit your needs. In terms of what to expect when you take that initial step to book a discovery call, you first book the call through our scheduling application that shows you my availability to help find the best time that works with your schedule, we conduct these calls via zoom conference and in fact, when you become a YFP Planning client, you work in a virtual space with your lead planner as well.

The meeting will last 30 to 60 minutes, depending on where their conversation goes. I do take notes throughout the process to capture information in the moment and also because, if you take the next step to become a client of YFP Planning, anything we discuss goes directly to your lead planner to review before your first meeting with them.

[0:06:48.9] TU: Great stuff, Justin, and for folks that are listening, maybe had been following the community for some time and they’re ready to take that step, they can do so. By going to yfpplanning.com, they’ll see that option to schedule a discovery call, they’ll see your face and they can pick a date and time that works for your calendar and works for their schedule as well.

Let’s jump into 10 takeaways that you’ve had. Now that we framed what the discovery call is, we’re going to talk about 10 takeaways you’ve had through over 50 of these discovery call, financial conversations with pharmacists over the last few months.

I think the first one is a good segue from what you just shared that this is really about discovering more about an individual’s financial plan and their goals, it’s hence called the discovery call and number one, I think the thing that we first see is that individuals might be seeking financial advice in these calls and my question is, what’s the problem here, isn’t that the team at YFP Planning has expertise in? Tell us more about this one.

[0:07:44.7] JW: Yes, right, exactly. Trust me, I’m not an expert in personal finance. You can certainly ask my own YFP financial planner, Kelly Reddy-Heffner. In fact, I’ve made many mistakes that you, Tim, outlined in episode 247 of 10 common financial mistakes pharmacists make.

Realistically, five months ago, I was a practicing pharmacist. I’ve spent 10 years in community and especially pharmacy settings including two years of residency at Ohio State, go Buckeyes. If you’re listening right now and afraid I’m going to test your financial literacy on a discovery call, I promise, you have nothing to worry about when I’m on that other side of the screen but even though, I’m not a financial planner, I do understand our comprehensive financial planning service better than most folks since I see it from the inside as part of the YFP team.

But my wife, Sara, also a pharmacist and I are YFP Planning clients as well. For a bit of background about the industry, a survey of financial advisors show that advisors spend 15 to 20% of their time on business development activities as in meeting with perspective clients and in our model, our financial planners focus solely on financial planning and I lead those discovery calls.

[0:09:10.1] TU: That’s a great call, Justin. I don’t think that’s something we’ve talked about before on the show that the model we’ve chosen is to really let the planners be really good lead planners so they can focus on the needs and the issues that the client is bringing forth and then obviously, your role, and Tim and I have shared some of this as well, to really focus on some more of those business development activities and I would even further contend, Justin, that I often said this.

Hey, I’m not a financial planner as well, I love the topic, I love to learn but I think there’s often value and not getting in the tactical weeds, right? In that first call, when you’re really just trying to understand, what are the goals, what are the hopes, what are the dreams, what are the pain points, what are the problems so that we don’t get sucked into very detailed student loan repayment or investing strategy but rather, we can just really learn about what is of greatest need and significance to the client. It’s so important early on in that relationship.

Number two, Justin, I often felt like you know, I still joke with folks as that I feel like sometimes when I do a talk or people come and talk to me, it’s almost like financial confession, you know, sometimes. Number two is I think that folks may feel like, “Hey, I’m coming with some guilt about the financial situation.” This one resonates with me, I felt a lot of financial guilt and pressure early on in my journey. Tell us more about what you’re seeing here?

[0:10:25.2] JW: Yeah, this was an element I honestly did not anticipate early on when I started taking discovery calls, particularly knowing my own financial mistakes. It has been fairly common for people to acknowledge they feel guilty or feel ashamed of how sharing or admitting a piece of their financial lifestyle that they’re not proud of, it could be related to a number of things, like their lack of a budget or consistently sticking to a budget, maybe the amount of student loan debt they have, not being able to clearly define their financial goals and more recently, many people have shared, they feel guilty about having a large amount of money sitting in their checking or savings account since their expenses were minimized during the pandemic and they just don’t know what the best strategy is but also know, it’s losing value sitting in a checking or savings account.

Generally speaking, if you have the motivation to book a discovery call to find time in your busy schedule to prioritize your financial wellness, you’re making a big step and that should be acknowledged. That should be celebrated. It’s okay to be human, you’re obviously aware that a change needs to happen on your financial path and whether financial planning can achieve what you need, it’s something we’ll talk thorough together. It’s similar to working with patients, right? When you have an engaged patient, ready to make a change, there are certainly a greater likelihood for success.

[0:12:00.8] TU: Absolutely, and then, number three on our list here of common things you’re hearing through these 50 plus conversations is, you know, folks coming in with questions, perhaps some concern about saving for retirement, why is this such a common concern?

[0:12:16.0] JW: Yeah, this is the second biggest concern from potential clients is saving for retirement. They share that they feel behind for retirement but they’re not sure why they feel that way. They say, “I just know I don’t want to work forever” or “I’m not confident, I’m on the right track for retirement because I don’t know what the finish line is or how to track my progress.”

The typical question is, “Is retirement and age, is retirement a dollar amount?” People often admit that because it is a goal that’s decades away, it’s hard to relate to and objectify. Honestly, that’s just human psychology. The further away something is, the harder it is to relate to. Typically, when people bring up retirement, I ask them, “You know, of the steps you’ve taken so far, do you think you’re on the right track?” and inevitably, the answer is a clear “No” or they refer to the chart on the dashboard of your 401(k) account, right?

Through the planning process, our planners help clients conduct what’s called a “nest egg calculation” or the amount of money that you would need to retire comfortably. The last time I did this calculation for my wife and I, it was about 3.3 million dollars and this is generally where people, look at me, I haver three million heads, right? Since it’s a big number, way in the future.

Whether retirement’s 20 years away, 10 years away, 40 years away, the big question is, what does that actually mean in today’s dollars and what do I do with that number? I think a good financial plan will really take that information, distill it down to, “Okay, let’s discount that information back to today’s numbers, what does that mean for how much we need to be saving each and every month?” and then, let’s begin to put a plan in place based on the tools we have.

Like a 401(k), a 403(b), and IRA. Automate that plan so we’re contributing in a tax efficient manner or keeping the fees low and we’re allowing compound interest to do its magic and time, value, money to kind of take its course.

[0:14:34.8] TU: Great stuff, Justin. I think we often think about retirement as a hope, a wish, a dream or a big scary data off in the future or we do get a little bit more granular, maybe punch some numbers in a calculator and then the number that’s spit out were like, that feels impossible, right?

[0:14:49.5] JW: Right.

[0:14:50.5] TU: I feel behind or I’m worried about that becoming a reality and I think, what I really hear there is that value in coaching of bringing that to life and then, let’s make sure we put that into numbers that mean something today and let’s also make sure we’re prioritizing that along with other goals that we’re working on with the financial planning, that’s great stuff.

Number four, the prevalence of questions and interest that you’re seeing in real estate. Both purchase of a primary home as well as in investment properties. I think this – I will say, this doesn’t surprise me, right? We’ve seen a lot of growing interest in real estate investing.

Part of the reason we launched the Real Estate Investing Podcast, we certainly have felt the interesting home buying, could be a first home, second home, obviously we know that that market is pretty wild right now. Tell us more about what you’re seeing here?

[0:15:35.2] JW: Yeah, I mentioned a bit ago that retirement was the second top concern of people I meet with, another top five concern is home purchase. What I found is that this is not limited to people who are buying their first home. I also hear this concern from people who have outgrown their current home or maybe looking for a second home, a vacation home.

Followed closely behind that topic of home purchase is interest in real estate investing. The prevalence of this topic as you said could be due to the nature of our podcast content, particular when they and David on the Real Estate Investing Podcast.

But for most people, it seems like real estate is an outlet for their entrepreneurial spirit and helps also create passive income but I also think it’s due to the nature of our fee only financial planning model. As Tim Baker shared in episode one of the Real Estate Investing Podcast, in most models of financial planning, the more that you put money into an IRA, brokerage accounts, the more the advisor gets paid.

They’re not incentivized to say, “Hey, maybe you should dump $50,000 into this property?” Because again, it takes away from that traditional investment vehicle. But our team does view real estate investing as a method to build wealth and we have the resources to help people through that process if that is the path you want to take.

[0:17:10.4] TU: Great stuff, this is another example, just like we often talked about with, “Hey, when you work with a planner, if you’ve got student loans and they don’t understand student loans, that’s a problem” right? If you’re working with a planner that maybe doesn’t prioritize or value real estate investing as an option, right?

We’re not saying this for everyone but it’s an option to consider, has experienced either themselves or advising other folks. Such an important distinction in that relationship. Number five, to no surprise, we’ve just talked about this in episode 248 of the podcast as I mentioned is, folks coming with questions, confusion, angst, excitement, any other emotion I think, surrounding PSLF. Tell us more ab out what you’re seeing here?

[0:17:49.6] JW: Yeah, as you said, if you’re listening and new to the term PSLF, definitely queue up episode 248 to learn more about the program and hear some of the pharmacist success stories there.

Since I did not practice as a pharmacist for a nonprofit or a 503(c) organization, I wasn’t eligible for PSLF but through my role here at YFP, I quickly learned how overwhelming and confusing the process can be for some people and personally, I would want an expert to help me through that process, to help me get thousands of dollars wiped away after a hundred twenty payments. That is what I hear on discovery calls as well.

People are confused about the nuances of the program, confused about how to optimize the repayment strategy in a tax efficient way and need a partner to help get them across the finish line. Obviously, I have a biased opinion but I’ve heard the success stories and I see the joy our team shares on Slack when they help a particular planning client get those loans forgiven. If you’re a pharmacist listening and need the support of a team to give you that peace of mind that we can get you to the finish line, YFP Planning is your best option.

[0:19:13.7] TU: Awesome stuff. Number six, Justin, is spouses or significant others where maybe one is a pharmacist and one is not and you know, maybe wondering, “Is YFP Planning even for us? Do we both have to be pharmacists or do you guys work with non-pharmacist?” Tell us more about what you’re seeing here.

[0:19:29.7] JW: Yeah, I wanted to include this observation since it was brought up during one discovery meeting and generally, if one person has a question many other folks do too. In this example, we were nearing the end of this particular discovery call and the pharmacist shared, “Even though I’m a pharmacist, my husband is not and I want to make sure that he’s represented throughout the planning process” and I could have not been more thrilled that she brought that up.

Because one, it taught me that I need to acknowledge upfront at our planning process is not just suited for pharmacists. Obviously, we’re called Your Financial Pharmacist but technically only 80 to 85% of our clients are pharmacists and the majority of those households we work with, only one person is a pharmacist. The active involvement of both partners regardless of their background we feel is critical to the planning process.

In fact, when you book a discovery call, we ask you to find a time that both you and your partner are available. If you’re married, engaged, maybe not married but living with your partner for many years, you generally have shared assets, maybe not combined finances, which is a step we walk clients through during the planning process if that makes sense but you generally own things together like a home.

In these cases, it is impossible to optimize the financial planning process if we don’t have all the decision makers at the table and I’ve learned this the hard way that generally speaking, if we conduct a discovery call with only one partner, we get to the end and they say, “Oh this sounds great but let me check with my spouse” and then what we end up doing is going through the discovery call process all over again because that partner may have a different perception of money, its impact and also their own financial goals.

It is critically important that both partners are involved in the discovery call and in that initial planning phase should you become a client of YFP Planning. So long story longer, yes, we’re called Your Financial Pharmacist but our planning services are technically for people of all income levels, all career backgrounds. It just has to fit what you’re looking for.

[0:21:57.2] TU: Yeah, so important, Justin. I’m a firm believer – I wrote an article way back when about 10 financial discussion every couple should have whether they decide to merge accounts or not and how assets are joined or not, whether they’re married or they’re not married, just healthy discussion for folks to have about getting on the same page financially even having an understanding where they agree to disagree in certain areas just to have those conversations.

We believe as you mentioned that outcome of the planning process is so much stronger, so much richer when both folks have a voice because what we often see and I’ve experienced this first hand with my wife, Jess, and I and Tim Baker, being our planner, is that you have that hour with Tim is great but the two hours afterwards and the conversation later that night and that weekend throughout that week where we are then discussing among ourselves, it’s so helpful to have that third party and to make sure both folks are present, to start that all the way at the beginning as they are evaluation that service to begin with.

Number seven, Justin, you shared with me kind of this chicken and the egg of timing of when to work with a planner, meaning that, “Hey, Justin, I’ve got a lot going on and the need is there for help but also just wondering of like maybe I should just wait to a certain point” right? Maybe I am in a busy phase of life and I should just wait until we get through things in the next six or 12 years but the other side of that coin is, right now I am looking ahead. I am in the middle of a lot of things where I could use the value, the help and a planner. So, talk to us through this one.

[0:23:18.0] JW: Yeah, so I heard Tim Baker share a phrase during a discovery call when I first started and it’s that, “Transition points bring lots of financial decisions.” The emphasis is that there is a cost to not starting with a financial planner. If you see the value that it can bring to you or your family, it will continue to cost you to not get started. It could be a tangible thing like paying more in interest on student loans, right?

Or money sitting in your savings account that’s being eroded by inflation or possibly more time lost toward your short-term goals like a home, vacation, car purchase, starting a family or even just stress around balancing multiple priorities. I hear people say, “Let me get rid of credit card debt and let me streamline my budget before I hire a financial planner” and I try to challenge those people that, “Isn’t that the reason you book this call because you need help with some of these aspects of your financial life?”

I also hear other people say, “Let’s wait until student loan repayments start” or “Maybe after our wedding” or “After I started my new job” and I totally understand that these transition points are stressful and that it’s difficult to think about adding one more task to your plate but that’s the beauty of financial planning. It is more about the process than the plan itself and through that process, these points of transition become easier to manage personally and maybe even enjoyable with less financial stress.

[0:25:00.4] TU: Great stuff. Number eight has to do with the fees and I think the unawareness of the fees and this is really insightful for you to come into the YFP Planning our fee-only, our pricing model, which I think is a little bit non-traditional to the industry and to get some experience but generally here, what you are seeing is an unawareness of the fees associated with the planning. Folks realizing maybe there is a lot of variation in the industry but not knowing really what to expect here in terms of that investment of money. Tell us more.

[0:25:27.7] JW: Yeah, as I mentioned before, hiring a financial planner is an investment of both time and dollars so we obviously talk about pricing during the discovery call but what I’ve noticed is that generally people have no idea how much a financial planner costs or even how a financial planner gets paid. Tim Baker tells the story of when he decided to become a financial planner.

He went to his mother and said, “I am changing career paths to become a financial planner” and his mother told him it was the stupidest idea he’s ever had since she doesn’t pay her financial planner anything and that lack of awareness around fees is not unique in the financial service industry. I actually started working with an advisor back in 2014 with another company and when I went through the discovery call process myself out of curiosity if YFP Planning was a good fit for me and my family, Tim Baker really educated me on all the hidden fees.

Since that point, I’ve learned that payment models for financial planning come in more varieties than Skittles and Jolly Ranchers combined. The most common fee though is called “assets under management” where your planner will charge you a percentage of the money you invest with them. This percentage can range based on the services they provide but it is generally at least one percent.

What I didn’t know is that there are also expense ratios assigned to those investments or funds based on where they are invested and since you need to pay a small fee for the company of the fund to handle those day-to-day operations but if you are not careful, those expense ratios can really impact the overall performance of your portfolio in the long run and that is where our model is different, right?

We’re fee only, we’re fully transparent about the fees that we charge. We believe that fee only is the best way to operate as a financial planner because it reduces conflict of interest. Similar to the real estate example that I just shared, in reality most folks don’t wake up one day and decide to hire a financial planner. You typically hire a financial planner to solve a problem and generally it’s not a math problem.

It’s because you want to live a richer life than you currently have and achieve your version of financial freedom and we believe a fee only model is the best way to keep your financial goals a top priority.

[0:28:12.8] TU: Justin, you’ve mentioned now twice that it’s a significant investment of time and money and you and I are both analytical pharmacists and I suspect you talk with many folks that are like, “Okay, it’s an investment of money, I get that” maybe they have even talked with someone before where it’s quote “free financial planning” and then they realize otherwise that there is either hidden fees or perhaps sale of products in their best interest.

That is really where the revenue might be coming from and truly not providing confidence of planning, so I value the transparency. I understand there is a fee involved with that but naturally the next question here is, what’s the ROI, right? What is the ROI? Tell me more about what you’re hearing from folks as they’re trying to make this decision of, “This is an investment of time and money, then what’s the potential return?”

[0:28:58.4] JW: Yeah, this has to be the number one question and I’m mastering a discovery call and it is very difficult to answer since as a comprehensive financial planning firm, we prioritize your complete financial life. When some people think of a pharmacist, they think of counting pills and I say some people because I like to think and believe that that narrative is changing.

The point I’m trying to make is that when most people think of financial advisers, they think of investments and in our model, investments is only a small piece of the financial plan. A few people have recently asked me, “What is your investment philosophy for combating inflation?” and one, I’m not a financial planner so I probably don’t have the best technical answer and two, if that’s your primary concern that’s fine but we’re probably not your people and that’s okay because in general, the market is efficient, right?

93% of active management advisors, so those who attempt to beat the market, 93% of them fail, right? There are pockets of inefficiencies like we’ve noticed recently but overtime, investments are a tool to actually combat inflation and with proper allocation, keeping expenses in your investment accounts low, your investments will grow with the market.

[0:30:24.9] TU: Yeah, great stuff. Definitely as Tim always say, which I wholeheartedly agree with his investments as you mentioned it is one part of the plan among many others, an important part but it is one part of the plan and in traditional planning and part because of how the industry was born and how fees are assessed, often you know that maybe with some insurance might be the bulk of the plan and there might be things like, “Hey, those student loans will just take care of themselves” or “That home buying like nah, not so much us” or “Investing in real estate, not so much.”

I think when you look at really good comprehensive planning, which I am bias of the work that Robert and Kelly’s team does and under Tim’s leadership with YFP Planning, a really good comprehensive planning will again, get us out of the silo and be really looking at how do we make sure we’re taking care of our future self. We need to be thinking about that – how do we also make sure we’re living a rich life along the way, right?

Yeah, we need to be saving and investing and in doing so efficiently and saving on fees and taking advantage of the tax benefits but we also need to be thinking about many, many other parts of the financial plan including the protection parts as we think about things on the insurance side, on the estate planning side, obviously the debt management piece and then all the other things that come throughout life and throughout the financial plan.

That takes time, an investment of time, an investment of money and obviously there’s benefit in that being transparent as you mentioned. Number ten is what you’ve I think seen often, which I will hear often as well is, “You do taxes?” and I think a lot of individuals may not be thinking about the synergies between the tax and the financial plan or the power of the synergies between the tax and the financial plan.

What are you hearing here and what perceived value are you getting that folks see of, “Okay, well, what could be possible if we really have the tax plan rowing in the same direction as the financial plan?”

[0:32:10.9] JW: Yeah, as you said, the synergies between taxes and the financial plan, that’s something that I’m still personally learning about since I too did not understand that for a long time how interconnected they are and in this time of year, a lot of people share with me how their tax returns went. I hear from people who own quite a bit of money and then excitement from other people expecting a big refund.

Previous Justin would have also been excited about a big refund but my perception is changing through my own comprehensive financial planning process. If you’re listening right now and are expecting a big refund, let me ask you how would you have spent those dollars better throughout the year? Could you have put up a bigger down payment on your home? Could you have added more to your 401(k) or investment contributions?

Could you finally leave your state and go on vacation, right? When you get a tax refund, you’ve basically given the government money interest free and through our planning process in quarter one, we file your taxes for you but the real magic happens during the year through our tax planning service where we ask you for a couple of documents and by understanding your situation, we can estimate either how much money you will owe or how much money you will get back and neither of those are great options.

We want to get as close to zero as possible, so we outline strategies that we can proactively put in place during the remainder of that year to again, get that number as close to zero as possible because that shows us that we’re being as efficient with our income as we possibly can.

[0:34:05.7] TU: Well, there you have it, 10 takeaways from 50 plus financial conversations that Justin Woods has had with pharmacists over the last few months and Justin, I can tell you firsthand when you came up with this list of ten, I’ve done a handful of discovery calls prior to your arrival. Tim Baker has done ten times as much as I have but these are themes that we’ve seen for years.

I think some of the takeaways that you brought here I suspect will resonate with many folks that are listening to this episode. As I listen or hear to this, I’m a pharmacist thinking, “Hey, maybe I am interested in taking this next step to get on a discovery call with Justin and learn more about the planning services” you know, see whether or not it’s a good fit, tell us more about what next step they can take and where can they go to schedule that.

[0:34:46.8] JW: Yeah, thanks for having me, Tim, and I hope that by sharing these observations of mine, it will encourage or maybe even motivate more people listening to consider a discovery call and we can work together to really understand if it’s a good fit for you specifically.

[0:35:03.9] TU: Great stuff and, again, folks can go to yfpplanning.com. You can see an option there to schedule a call and that will allow you to get some time on Justin’s calendar. Justin, thank you so much. I really appreciate it.

[0:35:13.8] JW: Thanks, Tim.

[END OF INTERVIEW]

[0:35:14.9] TU: Before we wrap up today’s episode of Your Financial Pharmacist Podcast, I want to again thank our sponsor, Splash Financial. If you’ve ever considered refinancing your loans, check your rate now through Splash Financial. Refinancing could help you get a lower monthly payment on your student loans or get a lower interest rate.

Splash helps you shop and compare loan refinancing offers across lenders nationwide. Browsing rates through Splash Financial is fast, free and won’t impact your credit and now, when you successfully refinanced $50,000 or more, Splash Financial will give you an extra $500 in cash bonus, using our link at splashfinancial.com/yfp. So, check your rate today and see what you might be able to save at splashfinancial.com/yfp.

[DISCLAIMER]

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 of 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 analysis 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 249: 3 Silent Killers to Your Investments

Posted on by yfpadmin

3 Silent Killers to Your Investments

On this episode, sponsored by Insuring Income, YFP Co-Founder and Director of Financial Planning, Tim Baker CFP®, RLP®, talks about the three silent killers of your investment pie and how to keep your investment portfolio fit.

Episode Summary

In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, to discuss the three silent killers of your investment pie: taxes, inflation, and fees. After a brief discussion about the most recent success of YFP Speaking Engagements, Tim Baker gets into the weeds on strategies to ensure financial security and freedom by protecting your investments. Tim and Tim discuss, in detail, how to keep your financial portfolio fit through evaluating your fees, investment choices, and the utilization of tax planning. Tim Baker explains some of the most common fees associated with investment plans and that often, investors do not know what exactly they are paying in fees. He shares the impacts of inflation on your portfolio over time and how to ensure financial security after retirement. You will also hear Tim Baker speak on his personal experiences as a CFP® and how tax planning permeates all parts of the financial plan, despite many planning firms not offering tax planning as a service. Tim Baker shares his answers to frequently asked questions like: why is inflation overlooked concerning the financial plan? What is the solution to inflation? How can market stability and fees negatively impact your retirement investments?

Key Points From This Episode

An introduction to today’s topic.
The importance of including tax in your financial plan.
How tax permeates all parts of your financial plan.
Tim Baker shares some of his experiences regarding tax, working as a financial planner.
Some examples of simple tax reduction strategies.
How to ensure the withdrawal of investments after retirement in terms of tax.
A discussion on inflation trends.
Why it is important to consider inflation in your financial plan and investments.
We learn how investments can help you get ahead of inflation.
A detailed discussion on the issues and impact of fees on your investment.

Highlights

“I think what you can’t do is just not participate. I don’t think you can stuff your mattress and hope one day you wake up, and you’re going to have enough to retire.” — Tim Baker, CFP®, RLP® [0:21:32]

“I think it’s really important that we understand those dynamics and know that we’re not always going to be in a low inflation environment.” — Tim Baker, CFP®, RLP® [0:24:30]

“It’s really important to understand how inflation can play a role in your ability to sustain yourself in the future.” — Tim Baker, CFP®, RLP® [0:24:34]

“I think a lot of people are unaware of what they’re actually paying, and the transparency is a real thing that needs to be overcome.” — Tim Baker, CFP®, RLP® [0:24:09]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[00:00:00] 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, I had a chance to sit down with YFP Co-Founder and Director of Financial Planning Tim Baker, to talk about the three silent killers of your investment by taxes, inflation and fees or easier way to remember as Tim, mentioned on the show, is how to keep your investment portfolio fit by evaluating your fees, investments and tax planning. A few of my favorite moments from the show include hearing Tim, talk about common tax mistakes he sees pharmacists making, and why he decided early on to bring a tax practice in house with the financial planning services. Why inflation is often overlooked? But an important part of the financial planning consider. What the antidote to inflation is? Why those nearing retirement should be looking closely at inflation and the volatility of the market? Finally, the common types of fees associated with the financial plan. Why these fees can have such a large impact on your investment portfolio?

Now before we hear from today’s sponsor, and then jump into the show. I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 240 households in 40 plus states. YFP Planning offers, fee-only high touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner, may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning financial planning services are a good fit for you, we know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.

Okay, let’s hear from today’s sponsor Insuring Income and then we’ll jump into my interview with Tim.

This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term life insurance and own occupation-disability insurance. Insuring Income has a relationship with America’s top-rated term life insurance and disability insurance companies so that pharmacists like you can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage, supports clients in all 50 states, and make sure all of your questions get answered along the way. To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics, visit insuringincome.com/yourfinancialpharmacist. Again, that’s insuringincome.com/yourfinancialpharmacist.

[INTERVIEW]

[00:02:41] TU: Tim, excited to have you back on the show.

[00:02:43] TB: Yeah, Tim. Glad to be back. What’s going on?

[00:02:45] TU: It’s been an exciting start to the year.

[00:02:47] TB: Yes.

[00:02:47] TU: Lots of exciting things going on at YFP. We’re heating up the season of some of the speaking engagements that we’re doing for the year. Grateful for those opportunities, I think the team is humming and moving forward. It’s been a good, good first quarter of the year. You’ve got an exciting trip coming up tomorrow. I think you’re leaving, right, International.

[00:03:05] TB: Yeah, going international. My wife Shay, shout out to her. If she listens to the show, sometimes, sometimes not is running the Paris marathon. A couple of weeks ago she actually had fractured her foot in a misstep. She’s been doing a lot of cycling and pool work and things like that. She got the news a couple of weeks ago that she could run again. So she’s, yeah, she’s raring to go, heading out and excited to visit Paris again. It’ll be her first time and yeah, just enjoy some one-on-one time without the kids. It’ll be nice. I’m excited. I feel we’ve been so cooped up, because of the pandemic, haven’t really been traveling as much. Yeah, I’m pumped up.

To go back to that thing Tim, I was shocked. I think when we actually sat down, and you tallied up the reach that YFP has had or the last couple years with, I think it was 72 different schools and associations that we’ve been speaking with and doing presentations and things like that. I think that was a little bit shocking to me but awesome to see that number and see it continue to grow.

[00:04:12] TU: Yeah. We’re so grateful for that opportunity. We’ve partnered with just over 70 different organizations. It’s been Colleges of Pharmacy, State Associations, National Associations, Fellowship Programs, Residency Programs, some of the businesses that are out there and entrepreneurs, so super grateful for that opportunity. I think the reach to that has allowed us to have as we as we look to help more and more pharmacists on their mission towards achieving financial freedom. We’re looking to grow in that list here. If anyone is listening that, is looking to have a session on personal finance, financial education, we’d love to engage the YFP team, the YFP Planning team, so you can reach out to us at info at yourfinancialpharmacist.com.

Tim. Today we’re talking about silent killers to your investment pie. We’re talking about things like tax inflation fees. We’ve talked about these separately on the show, but I want to keep coming back to these, we’re going to bring these together. We talked so often about the hard work of building your investment pie, right? Ultimately, we’re going to be paying ourselves out of retirement paycheck, we’ve got to do the hard work to save early, save often, take advantage of that time value of money. We might be underestimating the impact the silent killers like tax, inflation, fees that may not be as obvious or as front and center, but certainly can have an impact on our financial plan.

We’re going to go through these one-by-one in three parts. We’ll start with the taxes, we’ll then talk about inflation, we’ll talk about fees, we’ll reference previous episodes, we talked about these for folks that want to dig deeper in any one of these topics. Again if you’re going to do the hard work, and you’re going to build that investment pie, we want to do as much as we can to maintain the integrity. Tim, let’s start with tax season. Could it be better timing, were about half a month now, away from the IRS tax deadline, the YFP tax team is knee-deep and making sure we get the tax filing and returns, and a shout out to that team if they’re listening to this episode. Here we are, it’s front and center for lots of folks, maybe they’re looking at the returns that they filed, and maybe they got it spot on, maybe they saw opportunities to improve, maybe they got a big refund, or were surprised by a bill that was due. So just talk to us about why this topic of tax is so important.

[00:06:25] TB: Yeah. I’m actually looking at the title of this, I see, Tax Inflation and Fees. I think if we were to go in reverse order FIT, this is I think, really about keeping your investment portfolio fit. We’ll go tax inflation fees as we talk here, but I think the reason we kick off with taxes because it just permeates everything, Tim. Every conversation that we have related to the financial plan, there’s a tax conversation close by, unfortunately. One of the numbers that always sticks with me is that we mentioned speaking over the course of a pharmacist career they’re going to make about $9 million. The actual dollars that flow into the bank account is closer to six. That’s alarming, because you’re like, all right, where’s 30 – where’s a good chunk of that go?

That 3 million, that delta, a lot of that is being soaked up by Uncle Sam, the taxman. What we see related to tax is that there’s typically a lot of dollars left on the table in terms of what you can do to mitigate the amount that the government is taken from you. Again, I think everyone wants to pay their fair share, but no one wants to overpay if they don’t need to. Yeah, and I think for us, as a group I harken back to the day when we were starting, I have launched Script Financial now, YFP Planning, and even before that in my first job and financial planning, financial services. A lot of traditional financial planning firms do not do taxes. I found that to be very problematic, Tim, because, again, I think they’re just so closely aligned with what you’re doing on the planning side, that there needs to be some coordination on the tax side.

Shortly after I launched Script Financial, we started to do taxes for our clients. It’s not a fun thing to do, the tax work, Tim, as we know, right now, it’s it can be hectic, you’re trying to cram so much work in a small window of time. It’s like trying to manage a lot of projects on a tight deadline that you have inputs and outputs from a variety of people. However, the reason that we do it is, because I think the value that it brings to the overall plan. I’ll give you some examples. When I would do planning for pharmacists, one of the biggest thing a lot of the pharmacists that we are working, with the tail that wag s the dog are the student loans, right?

The student loans one of the major strategies there is the forgiveness strategy, particularly PSLF, or even non-PSLF, because in that strategy, one of the main techniques you could do if you’re married is to file separately to disallow the income of the spouse that doesn’t have loans and really just work off of the AGI and the student loan payment is off of one the spouse versus two. The problem is this, Tim. I say this like I would build out these dope, that’s the official term, dope, financial planning strategy related to the student loans. Then the client would say, “Hey, Tim, do you guys do taxes?” We’re like, “Nah, we don’t, but go work with his accountant across the street. They’ll hook you up.” We like what they do. But the problem is that, because most financial planners don’t understand student loans, so I think the stat out there that I saw is that 33% of financial planners will work with clients on their student loans.

That doesn’t mean they necessarily understand them, but they’ll at least address them. That means the overwhelming majority don’t even really look at it. The problem is that because advisors don’t understand student loans, typically the accountant that they work with don’t understand it, and in 99 out of 100 times, for most people file in anything, but filing jointly for a married couple is wrong, but we just happen to work with a lot of pharmacists that it does make sense because of the huge benefit you get from maximize the forgiveness. I just got fatigued by building out this great debt plan, and then it being messed up by the lack of technical expertise on the tax side of things to see that through.

Then I think the other piece of this is we’re planners, right? I want a plan. I remember, again, back in the early days, I would hire a tax person to do my own personal taxes, and I’m a business owner. So when I got a good referral from someone, I met with them, they’re like, “Oh, yeah, we’ll be able help diagnose some things with your business and all this.” I’m like, “Great, that sounds awesome.” Then a couple months rolls around, I’m like man, it’s April 14th, where are my taxes? I sent out an email, and I get an email back, and it’s a PDF of the tax return some DocuSigns to sign, and then an invoice. I equate, it seems like a paper route, right? It’s like, here you go. Chuck the paper out the window, you figure it out. I just didn’t like that, because again, I was looking for things that and I’m a nerd like that.

Again, as a business owner, I want to make sure like, am I doing everything to mitigate my tax exposure. I just got zero guidance, zero planning based on – planning advice based on last year’s activities. I really wanted that. To me, I think there’s a lot of people that want that and are trying to figure out ways to get in front of the taxman. Then finally, I think just the reason that we did it is like I said before, is I think it’s just the coordination of your financial plan. It’s not just the debt piece. We would work with clients in my last firm where there probably needs to be a healthy conversation regarding the investment portfolio, just that this wasn’t had. I understand. I get it, during tax season it’s really hectic.

You’re just trying to move the return through, but at the end of the day, the reason that we make sure that everything goes through the lead plan of the CFP, it’s a check to say, “Okay, does this jive with everything else that we’re trying to do.” Not this debt, but the investments and whatever else is on the client’s plate just to make sure that there is a clear intention of, hey this reporting period and Q1 all the way up to April 15. This is really a reaction to what happened last year. But then what are the things that we can do or what are the things that we learned from this year that we can apply to the present year in this case, 2022?

I think if you stack just the financial plan, I think if you stack years of doing that, you really shrink that delta, that 9 million to six. I think you really start to shrink that in terms of what you’re keeping in your pocket. I think for most people out there that’s worth the conversation and with the planning.

[00:13:11] TU: Yeah. Tim, just to that point that the delta significant and of itself 9 million to 6 million, and you and I both agree, like taxes have value, right? They provide services we all appreciate. We want to pay our fair share. It’s not just the delta, but also how can that delta be put to use, and what is the effect to that?

[00:13:26] TB: Yeah, exactly. I think that there’s just a lot of – from things that we see with clients, there’s just a lot of meat on the bone. There’s a lot of opportunity to, hey, have you thought about this? Or as an example, HSAs those are our every week, we talk about them a lot, but a lot of people don’t necessarily fund them. Even things related to children FSAs, particularly for dependent care, making sure money goes through their, education planning. Sometimes there’s this singular focus on things like Roth IRA and conversions, and backdoor and all that kind of stuff. It’s like, we shouldn’t even be having this conversation yet. I think some of it is overconfidence for the taxpayer of what’s important and what’s not.

We see a lot of things with taxable accounts, Robin Hood, things like that, where there are, there’s a focus there that really shouldn’t be or disallow losses due to wash sale rolls or things like that. We’ve seen lack of record-keeping for side hustles as we’re talking about Schedule C, income expenses, lack of coordination for charitable giving with a larger deduction these days. There’s a bunch strategy where you should be bunching your charitable giving versus doing a consistent year over year. Cryptocurrency, we could have a whole thing on that, Tim. Cryptocurrency and then just the overlay of, hey, there’s a huge refund or a huge tax bill, that I think sometimes it’s due to either a lack of planning or a lack of follow-through on the planning or just an understanding of how withholding or the W4 works.

This is a sample of things of what we see and I think again if you can start to work through some those issues, Tim. I think you start to see. Again, it’s hard to quantify year over year, but these are just little tweaks here that I think we talked about the investment portfolio being a rocket ship, sometimes like fees and things like that is drag on that. I think the same thing could be the case with taxes and your net worth, your financial plan.

[00:15:20] TU: Yeah. It’s great stuff. The compound effect of those changes I think about someone who unlocks things like the HSA or is able to really look at some of the bunching strategies or other things that you mentioned dependent care FSA, etc. or priority of investment and making sure you got that, right. It’s not only getting that advice, recommendation strategy put in place today, but what does that mean going forward in the compound effect of that. We talked about lots of that. We had our director of tax, Paul Eikenberg, on Episode 233, we’ll link to that in the show notes. We talked about some of the common tax strategies, tax mistakes that pharmacists should be thinking about.

I’m glad you brought up the student loans to kick off that conversation. Just last week, we had three PSLF success stories, and through those stories, we heard about some of the optimization strategies and of course, one of that would be the filing status, which folks may mess up if they’re not getting good advice there. Tim, one of the things I’m really excited about and shout out again, to the tax team that’s been hustling this season, is you and I think are really behind this vision and approach of, yeah, “We got to file the IRS as we have to do it, or else they’re going to come knocking on our door, that’s great, we’re going to keep doing that, but we’re going to do that, really, if it’s a part of the planning and the strategy.”

So you gave that story of April 14th, here’s the DocuSign, sign it, here’s your bill, that’s great. I mean, that’s stuff that’s been done, it’s in our rearview mirror. Let’s talk about what we can do going forward to really optimize the plan and perhaps avoid some of the mistakes that were made throughout the year. So we’re excited about really shifting away from just that filing to more that year-round planning, that strategy, that mid-year projection, that pivot, how do we really optimize this with the financial plan? Well, this tax season, we’ve closed the doors in terms of new folks that we’re going to be doing tax returns. Again, we’ve only got about 15 days, couple of weeks left in the season. We are going to start to build out a list of folks that are interested in more that year-round planning optimization and you can go to yourfinancialpharmacist.com/tax and get more information there.

[00:17:19] TB: Yeah. I think the other thing that can take into consideration here is right now, we talk a lot about the accumulation of the portfolio and how tax is related to that. I think the other thing is really looking at the withdrawal. When you’re a pre-retiree, and again, simple if you have a million dollars in your traditional 401K, a million dollars, saying a Roth IRA, and a million dollars in a taxable account. Unfortunately, all of those dollars are not yours, particularly the traditional Uncle Sam so has to take the bite of the apple. But one of the main things that we look at when we’re trying to structure a paycheck that is going to be able to sustain that retiree for the course of their lives is the tax and minimizing the tax burden and how we draw on each type of account and the best strategy for it. A lot of that is a tax conversation.

To me, it’s something that, it’s again, permeates every part of the financial plan, but it’s also every stage of life. There’s even conversations of okay, how do we structure, how much in this bucket or this bucket, as we are accumulating to get in front of that when we are starting to say, “Okay, I’m 65, I’m retired. We’re going to use 30 years as I’m going to live to 95, just to model this out. How do I draw from each bucket? Overlay things like social security and everything else, to make sure that I – the biggest I think stressor for a retiree is, “Am I going to have enough money? Is the money going to run out? I don’t want to be destitute or have to rely on family.” It’s really trying to, and again, if we can hold on to more of those dollars, that still have to be tax or take those moneys when you’re in a lower tax bracket, or whatever that is. It’s really important to have that coordination. It’s a frequent conversation. It’s not just, hey April 15th, come and gone, and it’s something that we continually look at and make sure we’re on top of.

[00:19:15] TU: Well, thanks for being a wet blanket, Tim. If I’ve saved a million dollars, I might actually not have a million dollars.

[00:19:20] TB: Yeah, yeah. Sorry about that.

[00:19:20] TU: Good plan. That’s a good summary of taxes. We’re going to keep coming back to this topic. So important for all the reasons we mentioned. Moving on to the second one is you mentioned in this concept of making sure and investment portfolios fit. The IB inflation. I think, normally we talk about inflation, and it’s like, nah, yeah, whatever. Especially for folks that are in the first half of their career, we have not seen inflation at the rate that we are seeing it right now.

[00:19:46] TB: Yeah.

[00:19:46] TU: Certainly it has been higher than that historically, but it’s well above what we had expected be on an annual rate. So we’ve got as of January if you look at the yearly rate we’re hovering around 7%. We talked about this in episode 239: Two Financial I’s You Might be Overlooking: Inflation, I-Bounds, will link to that in the show notes. Since that episode, I would say this has been exacerbated by the unfortunate situation in Ukraine. We see oil prices going up. We see the market volatility that’s happening. Tim, we know inflation is real, we’re feeling it in the moment. Jess and I were just talking about this and in terms of month to month with this is playing out to be in terms of expenses, but still, hard, I think sometimes put our finger on it, and the impact it can have on the plan. Why is that? Why is it so important as we think about the integrity of our investment pie?

[00:20:34] TB: Yeah. I think inflation is really one of the main reasons why we need to invest. I say that if you’re looking at the markets, and right now, the markets are very volatile, up and down, negative in some cases. What you feel is that you want to take your investment ball and go home and be like, “I just can’t take the swings, Tim.” –

[00:20:54] TU: I’m feeling right now. I’m not going to lie, Tim.

[00:20:55] TB: Yeah. I don’t looking at my accounts and seeing X and then the next day and seeing X minus 10%, 20%, 30% if we have a major correction. I get it. I think, if you’re 20, 30 years from your retirement date, and that’s the purpose of your portfolio. I think you really have to train your heart and your mind to be like, “Okay, it’s going to come back. Let’s not worry about it now.” I mean, if you’re in retirement now, and you’re relying on that, and we don’t have a good bucketing strategy, or what have you to sustain those losses, then I think it’s more problematic. But yeah, you can’t – I think what you can’t do is, is just not participate. I don’t think you can stuff your mattress and hope one day you wake up, and you’re going to have enough to retire.

I think the inflation piece is one of the main reasons why we need to invest. One of the examples I gave is that $4 latte that you buy at your local coffee shop in 2020. If you use historical rates of inflation over the next 30 years 2050, that same latte will cost $10. But I don’t know, that’s a great, good enough example, Tim. Let’s put it another way. If you make $120,000 as a pharmacist today, and we fast forward 30 years and we’re using historical rates on inflation, which is typically most planners are using about 3%, which we know this year is high. It’s low because we’re seeing seven-plus.

$120,000 today as a pharmacist in 30 years, that would be equivalent to $291,000. Think about that, $120,000 today would be equivalent to $291,000 in 30 years. From a planning perspective, if we’re trying to build out a portfolio that can generate a paycheck that is some discount at that 291 because we know that social security is going to be there. It’s going to be limited than what it is today, so we can take a little bit off for that. Then you’re probably not saving some of that 291 would go to retirement savings, but if you’re going into retirement, you’re not going to be saving for retirement.

There’s some discount to that, but the idea is that, let’s say it’s $200,000, or let’s say it’s $180,000, whatever the case is. We have to be able to build a sustainable portfolio so then, Tim, if you’re my client at 65, 30 years from now, or whatever the number is. You’re going to say, “Hey, where’s my $200,000? At 66. “Hey, where’s my $200,000.” All the way up until 95 or whatever we’re planning as nobody knows when they’re going to pass away.

That is really important, because the investments particularly an equity portfolio, in your accumulation phase is going to be really important for you to stay in front of inflation, and the taxman, quite frankly. So yeah, and just a backup, we talked about this in the “Two I’s”, when we talk inflation, it’s really, inflation is the decline of purchasing power of a given currency over time. What it basically means is that a basket of selected goods and services in the economy will increase over a period of time. Sometimes that is due because the government is printing money, which is certainly true. In our case, we talked about quantitative easing and things that. It could also be supply and demand. So one of the things that you didn’t mention outside of the Ukraine crisis is all of the boats that are at the Port of LA or that are still need to be unloaded because of pandemic or whatever, that’s causing a lack of the supply demands, making prices go up.

I think it’s really important that we understand those dynamics and know that we’re not always going to be in a low inflation environment. It can’t go up it has this year because of X, Y, or Z. Even back, if you look back in the 80s, in the early 80s, inflation was 13 and a half percent, and mortgage rates, as a result, were close to 17%. If you think about we know rates are going up now, there’s been a steep decline, and I think the government is trying to do what they can, but the fact is, we have printed a lot of money in the past that could rear its ugly head. I think the way that we can mitigate the impact of inflation is really to invest in equity stocks, and hold it over a long period of time, Tim.

We know that we’re talking about 20 plus years, we know that the stock market is fairly predictable. Typically, over a 20 year period, the stock market will return about 10% on average, and if we have just that down for inflation that’s seven. So this year, that might not do a whole lot for you, because that’s the rate of inflation, so you’re breaking even at that point, but to me, it’s really important to understand that how inflation can play a role in your ability to sustain yourself in the future. Again, we’re feeling the pinch now, because inflation has gone up so high, and so much in a shorter period of time, where we’re starting to really notice.

Tim, I’m sure with four boys, you’re noticing it with your food bill, or even we’re seeing in at the pump. Those are things that you were seeing it with housing prices, right? Those are things that get our attention, but we’re probably not thinking about how this affects us in 10 years, 20 years, 30 years, depending on your timeline for retirement.

[00:26:15] TU: Yeah. As a shout-out to your 76 years, you got to trust the process.

[00:26:18] TB: Trust the process. Yeah.

[00:26:19] TU: When you say investing is the antidote to inflation, a lot of people hear that in the moment and they see the volatility, and they’re like, “Ah, it’s the opposite of what I’m thinking.”

[00:26:30] TB: Right.

[00:26:30] TU: We’ve got to zoom out. I think this is where the power of accountability and a coach and having that long view is so valuable. Tim, I’m also thinking about the folks that are listening that are, “Hey, I’m nearing retirement.” Or I thought I was going to make that decision here and the next year or so and here we are when I’m going to be going into retirement in a high inflation period. I’m going into retirement, while there’s also a lot of volatility in the market. Just talk to us for a moment and another episode for another day about the timing of that decision of retirement when we start to draw from our portfolios, and how in high inflation period, and a high volatility period could have an impact on that.

[00:27:07] TB: Yeah. It’s probably – so what we’re talking about here is sequence risk. Sequence risk is essentially where what you’ve accumulated over the course of your career takes a hit. We’re talking 20, 30% which could be very well beyond the horizon for us in terms of a correction of the market. So now you’re will use a million dollars, let’s say your portfolio was a million, and then it bottoms out to $700,000, but then you’re also taken $80,000 a year, or whatever the number is.

So in two years, and three years, you could see where your portfolio is almost half of what it was when you actually went to retire. You’re like, “Well, I had a million and now I have $560,000.” Or whatever the number is, that’s where you really see a higher rate of failure to the portfolio failure meaning that the money runs out, that balance goes to zero before you reach your end of plan year, which a lot of people use 30 years, so if you retire at 65, 95. It’s the combination of the portfolio being down, and then drawing down the portfolio at the same time, you almost can’t make it up.

I have a little bit experience, it’s just a proxy. I remember, my first job out of the military was with Sears Kmart. It actually took over – I was a trainee for my first year. Then I took over for a lady that retired. This was right around ‘08, ‘09, and that’s when the market just completely got, the market was completely down, because of that subprime mortgage crisis. I think she actually had to go back to work because her portfolio took a beating and then she was actually drawing on it. She quickly realized that she needed to not draw on that portfolio. So really, in these periods of time right leading up, you could probably say about five to 10 years before retirement, maybe in five to 10 years after retirement, that’s where you need to be the most conservative. It’s the eye of the storm.

In for some people, it makes a heck of a lot of sense not to retire than – and try to push it off, sometimes it’s unavoidable. Sometimes 40% of people retire sooner than they think either because of illness for themselves or for a family member or, or it could even be being pushed out of the workforce. Sometimes it’s out of your control, but when you overlay these decisions with things security, when to claim that and all that, it’s super important. You could do everything correct for 30 years leading up to retirement and then that those first couple of years in retirement be blow up your playing completely. That sequence for us at its finest.

[00:29:59] TU: We’re going to come back to some more episodes, we have planned out on building that retirement paycheck in consideration as you’re making that transition from all the hard work you’ve done, and now making sure we’re able to sustain that. We’ve talked about taxes, we’ve talked about inflation, certainly not least, but last on our list is fees. We know that fees can have a major impact on how much wealth one is able to build and something that many folks may not realize of how big that implication can be. We went into detail about fees on Episode 208, Why Minimizing Fees On Your Investments is so Important, we’ll link to that in the show notes.

Tim, summary here of fee something that we harp on over and over again, that folks may not be aware of those fees often are not as transparent as perhaps we’d like them to be. So as we continue this theme of some of the silent killers of the investment pie. Talk to us about fees.

[00:30:52] TB: Yeah. There’s no such thing as a free lunch, right, Tim? When you’re investing or if you’re working with an advisor, there’s typically a costs associated with that. I think the thing that I think bothers me as an advisor, but then also as a consumer is the lack of transparency, right? We know even in healthcare, there’s people get upset about what is the actual price or even we talk about PBMs, and things like that. I think a lot of it comes down to transparency, and what’s going on behind closed doors. To me, and we see this a lot and actually, we recently, we have clients that are prospective clients booked time with us to see if they would be a good fit.

We’ve added a button that they can upload a statement so we can talk at a high level, if they’re working with advisor what they’re actually paying, because most people either have the notion of, I’m not paying anything, which that’s actually a common belief or they know that they’re paying something, they just have no idea and often is the case that they’re paying a lot more than what they think. I always go back to this story. I remember, so my first job out of the military with Sears then I had another job with a construction company. I was like, “You know what, I want to do something completely different, go into a new industry.” I was like, “Hey, Mom, I think I’m going to become a financial planner.” I think verbatim, she said to me, “That’s the dumbest idea I’ve ever heard.” I’m like, “Why?” She’s like, “Well, we work with this as advisor and we don’t pay them anything.” I’m like, “That can’t actually be true.” Years later, when I understood the landscape a little bit, actually peeled back the onion, and they were paying over $8,000 in fees, unbeknownst to them so.

To me, I think, it’s fees are aren’t necessarily a bad thing. I think it’s the transparency around that I think needs a lot of work. Really, the fees that we’re talking about here, Tim, that are most common are things advisor compensation. These are things that you would, these are fees that you would pay or commissions that you would pay to an advisor to either provide financial planning or investment advice to you. One of the more common things that we see is an assets under management fee. This is like, “Hey, Tim you have $500,000, and I’ll manage for you, I’ll charge you 1% in the fees. 5000 I’ll bill that right out of your investment accounts.” That’s very common.

To be honest, that’s one of the reasons that pricing structure is one of the reasons why when we do find younger pharmacists that are working with advisors, so they’ll either be shut out, meaning the advisory would say, “Hey, young pharmacists, I’d love to be able to help you, but I can’t.” It’s not really because they can’t, because they don’t have those assets for you to manage that – in term of that that 1%. They’re either shut out of the market, or they’re sold, I would say less than suitable products, so they can make a commission and do some work with them. They kind of wait for the assets to build over time.

This is where, if you’re out there, and you’re in pharmacy school, or shortly thereafter, someone tried to sell you a life insurance policy, a disability policy, those are the next best thing for a lot of advisors that can earn a commission, “help the client” and then stay in touch with them until they have some assets for them to manage. It can be the same things like, “Oh, well invest your Roth IRA, and we’ll sell you in A-share mutual.” I was looking at a statement where there’s both an AUM fee but then A-share. Any share mutual fund is a front loaded commission. You pay five and a quarter percent on that and the advisor gets the commission and goes from there.

There’s lots of other fees there, Tim, related to advisors, hourly flat fee, there’s could be a hybrid unrelated to the investment portfolio, but still in mix, there are things like Life Insurance Commissions, Disability, Annuities, we recently saw a non-traded REIT, which is really sweet for the advisor, because that’s sometimes 6, 7, 8% terms of commission. So that’s a big piece. I think a lot of people are unaware of what they’re actually paying and the transparency is a real thing that needs to be overcome.

[00:35:08] TU: Great summary. We’ll get rolling back to Episode 208. Why Minimizing Fees in your Investments is so important. I think the transparency is one piece, Tim as you mentioned also just the tendency, we have to underestimate the impact of something like 0.1, 0.2, 0.3 right? As we look into individual investments.

[00:35:24]TB: Yeah, absolutely. I think if you’re not working with an advisor, there are other things that are present probably the biggest one is expense ratio, Tim. Justin probably – Justin was our director of business development, working with another advisor for years, before he came on to YFP. His portfolio, his all in expense ratio was about – it was almost 1%. 0.91 to be exact. What the expense ratio, it’s what the fund takes. If you have ABC mutual fund that’s managing billions of dollars, they might take 0.91% to pay for the mutual fund manager, the analyst, the fancy office on Wall Street, pay for information. They do that to keep the lights on. You basically buy that to get exposure to lots of different stocks and bonds, because that’s what a mutual fund is, or an ETF.

0.91% on a $100,000 portfolio is $910 per year, whereas if you do something YFP portfolios, .05, so why would I pay 1000 bucks if that guy pay 50 bucks and have similar results and things like that, but so that the expense ratio is a huge one. Platform fee, some, when I was in the broker deal where we would charge $50 or whatever, just to have an IRA open. There’s things like annual account fees, closing account fees, retirement, especially in a low interest rate environment like you’re just trying to eke out fees, because you can’t make money on the float, but things trading costs, all of these things add up.

Again, this can just be drag on a portfolio. Those are the four big ones I would say is advisor, compensation, trading costs, platform fees, and then internal to the funds that you’re in expense ratio. What we try to say to clients is like we try to minimize those as best we can, because at the end of the day, we want that portfolio to grow uninhibited as best we can. So there’s no such thing as a free lunch.

[00:37:25] TU: Yeah. That folks are going to pay for advising fee, and we’re not shy about the fees that we charge and the value they bring. The point being is you want the value to bring, right? So as you look at the coaching, the accountability, the holistic nature of comprehensive financial planning. There’s a fee there, and it’s transparent, you want to understand it, you want to feel good, that’s the return on the investment. We’re talking I think about in terms of minimizing other fees or fees that maybe don’t add value, or that are not transparent, so really evaluating closely the impact that those can have on your overall investment pie.

I’m going to link to a blog post from way back when, that I wrote, we looked at two different individuals that were saving about $1,000 per month between the ages of 30 and 65, because of some of the difference in fees and things expense ratios, or other hidden fees, they ended up with a nest egg that was about a million dollars difference. Again, the impact that we can see over the long run and what those fees can have.

For folks that want to learn more about the financial planning services that are offered by the team at YFP Planning, perhaps you’re working with a planner and interested in a second opinion. Want to have an analysis of that statement just to get some different thoughts as well or if you haven’t worked with the planner, we’d love to have a conversation as well. Folks can book a discovery call to learn and see if that’s a good fit with our Director of Business Development Justin Woods, also pharmacist and you can do that by visiting yfpplanning.com. Tim Baker as always great stuff and wishing you and Shay the best as you get ready for your trip to Paris.

[00:38:54] TB: Yeah. Thank you my friend. Good to be on the episode here. I think some good stuff to be – to chat about and probably even expand on in future episodes. So yeah, I appreciate you having me back on.

[OUTRO]

[00:39:05] TU: Before we wrap up today’s episode of the Your Financial Pharmacists Podcast, I would like to again thank this week’s sponsor, Insuring Income. If you are in the market to add own occupation, disability insurance, term life insurance or both, Insuring Income would love to be your resource. Insuring Income has relationships with all of the high-quality disability insurance and life insurance carriers that you should be considering and can help you design coverage to best protect you and your family. So head on over to insuranceincome.com/yourfinancialpharmacist or click on their logo or link in the show notes to request quotes, ask a question or start down your own path of learning more about this necessary protection.

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

For more information, please visit 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 247: 10 Common Financial Mistakes Pharmacists Make

Posted on by yfpadmin

10 Common Financial Mistakes Pharmacists Make

On this episode, sponsored by APhA, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, talks about ten common financial mistakes pharmacists make.

Episode Summary

In this episode, Your Financial Pharmacist Co-Founder & CEO, Tim Ulbrich, PharmD, flies solo to dive into ten common financial mistakes that pharmacists make. Tim talks through the math behind the age-old retirement advice that we have all heard, “save early and save often.” He discusses some common mis-prioritization of investments that leave tax savings on the table, like prioritizing non-tax favored investment accounts. Tim further discusses two common student loan mistakes that can cost folks tens of thousands of dollars and in some cases, much more than that; paying too much interest and not maximizing PSLF. Tim shares about the importance of having an emergency fund, protecting your income, and saving for your kid’s college in the correct order. He details common financial missteps such as accepting that income is fixed (because it will change) and failing to or delaying retirement savings, plus some long-term impacts of each. Tim then wraps up with another look at tax planning and how proper tax planning each year (not just tax filing) can affect the financial plan. Lastly, Tim explains how having a financial planner that does not have your best interest in mind can be one of the biggest mistakes that you don’t have to make.

Key Points From This Episode

The number one mistake on our list: paying too much interest on your student loan debt.
Tim shares the way to shift your mindset away from the ‘monopoly money’ feeling.
Diving into student loan strategy and the different buckets to consider.
Talking about service loan forgiveness and PSLF strategy, and how to maximize these.
Why emergency funds take a back seat and how to avoid delaying getting one.
Some tips on starting your emergency fund.
Mistake number four: protecting your income.
Accepting your income is fixed, and factoring in inflation and debt loads.
Putting numbers to the retirement savings saying of ‘save early, save often.’
Investing in a way that maximizes your tax savings!
A reminder of why it’s crucial to create a tax strategy and do your tax planning.
Talking about saving out of order for kid’s college.
How to get a certified financial planner who has your best interests at heart.

Highlights

“We tend to underestimate how much interest we’re going to pay over the life of a loan and therefore, we tend to underestimate how much we’re going to actually pay out of pocket.” — Tim Ulbrich, PharmD [0:08:37]

“When it comes to insurance, the balance point here is we want to not be underinsured, we want to make sure we can protect the time but we also don’t want to be over-insured.” — Tim Ulbrich, PharmD [0:19:23]

“You can borrow for your kid’s college, but you can’t borrow for your retirement.” — Tim Ulbrich, PharmD [0:30:48]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

[0:00:00.4] 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 fly solo to talk about 10 common financial mistakes that pharmacists make, no judgment as I’ve made many of these mistakes myself. Some of the highlights from today’s show includes talking through two common student loan mistakes that can cost folks tens of thousands of dollars and in some cases, much more than that, the math behind the age-old advice that we’ve all heard, save early and save often, as well as talking through some common mis-prioritization of investment that leaves tax savings on the table

Now, before we hear from today’s sponsor and then jump into the show, I recognize that many listeners may not be aware of what the team at YFP planning does in working one-on-one with more than 240 households in 40 plus states. YFP planning offers free only, high-touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com.

Whether or not YFP Planning’s financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom. Okay, let’s hear from today’s sponsor, and then we’ll jump into the show.

[SPONSOR MESSAGE]

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

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

[INTERVIEW]

[0:02:08.5] TU: Hey everybody, Tim Ulbrich here, welcome to this week’s episode of the Your Financial Pharmacist Podcast. I’m flying solo this week and we’re going to talk through 10 common financial mistakes that I see pharmacists often making, that we see pharmacists in the YFP community often making. As I mentioned in the introduction, there is no judgment here in these mistakes.

I’ve made many of these mistakes myself. My hope with this episode, through sharing some of those experiences and other common mistakes that we see folks making, is to hopefully prevent those, right? For others that are perhaps on this journey towards achieving financial freedom.

Before we jump into the 10 common mistakes that we’re going to talk about in today’s episode, I am not going to be covering a few things that are worth noting because I’m going to assume that you’ve got these bases already covered, right? Those would be things like having a budget and being intentional with your spending, so important, right?

We’ve ultimately got a certain amount of income to work with each month, we’ve got a lot of things that are competing for our attention financially, various goals, various expenses and so that budget is going to allow us to be intentional with our spending. I’m going to assume that that is already in place.

I’m also going to assume that we’ve either eliminated any high-interest rate, credit card debt that is revolving each month in a current interest or we’re going to avoid that if we possibly can, right? Very important is, we look at how the impact of that interest can really hurt us as we look at trying to achieve other goals.

Finally, of course, we need to minimize our lifestyle creep, right? For many pharmacists, we know that we see, certainly, a great income overall but that income often can be relatively flat throughout one’s career. Expenses tend to creep up on us over time, perhaps families grow, home expenses, other types of things throughout one’s career and so, we got to do our best to keep those expenses at bay and so that we can focus those limited dollars that we have on other goals each and every month.

Again, things I’m not going to cover, having that budget, being intentional, spending, avoiding, eliminating credit card debt, minimizing lifestyle creep. Now, what we are going to talk about are some common student loan mistakes, we’re going to get really tactical with some numbers that highlight why these mistakes can really have a significant negative impact and really ultimately leave a lot on the table that could be put elsewhere in the plan.

We’ll talk a little bit of our emergency funds and protecting the income. We’ll talk about a couple of things in the long-term savings, retirement side, in terms of prioritization and delaying of savings. Then I’ll wrap up by talking about tax planning as well as looking for a planner that has your best interest in mind.

All right, I hope you’re ready, I’m going to go quick, we’re going to hit a lot of information and we’re going to reference several resources throughout the show and we’ll of course, link to those who you could deep it to those deeper after the recording.

[0:04:49.0] Number one mistake on our list is paying too much interest when it comes to paying off our student loans. Now, you’ve heard me say a hundred times on this show, that pharmacists are facing significant student loan debt. The cost of 2021 to be exact, median debt load, have $170,000 as reported by the American Association Colleges of Pharmacy Graduating Student Survey.

Now, the good news is for the first time in over a decade, we’ve seen that number come down was $175,000 for the class of 2020. Bad news is, that’s still $170,000 and when we look at how interest accrues on a $170,000, those start to be really big numbers. One of the things I often say is that for me in my journey of paying off debt, when I was in school and even early on in the repayment journey, to be frank, it felt a little bit like monopoly money, right?

Once we get into active repayment, once we see the impact of that interest accruing, it starts to become really real, really quick. One of the ways I like to shift that mindset away from that feeling of monopoly money is to calculate the daily interest that is accruing on our loans. The way you do that is take your loan balance that currently remains, you multiply it by your interest rate and you divide it by 365 days.

If you were to have $170,000, let’s just say the Median debt load, $170,000 if we multiply that by 6% and assume that’s an average interest rate across our federal loans, and we divide them by 365, we’re looking at about $28 per day of interest that is accruing. $28 per day. Now, of course, as that $170,000 gets paid down to 160, 150, 140, et cetera or, and/or, we’re able to reduce that interest rate either through our process of refinancing or perhaps some forgiveness opportunity.

Then of course we’re going to see that impact of interest go down but that really is the opportunity cost that we need to be thinking about. $28 per day, if we look at the median debt load of a pharmacy graduate that is going towards interest alone as they begin that repayment period.

[0:06:47.8] One of the feelings I had early on in my repayment journey is I felt like I was spinning my wheels in terms of making substantial monthly payments but not feeling like I was really making a whole lot of progress and momentum towards getting that debt load paid off.

The reason that was and the reason that is for many of you that might be listening to this show, is because the amount of that payment that goes toward interest, right? When we look at big debt loads like 170, 180, $200,000 or perhaps even more at interest rates, six, seven percent, maybe higher on some private loans, what we see is pretty big monthly payments but we also see a lot of that that is going directly towards the interest.

Let me give you an example. If somebody has $170,000, again, let’s just use a 6% average interest rate, if we assume they’re going to pay that off over a 10 year period, that would be the standard repayment option, 120 fixed monthly payments, what we see is a monthly payment of about $1,900 per month for 120 payments or 10 years. $1,900, fixed payment for 10 years.

Now, of that $1,900 that first payment, about $1,000, 45% or so is going to go towards principal and about $850 is going to go towards interest. Right out of the gates, we see that in a standard 10-year repayment about half is going to put a dent in the actual principle and about half is going to go towards interest. And of course, with each monthly payment that we make, we’re going to see a little bit more going toward principle and a little bit less going towards interest.

[0:08:19.2] This is why folks often feel like, “Hey Tim, I’m making big monthly payments but I don’t feel like I’m progressing as quickly as I would like to in terms of getting this paid off” and that’s because of the interest that is accruing on those payments.

One of the common mistakes here that we’re talking about in terms of paying too much interest is we tend to underestimate how much interest we’re going to pay over the life of a loan and therefore, we tend to underestimate how much we’re going to actually pay out of pocket.

I see this all the time and talk with the pharmacy students, they may say, “Hey, I’m borrowing $20,000 a semester” let’s say for tuition cost, the living expenses, they multiply it by eight semesters and they think, “Hey, that’s roughly my student loan debt number.”

Now, what they’re forgetting is of course the interest that’s accruing while they’re in school, outside of administrative forbearance period, such that we’re in right now, and they’re also not including the interest that’s going to accrue while they’re in active repayment, right?

If we’re looking at a 10 year, perhaps for some it’s even a little bit longer repayment journey, then we’re going to see a significant amount of interest that’s also accruing throughout the life of a loan.

That’s why often, folks look up and say, “Wow, that’s a lot more that’s getting paid back than I really had anticipated was going to initially be the case.” What we want to be thinking about here as we talk about this first common mistake, paying too much interest is, what can we be doing to minimize the interest that we’re paying?

[0:09:38.9] That’s where we really get into student loan repayment strategy, right? A topic we have covered, lots of different ways on this show and there’s several different buckets that we need to consider.

That could be tuition reimbursement programs, forgiveness programs, either public service or nonpublic service loan forgiveness programs or we’re going to pay them off but we have an option perhaps to move our loans into the private sector through a refinance that’s going to help us reduce that interest.

The first couple of areas that come to mind if I’m thinking about, “Hey, how can I avoid paying too much interest?” is number one, could I have somebody else pay the bill, right? That could either be through a tuition reimbursement program or through forgiveness, whether that’s PSLF offer or non-PSLF, if that’s not viable or of interest, then perhaps, might I be able to reduce my interest rate through a process of refinancing.

One of the things that we want to avoid is staying in a status quo position in terms of staying in the federal system, paying a high-interest rate, or paying a high private rate, if there’s a better option out there, whether that be forgiveness or whether that be considering a refinance.

A couple of things to think about as we talk about that first mistake of paying too much interest and I’m going to reference a resource here where you can dig more into student loan repayment strategies to evaluate that further.

[0:10:50.9] Number two mistake on our list of 10 is not maximizing public service loan forgiveness. Now, we have talked about this on the show extensively but I feel the need to continue to shout from the mountain top about this topic because there’s a lot of folks that maybe have the option or pursue public service loan forgiveness and for whatever reason aren’t making that choice or folks that are kind of half in and they’re half out, right?

We’re leaving something on the table. When it comes to public service loan forgiveness, assuming that’s the right play for you and your personal financial situation, if we go that pathway, the goal is optimize and maximize forgiveness and minimize what’s out of pocket, right?

When I say, the common mistake here is not maximizing PSLF, what I’m referring to is that we’re leaving something on the table, either we’re paying more interest that we could have forgiven, or/and potentially, we’re not optimizing certain situations that would allow us to be able to also save through our forgiveness period.

One of the things we need to do here is actually break down the numbers of what this means for your personal situation. Now, I’m not going to go through the rules of PSLF, again, we’ve talked about that extensively on the show before, highlights here, we have to work for the right type of employer so 501(c)(3), not for profit or federal government agency or organization.

You have to be in the right kind of loan, so a direct loan, we’ve had some provisions with the Biden administration that have allowed some forgiveness and latitude on that, we’re going to talk about that more in an upcoming show. You have to be in the right repayment plan, which is an income-driven repayment plan.

[0:12:22.8] You have to make 120 payments and be consecutive but 120 qualifying payments before you’re ultimately applying for and receive tax-free forgiveness. Now, one of the things folks often omit, when they’re thinking about optimizing PSLF is really trying to figure out what can I be doing to pay less towards my student loans so that more is forgiven and that really gets to how the monthly payment is calculated towards your student loans when you’re in PSLF through an income-driven repayment plan.

The formula that is used is they take an amount that’s called your discretionary income and that is included of your adjusted gross income, so your taxable income reported on your tax returns, so your AGI, minus 150% of the property level, that is your discretionary income and then that gets multiplied by a certain percentage.

Just by definition of that calculation, there’s some things that we can do if we look at that discretionary income. That AGI minus that 150% poverty level, hopefully, you’re asking yourself, “What could I be doing to lower my AGI?” right? We don’t want to make less money but, “What I could be doing in terms of optimizing strategies to lower my AGI so that I can pay less towards my student loans, increase the amount that’s forgiven, and perhaps also, move forward other financial goals at the same time?”

What we know, what you know from listening to the show is there are strategies that we could do to lower our AGI, right? We think about accounts like 401(k) contributions, 403(b) contributions, HSA contributions. This is where we get to the strategy and the numbers start to become pretty wild in terms of not only optimizing what is forgiven tax-free but also, what could we be putting towards investments that over this repayment period of 10 years with PSLF, we also take advantage of compound interest and compound growth over that period of time.

[0:14:16.0] You know, it doesn’t take a whole lot of whole numbers in terms of putting money away at three, five, seven percent of compounded growth each year. Again, it’s not just the tax-free forgiveness that of course is a huge benefit but also, what can we be doing to moving forward in accelerating our investment plan. That’s the second mistake, not optimizing our PSLF strategy.

Now, a couple of resources I want to point you to here. Student loan repayment, you’ve heard me say it many times, one of the most important decisions pharmacists are going to make early in their career, one that we don’t want to walk into blindly, one that we don’t want to replicate what somebody else is doing that may not be a good fit for our situation.

This decision can be the difference, easily of tens of thousands of dollars, if not more, based on the option you choose and so, I really want you to invest the time and the energy to understanding this loan repayment options, as nuanced as they are. We’ve got a great comprehensive resource, The Ultimate Guide to Pay Back Pharmacy School Loans. It’s a free blog, comprehensive, almost like an ebook, to be honest, you can download that, read that blog at yourfinancialpharmacist.com/ultimate and we’ll link to that in the show notes.

Now, for those of you that are saying, “Hey, the information is great but I want one-on-one help with an expert that knows this in and out.” We do have a one-on-one student loan analysis survey that pairs you up with a YFP Planning certified financial planner and the goal of that is to analyze all of your options and ultimately decide on the best repayment plan for your situation.

You can learn more about that service at yourfinancialpharmacist.com/sla. Again, yourfinancialpharmacist.com/sla. All right, that’s number two, not maximizing PSLF.

[0:15:57.3] Number three is delaying the emergency fund. Now, we just came off of talking about student loan repayment, right? That’s a gorilla that is often in the room. Many folks are also trying to think about saving and investing for the future, perhaps there’s a home purchase, kids that might be involved, kid’s college, the expenses, and the list of expenses goes on and on.

Sometimes, the emergency fund can take a back seat for a couple of reasons. Number one, it’s not very exciting, when you think about making progress on our debt, to become ultimately debt-free whether that’s by paying them off or forgiveness or saving for investing for the future.

Those are typically a little bit more exciting goals to be thinking about. Putting money away in a savings account that’s going to earn minimal but not too exciting amount of interest and it’s there if we need it but hopefully, you don’t, not super exciting, right?

This often may fall by the wayside but the purpose and the goal of that emergency fund is to protect the financial plan when, not if, but when an emergency happens, and work from a position of financial strength with the rest of the plan, right?

[0:16:57.2] This could be a short-term job loss, gap of employment, this could be a health emergency, an emergency with the home, the list of things that could be involved here obviously go on and speaking from personal situations, something will come up at some point, probably not too distant in the futures that is going to require you to tap into this emergency fund.

Generally speaking, our target here is three to six months’ worth of essential expenses. Not to say three to six months’ worth of income but three to six months’ worth of our essential expense because there can be a place where we have too much in this emergency fund. Obviously, we want to be comfortable with that amount but too much means opportunity cost of dollars that could be used elsewhere in the plan.

Now, in terms of where to put it, generally speaking, we’re going to be looking at a long-term savings account, a money market account, somewhere that we can get to the money, it’s a liquid, it’s accessible, it’s running a little bit of interest more than you’re going to see in a checking account, typically which is closer to zero.

Maybe you’re going to getting 0.4, 0.5, 0.6 right now, not too exciting, we’re getting a little bit of interest but it’s a liquid, it’s accessible, this is not the place we’re trying to take a risk with our financial plan, right? We’re going to do that in the savings and investing for the future.

[0:18:05.9] Now, one of the tips that I could share with folks is I think it’s incredibly helpful to get these dollars out of your checking account, right? This really gets to the intentionality of the financial planning.

If we have a bunch of money lumped into our checking account that is for our month-to-month expenses and then we say, “Yeah, I’ve got some of that, that’s earmarked also for an emergency fund,” get it out of the checking account, put it in a separate savings account. Number one, out of sight, out of mind.

Number two, we’re really going to call that account an emergency fund and that’s going to show us our intentionality towards building that and protecting it and getting that out of our month-to-month checking account where we’re either doing our expenses or that we have tied to a credit card where those expenses are charged, so that’s number three.

[0:18:44.0]: Number four is not protecting your income and this obviously gets to a whole laundry list of types of insurance we need to be thinking about including health, home, auto, renters, and so forth, professional liability.

The two that I just wanted to touch on briefly here are term life and long-term disability, and one of the things I often share with pharmacists is “Hey if you are going to do the hard work to really figure out how we’re going to manage just a $170,000 student loan debt if you are going to do the hard work to build a nest egg and a retirement portfolio, we’ve also got to invest some time to make sure we’re playing defense so we are preventing the catastrophic from disrupting that progress in our financial plan. “

When it comes to insurance, the balance point here is we want to not be underinsured, right? We want to make sure we can protect the time but we also don’t want to be over-insured, which is something we often see folks might be in a position of a policy that has been sold to them that is not necessarily coverage that they need or that is in their best interest.

When we are talking about term life insurance what we are talking about here is insurance that would be able to replace your income and what that income provides in the event that you were unexpectedly passed away, right? We’re big advocates of term life insurance. Other types of life insurance out there are whole life, permanent, value types of policies not to say that those don’t have a place anywhere but for the vast majority of folks that we talk with, a coverage with a term life insurance policy might be a 20 or 30-year term.

A million, two million dollars, it really depends on your personal situation but that is going to allow for an affordable monthly payment that is a fixed monthly payment that is going to then allow us to free up dollars to be able to put towards other parts of the financial plan.

[0:20:24.9] In terms of a term life insurance by definition, let’s say somebody buys a 30-year term policy for a million dollars and they’re 30 years old, they are going to pay a monthly or annual premium, depending on how the policy is set that is a fixed monthly payment over that policy length, so it will be a 30-year policy in this case. From 30 to 60 years old in that situation, they would pay a monthly or annual premium.

Now, if they were to die unexpectedly at some point, so let’s say at the age of 50 that person passes away, well at that point their beneficiary would receive the money that’s known as the death benefit and that would be a tax-free policy that would be paid out to the beneficiary. Now, if they don’t die in that 30 year period, which is a good thing that’s the goal, a term life insurance policy, you’re paying those premiums on but you are not going to get those dollars back, right?

If we get to 60, we’ve made it, we are still alive at that point, the policy ends and we are not going to recoup any of those dollars. We are really preventing things on the catastrophic side. We are not looking at this as an investment vehicle. Now, on the disability side, what we are talking about here is really trying to address a scenario where what if you are unable to work as a pharmacist because of a disability?

Car accident, chronic illness, whatever it may be, and obviously at that point, you are disabled and so you are unable to work, in that case, your expenses still live on but your income now here is in jeopardy. A long-term disability policy is the one that we’re often referring to here, again, monthly or annual premium, typically a percentage of your salary that you are going to purchase a policy for.

It could be a five-year, 10-year, 20-year policy up to the age of 65 so it depends on the type of policy, lots of nuances here to think about and then if you were to become disabled, there is going to be known what’s an elimination period, which is the time period between when the disability happens and when your policy kicks in and you have to self-fund that period. It might be 30 to 180 days depending on the policy and then after that point, your monthly policy kicks in to help replace your income.

[0:22:16.8] This is one of the areas we see pharmacists often overlooking and both with term and long-term disability, you may have some base coverage that is provided by your employer. It works a little bit different on the tax side of things of how that benefit is taxed or not taxed depending on where the policy lies and how the premiums are paid and really the question here is, what additional coverage might we need beyond what we have offered through our employer?

If you go to yourfinancialpharmacist.com/insurance, we’ve got two additional resources pages on term life and long-term disability where you can learn more about those and see where that fits in with your financial plan. So that is number four, not protecting your income.

[0:22:57.1] Number five is accepting that your income is fixed. Now, many pharmacists graduated in 2008. If you look at the average of pharmacists in 2008 versus what it is here in 2022, if you factor in inflation, not a whole lot has changed, right? Pharmacists tend to make a great income coming out of the gates but depending on the area of practice that they are in, that income may be relatively flat throughout their career.

All the while our expenses are going up and we also see debt loads continue to creep up through that time period. One of the things we want to be thinking about here is how can we potentially maximize our income, right? This would be a benefit to both diversify your income, so I talk with many pharmacists that might let’s say, full-time at a community pharmacy pick up some PRN hours at a hospital pharmacy so they have their foot in the door at a couple of locations.

Again, additional income but also to diversify, pharmacists that are working on side hustles and doing some medical writing or other businesses to generate additional revenue, also areas of interest. And so this could help us diversify but also can help us accelerate our financial goals, so lots to think about here and this really is very much an individualized decision and we’ve got a great resource available, 14 Extra Ways That Pharmacists Can Consider Making Additional Income. That is a blog that we have in the YFP blog, we’ll link to that in the show notes with this episode.

[0:24:19.5] Number six is delaying retirement savings. Now, many of us have been told by parents, grandparents, perhaps multiple people that you need to be saving as early and often as you can, right? Time value of money, compound interest, as Albert Einstein said, it is the eighth wonder of the world and so what we’ve been told, what we’ve been taught is the longer we delay our savings, the harder it is going to be to catch up.

I want to put some numbers to this because I think sometimes we hear that, were like, “Yeah, yeah, easier said than done. You don’t have $170,000 in student loan debt, you aren’t trying to purchase a home and doing all of these other financial goals at the same time” but the math here is really compelling.

If we look at a pharmacist who is making about the average salary of a pharmacist that’s out there if we assume they are putting away about 15% of their income and they are getting an average annual rate of return on their portfolio around 6%. So if you look at the historical rate of return of the stock market around 10% net of inflation closer to 7% and so if they are putting away 15% of their income and they have a desired retirement age of 60, what we see is by putting away about 15% of their income each and every year, if they start at the age of 25, when they get to the age of 60, they’re going to have about 2.6 million dollars saved.

Now, if they wait to the age of 30, that 2.6 turns into about 1.8. If they wait to the age of 35, that 2.6 that could have been if we started at 25 turns into 1.2 and if we wait to the age of 40, that 2.6 turns into $800,000. So that value, that advice is real, right? The earlier we invest and save, obviously we are going to have more time for that money to grow and to do its thing in terms of compound interest throughout many, many years.

Again, we’re just talking about one factor here in a vacuum as we talk about delaying retirement savings. We of course have to zoom out and consider this with other financial goals that we’re working on but ultimately, as we are able to do. We want to be focusing on starting as early as we possibly can.

[0:26:17.9] Number seven here is prioritizing non-tax favored investment accounts. Now, we talked in episodes 72 through 75, we did a series on kind of an investing 101 series meant to be a crash course for those that are wanting to learn more about investing in terminology, some of the biases associated with investing, some of the information on fees, types of accounts, 401(k)s, IRAs, et cetera and so that is a great primer if you want to go back and listen to episode 72 through 75.

What I am referring to here is investing potentially out of order. Now, this is certainly not investment advice, right? We don’t know anything about your personal situation but there is some low-hanging fruit from a tax advantage investing standpoint, right? When you think about 401(k), 403(b), employer-sponsored retirement accounts especially when we think about employer match, free money, right? We have all been told that before.

If we keep working down there, we think about things like health savings accounts, triple tax benefits. We have talked about that on the show before, Roth IRA accounts. Again, another account where we might be putting dollars in that have already been taxed but they’re going to grow tax-free, we pull them out without a future tax burden, so if we are contributing to let’s say a brokerage account, whether it is through a tool like Robin Hood or Acorns or Betterment or whatever be the app or tool. But we are not yet taking advantage of some of those other things, the question we want to ask ourselves is, are we investing in a way that’s going to allow us to maximize our tax savings, right?

Are we investing in appropriate priority? There certainly is I think a place and a role for a brokerage or taxable account but let’s be thinking about the order in which we are doing that relative to employer retirement accounts, IRAs, HSAs, and so forth.

[0:28:02.1] Number eight here is tax filing without tax planning and strategy. Now, we’ve been hitting on this in the show in the last three to six months, shout out to the team at YFP Taxes doing a great job servicing the clients of YFP planning as well as some new clients here in 2022 and what I am referring to here is someone who is doing tax preparation but is not thinking more strategically on the tax planning side.

So, if we look at a pharmacist on average, if they are making an average income working 40 years or so, and if we adjust up that salary for inflation of pharmacists throughout their career as going to earn about $9 million in their career. But only about six million of that depending on their tax situation is going to hit their bank account, so that delta of $3 million is what we want to be thinking about to pay our fair share, right? But we want to optimize how we can be able to use dollars elsewhere if we can allocate those towards a financial plan.

Tax preparation, that’s what we are all doing, we’re required to do it, right? If we don’t file our taxes by April 15, the IRS is going to be coming knocking on our door unless we file for an extension. Tax preparation is historical. It is looking backward, so it limits the impact that we can truly have on our tax liability because things have been done at that point in time, so it is mechanical, we have to file, it’s looking back.

Where tax planning is more of the forward-focus strategic part of integrating the tax plan with the financial plan. Here is where we can avoid common issues in advance, right? We can look at how we can adjust withholdings, do some projections, how can we optimize our savings accounts, how might we look at our savings and philanthropic contributions to be able to optimize those as well.

Lots of things to consider, there’s optimization strategies around long term savings accounts HSAs, 529s, we know there is tax saving strategies with PSLF, lots of child-related optimization strategies, child care credits, dependent care FSAs, maximizing charitable contributions, you know really the list goes on, right? If we are able to do more of that planning and strategy work and look ahead, then we’re obviously able to take advantage of those, so that when we do the filing, we know we have optimized the situation throughout the year.

I would reference folks to episode 233, where our director of tax, Paul Eikenberg and I talked about some tax moves to consider from an optimization standpoint and we’ll link to that in the show notes.

[0:30:27.2] Number nine here is saving for kids college out of order. Guilty as charged, right? I found myself in this trap and as I reflect on that, I think about, “Well, why was that the case?” right? I knew about tax advantage, retirement vehicles, I knew that I have been given the advice over and over again that you can borrow for college, you can borrow for your kid’s college, but you can’t borrow for your retirement, so why was I not focused on the correct order of that?

The more I thought about that, was that it was my reaction to my own journey of not wanting to see my kids incur a couple hundred thousand dollars of student loan debt, right? I think for many pharmacists, that may be the same thing where they are going through their own journey, they are living through that, obviously, the pain of it may be right in front of them right now. And therefore, they might be looking at saving in a 529 account with good intentions, but are we doing that in the right order, right?

This is a great example of where we don’t want to look at one part of the financial plan and the silo because if we just answer the question, saving for kid’s college in a 529, is that a good financial move? Sure, there is tax benefits in doing that especially if we look at the potential growth over 10, 15, or 20 years. If we zoom out and look at what else we’re doing to financial plan that may or may not be the move to make at that time.

We talked on episode 211, the ins and outs of the 529 college savings plans and we’ll link to that in the show notes for more information.

[0:31:51.5] Finally number 10, hiring a planner that does not have your best interest in mind. Now full disclaimer of the bias of the planning services that are offered by YFP Planning, we wholeheartedly believe in fee-only financial planning and we’ll talk about that here in the moment. Obviously, I have a bias towards the services that the team at YFP planning offers, so we need to keep that in mind as we talk about this tenth point.

Now, we talked on episodes 15, 16, and 17 way back when we did a three-part series on working with a planner, what to look for, questions to ask and we also talked about why fee-only financial planning matters. When you think about working with a financial planner here, is the term financial planner or adviser in it itself does not necessarily mean something that we can hang our hat on, right?

We, in the pharmacy world, we’re used to the PharmD board certifications and residencies. We know exactly what those credentials mean and there is a relative amount of consistency in those credentials, so that when someone says, “I completed a PGY-1 residency.” We know what that means.

When it comes to financial planning, financial advisors, wealth managers, wealth advisers, there are a wide variety in terms of education, training, and experience. And what those services look like that will inform and help inform whether or not those may be a good fit for you. So we need to be looking at, what is the educational background of these individuals, what is the credential, how are these individuals regulated?

We firmly believe in the certified financial planner credential, we’ve got five CFPs on the YFP planning team. The CFP is certainly not a credential that is required to do financial planning but very robust in terms of the requirements of the educational portion of the CFP or rigorous examination to pass as well as an experiential component that we would think of as like appys in terms of pharmacy education.

[0:33:42.7] Other things to consider here, I have mentioned the term fee-only, so fee-only by definition is that you are paying the planner and the planning team for the advice that they are giving, so they are not getting paid by recommending products such as insurance or investments where they’d be on a commission, and obviously a potential bias on that recommendation. And then we also really encourage folks to look at whether we are or are not the solution that is the best fit, someone who really offers comprehensive financial planning.

The reason that’s important is that historically, the industry has focused a lot on investments and insurance, you know, think of folks that might be a little bit further along in their career, they have a substantial amount of assets to manage. And so, often there may be a minimum of assets to work with a firm, but when it comes to other things that might be of significance like student loan debt, like some of the early insurance discussions.

Like, “Hey, I am thinking about starting a business or a side hustle” or “I’m looking at purchasing a home or investing in real estate” or “What about the estate plan?” or “What about the tax part of the financial plan?” Making sure the adviser regardless of the stage that you are in of your career, making sure the adviser and the advising team has the expertise and the experience to be able to serve you and the needs that you have for your financial plan.

When it comes to working with YFP Planning, we’re really proud of the work that the planning team does. I mentioned five CFPs, shoutout to our lead planners, Robert Lopez and Kelly Reddy-Heffner who lead those two teams, working with Robert is Kim CFP and Savannah, working with Kelly is Christina, CFP, and Sarah. And then we also have a tax team that supports the financial planning.

We are currently working with about 250 households and over 40 states all across the country, very robust in terms of the comprehensive nature of the plan. For folks that are interested in learning more about that service and what it would look like in terms of working one-on-one with a YFP certified financial planner, you can visit, yfpplanning.com, and you can book a free discovery call with Justin Woods, also a pharmacist who is our director of business development.

[0:35:40.8] Well, that’s 10 common financial mistakes that we see pharmacists making. I really appreciate you joining me on this week’s episode and we’ll see you here again next week.

[END OF DISCUSSION]

[0:35:48.4] TU: Before we wrap up today’s episode of Your Financial Pharmacist Podcast, I want to again thank our sponsor, The American Pharmacist Association. APHA is every pharmacist’s 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 and using the coupon code “YFP”.

[DISCLAIMER]

[0:36:28.5] 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 of 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 analysis 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 242: Social Security 101: History, How it Works, and Why it Matters for Your Financial Plan

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Social Security 101: History, How it Works, and Why it Matters for Your Financial Plan

YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® talks about social security retirement benefits, how they are funded, how to determine eligibility and considerations for receiving benefits.

Episode Summary

It’s time to talk about the elephant in the room that most people ignore for as long as possible: social security retirement benefits. Whether retirement is decades or just years away, it is something you should be talking about sooner rather than later. This week Tim Ulbrich sits down with YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP® to do a deep dive into the history of social security, how it came to be, and what it was and was not intended to do. Tim Baker covers how social security benefits are funded, the credit concept, what number of credits are needed to be eligible for benefits, and how those credits are determined. You’ll also hear some golden nuggets from Tim on the power of being protected against inflation, as well as reminders on striking a balance in the financial plan around happiness and physical and mental health. Finally, Tim and Tim touch on how the amount of benefit paid out is determined and considerations for when someone elects to receive their benefits in early, full, or delayed retirement. This episode helps establish a great foundational understanding of social security benefits and how they fit into a broader financial plan.

Key Points From This Episode

An introduction to today’s topic and a reminder that we can help you with your tax.
Addressing why people aren’t having enough conversations about social security retirement benefits.
Hear some intense statistics about retirement and working longer that will blow your mind.
Talking about the history of social security and the difference between that and a 401(k).
Being protected against inflation by being inflation-adjusted.
Tim talks us through some annuities and numbers in a basic scenario.
Discussing our huge year next year from an inflation perspective.
How retirement is not just a money decision, it’s an emotional decision.
Tim digs a little into the different ways scarcity fear can arise during retirement.
Looking at your pay stub: explaining credit and payroll taxes.
The outcomes of the three ages of retirement: early, full, and delayed.
Touching on some of the nuances around health and spousal benefits.

Highlights

“How you approach social security is one of the most important retirement income decisions you’ll make.” — Tim Baker, CFP®, RLP® [0:05:33]

“We’re just not great savers, we don’t think that far ahead. Social security forces that issue and, by law, makes you kind of set that money aside for that future benefit.” — Tim Baker, CFP®, RLP® [0:10:00]

“This is not just a ones and zeroes decision. It’s not just a money decision, it’s very much emotional.” — Tim Baker, CFP®, RLP® [0:15:44]

“At the end of the day, you’re really trying to manage and plan for the unknown and that makes it really difficult. I think it goes back to, you just want to be intentional.” — Tim Baker, CFP®, RLP® [0:31:44]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

This week, I had a chance to sit down with YFP co-founder, co-owner and Director of Financial Planning, Tim Baker, to talk through social security retirement benefits. During the interview, Tim and I discuss the history of social security, how it came to be and what it was and was not intended to do, how the benefits are funded. We also discuss what number of credit is needed to be eligible for benefits and how those credits are determined and finally, how the amount of benefit paid out is determined and considerations for when one elects to receive their benefits.

Now, before we jump in to today’s show, let’s pause to acknowledge that we are in the midst of tax season. Those tax forms are piling up and it’s time to have your tax filing and planning top of mind. Now, tax strategy and planning is an undervalued but very important part of the financial plan and YFP Tax is working hard to help pharmacy professionals optimize their tax situation. YFP tax is opening up its services to file 2021 taxes for 125 pharmacist households this year.

The team at YFP tax isn’t focused on just completing your tax return, instead, they provide value, care and attention to you and your taxes. Because YFP tax works specifically with pharmacists, they’re familiar with aspects of your financial plan to have an impact on your taxes. The 125 slots are filling up quickly so don’t wait too long. I5f you’re interested in working with a team of highly trained tax professionals, head on over to yourfinancialpharmacist.com/tax to sign up. Again, that’s yourfinancialpharmacist.com/tax.

[INTERVIEW]

[0:01:47.9] TU: Tim, welcome back to the show.

[0:01:49.1] TB: Yeah, good to be back, love these deep dives, these full episodes.

[0:01:52.9] TU: Good stuff, looking forward to doing more of that in 2022. And we’re now 240 plus episodes into the podcast, I think we’ve laid a really good foundation on so many topics that are front of mind for pharmacists and those in the YFP community. I think we’re itching to really take it to the next level and today, we’re going to do that by providing a primer on social security benefits and what pharmacists should be thinking about in terms of how social security benefits fit into the broader financial plan. And on future episodes, we’re going to discuss some common social security mistakes and strategies. So today, we’ll make sure to establish a good foundation that we can build upon going forward.

Whether you’re listening and you’re approaching retirement in the middle of your career, just getting started, you know our hope is that you’ll walk away with a social security nugget or two that you can consider and evaluate as a part of your own plan. Today, as we talk about social security benefits, we’re going to use that term interchangeably with social security retirement benefits. We’re not going to be including and discussing this social security disability benefits.

Tim, I was looking at a recent Wall Street Journal article and I know you’ve got some other stats as well that we’ll draw out throughout the episode but that article, which we’ll link to in the show notes references some work that was done by Boston Colleges Center for Retirement Research. They say that for the typical American household aged 55 to 64, the present value of social security’s represent about 60% of their retirement assets. And with that in mind, even if that number is half, let’s say, 30% for those that are listening to the podcast because they’ve been diligent in setting up their own savings plan, why aren’t we talking more about such a big part of one’s retirement assets?

[0:03:39.4] TB: Yeah and it is crazy Tim, because there is the tenure out there that, “Social security won’t be there for me in the future, I can’t trust it. I have to go do this all myself.” I don’t think that’s necessarily true. I think that social security will be a program that will endure and it might take tweaks and pushing for retirement age out and payroll taxes and things like that. I think there could be things that happen along the way that make it more enduring.

I think that for that sense of the fold, it would be catastrophic because, to your point and your stat, so many people rely on this for their ability to survive in later stages of life. I read a stat that a third of retirees, 90% of their income comes from social security, think about that. I think it goes to show, it’s like, we’re not great at kind of transporting ourselves into the future and saying like, “Hey, I really could use this nest egg of dollars” because we just disassociate ourselves from things that are 20, 30, 40 years out and it’s such an important thing to kind of breakdown and look at because it’s one of those things that you wake up and you’re like, “All right, I’m 50, I’m 60, I’m looking at retirement and what do I have?” And it’s not enough.

Social security, we’re going to go into the some of the background and everything but it is a major piece of this Rubik’s Cube that is, “Okay, once I stop working, how can I convert or how can I build this retirement paycheck that I’ve been really working my whole life for?” Social security is going to be a big part of that, with the stats support that. How you approach social security is one of the most important retirement income decisions you’ll make. I would say, most of the retirement, one of your most important retirement decisions, not even income decisions.

To me, yeah, we haven’t talked about this enough. I think it’s really important because it is going to be a major piece of the pie when we’re breaking down, “Okay, we need X amount of dollars per year, this percent is going to come from social security, this percent’s going to come from your 401(k) IRA, this percent is going to come from here.” That’s really important to break it down and I read a stat Tim, this will blow your mind, we’re talking about – with some clients, the power of working longer.

[0:06:14.5] TU: Yeah.

[0:06:14.8] TB: The stat is that, delay in retirement by three to six months is equivalent to saving 1% more for 30 years.

[0:06:22.2] TU: Wow.

[0:06:23.2] TB: That’s insane. Then, to break it down a little bit more, defer retirement by one month is equivalent to 1% more savings for the 10 final years before retirement. What’s going on here, there’s lots of different variables. When you work longer, you are earning and typically, you earn at the top end and we’ll talk about that with social security, you’re making the most in your career towards the latter part of your career.

You’re also not – that’s one last month or year that you’re digging into your 401(k), 403(b). It’s one less year that if you live to age 90 that you’re drawing on that. Social security is a big part of that in terms of delay and deference, so there’s just a lot going on that really is important to understand. And again, social security is going to be a big part of that and that’s why I’m eager to kind of dive in with you and kind of crack the nut, so to speak, in a very important topic.

[0:07:19.9] TU: Well, thanks Tim, for dashing my hopes of early retirement. No, I’m just kidding. Let’s start with the history of social security. I think it’s important, your comment earlier was a good one, right? I think for many of us, myself included that it’s easy to disassociate with something that’s 20 to 30 years out. I think even more so, there’s been such negative talking points around social security that I think especially for us that maybe are on the early or mid-part of our careers where it’s kind of been not a big thing that we’re thinking about. Which on one hand, you could argue as a blessing because that means hopefully we’re building our own retirement paycheck and social security might be a bonus. But on the other hand, I think as we’re going to expose today, that probably means we’re not thinking enough about it.

[0:08:03.1] TB: Right.

[0:08:04.1] TU: You mentioned, it’s an important part of the Rubik’s Cube. Understanding the history and what it was intended to do and not intended to not do, I think, is a good segue into understanding some of the benefits and credits in how we determine how we’re going to approach the strategies for withdrawal. Talk to us about the history of social security starting with the social security act of 1935?

[0:08:24.0] TB: Yeah, this was an act that was signed in the law by FDR, President Franklin Delano Roosevelt in August of 1935 and really, what it was the main effort here was, it created a social security administration and thus, the social insurance program designed to pay retired workers at retirement, age 65 or older and to continue throughout retirement until death.

It was really meant to kind of look at the problem of economic security for those in old age by setting up this system, which you contribute as a worker throughout the course of your career into this huge fund and it’s not – it’s different. We just had a question about, “I’m maxing out my 401(k), what should I do from here?”

In that case, when you put money into a 401(k), that is your own individual account. Every dollar that you put in, again, dependent on your investment selections like you’re going to get that back. Social security is not the same, it’s a big pool that then pays benefits as you kind of hit those retirement ages.

You’re funded. And when you look at your pay stub, Tim, you’re going to see a big line for social security and you’re going to see that money’s coming out each paycheck and how much you contributed for the year, but it’s really meant to kind of be based on the fund and based on the payroll tax contributions that you make during the course of your working life.

I think around this time, you got to think. I think there are lots of measures that kind of protect the worker, not just in this in terms of economic security but I think even safety and things like that and I think the data shows that even today. And maybe it’s because of this, but we’re just not great savers. We don’t think that far ahead and social security kind of forces that issue and, by law, makes you kind of set that money aside for that future benefit.

But social security, from the outset Tim, was never ever meant to be, to meet 100% of the needs of retirees. Although, like we said in some of these stats, for some people, it comes pretty darn close. Again, to me, depending on where you’re at in the income scale, if you’re lower income, it could be 100%.

If you’re a higher income, it could be a very much smaller percentage of the overall need but it is one of those incomes for life that is inflation protected which you just can’t find anywhere. Even if you were to say, “Hey, I have a three million dollar portfolio and I’m going to drop $500,000 or a million dollars into an annuity that I’m going to buy,” it’s not going to be as good or as beneficial to you as what social security is going to provide.

Like you said Tim, the history – I think this just comes with different amendments but it was really also meant to protect disabled workers and also, families where the working spouse or parent died. It is a monumental piece of legislation and I think really paved the way for people to have a benefit that they can lean on in older age and not really work for the entirety of their life.

[0:11:26.5] TU: Tim, when you say it’s inflation protected, just to clarify there for folks that are diving into some of this, perhaps the first or second time, that’s because the benefit itself is inflation adjusted, right? I remember talking with folks this year that our drawing social security benefits because we’re inflation and they saw a significant bump in that benefit heading into 2022 and to your point, that’s just really hard to find that type of benefit and we think about traditional kind of retirement planning, 401(k), Roth IRAs and other types of things, you’re having to account for that yourself, right? As you’re building that portfolio.

[0:12:01.4] TB: Yeah, exactly. That’s why when we talk about, “Hey, you can’t just stuff the mattress full of dollar bills and hope that in 30 years, your purchasing power is going to be there.” In social security, that’s built in for you. I think it’s by law so every year, they set the COL, the cost of living and then they adjust the benefit accordingly. I think recently, it’s been lower, I think I saw a number, it was like 1.7 but next year, it will be a lot higher because we’re seeing rates start to tick up. But that benefit alone, Tim, is not to be underestimated.

Because again, if you go on to the marketplace, either an annuity – when I say annuity, essentially, what I’m saying here is – that’s all really social security is, in the sense that – an annuity is, you put money in either in like a lump sum over time and then sometime in the future, you annuitize it so you basically start to draw on that benefit and they say, “Okay, based on the amount of money that you put in and our ability to invest on your behalf, we think that we can pay you a benefit of $2,000 per month.”

What a lot of people do is, they’ll take some of that nest egg, some of that defined contribution like a 401(k) and they’ll peel that off so they’ll say, “Okay, if I need a paycheck…” Kind of tangent here but I think worth going down.

[0:13:21.9] TU: Yup.

[0:13:22.5] TB: “If I need a paycheck of $5,000 per month and $2,000 is going to come from social security and I know that for me to keep the lights on, housing, food, kind of the basic necessities, I need $3,000.” Basically, what I would do is, I have $2,000 from social security, I’m going to purchase an annuity that’s going to give me an additional thousand dollars per month so I’m going to take, I’m going to make up a number, I’m going to take from my portfolio of half a million dollars and basically buy that annuity that it will give me a thousand dollars per month.

There’s lots of different ways to go, you can have a joint rider where you can have a term certain, there’s lots of different ways to do this on how it’s invested and things like that. Essentially, what you’re doing is you’re creating a floor. You’re saying, for me to keep the lights on, it’s $3,000 per month, social security is going to cover two, I’m going to purchase the one.

[0:14:15.4] TU: The one, yup.

[0:14:16.9] TB: Then the other two is more like discretionary where I might be traveling and spoiling grandkids or that type of thing. That’s all this is and again, that’s one of the beautiful things about – to go back to the annuity thing, for you to find that same type of inflation protection, it either doesn’t exist or it’s capped.

If we have a huge year next year from inflation perspective and it’s 4%, 5%, 6%, 7%, the annuity might say, “You’re capped at whatever, 3%, three and a half percent.” Then, what happens and really in that year is that your purchasing power is diminished. That’s one of the things is like, the social security – and it’s backed by the full faith and credit of the US government, the tax payer, which you can argue, “Okay, that’s good.” But from an investment perspective, it’s about as safe as you can get in the world.

Yeah, that’s important. It is really important to understand that, in terms of the context of where those dollars – we can get into this a little bit more but just like everything we talk about this with different parts of the financial plan, Tim, this is such an emotional thing. And you see, we’ll get into the decision to claim, to claim or not to claim when you do that and what age.

It’s really important and people stress out about, “Oh if I wait the claim and then I die and I don’t get all those dollars, what a waste.” The other thing Tim, to really consider in this whole conversation is, it’s really so true for the rest of the financial planning is that, this is not just a ones and zeroes decision. It’s not just a money decision, it’s very much emotional.

This decision on social security and when to claim, when not to claim, and there’s lots of different approaches out there in terms of total benefit of social security versus the break even analysis. And the idea is like, “If I wait to claim,” there’s so many retirees that say, “If I wait to claim at 70 and then I die at 75, I left a lot of money on the table.”

[0:16:12.9] TU: Yup.

[0:16:12.6] TB: There’s a lot of different pieces of that to consider but I think the other – so there’s lots of stress and uncertainty there but I think the other thing to kind of mention in this discussion is that if I kind of invoked the example that I’ve said, “Okay, if we’re looking at $5,000 paycheck, two is going to come from social security, we bought another one.” In that $3,000 total, out of the five is just what we need to keep the lights on. It’s for living, food and all that kind of stuff.

The emotional part of that is palpable, it’s really important to understand that because, you know, just like there’s stress and emotion around when to claim, there’s also this feeling of, you know, if you don’t create that floor and you’re dipping into your three million dollar portfolio as an example and your every month or every quarter or whatever it is, you’re deducting from that, there’s this feeling of scarcity too.

Sometimes, you know, you want a little bit of column A and a little bit of column B. Sometimes, people don’t create that floor because they want that investment to really thrive and the idea of taking a big chunk out of that to create income is scary. But from a scarcity abundance mindset, a lot more people either by delaying social security or creating that floor through social security and annuity, really allow that abundance to thrive.

I always joke, like I joked when we bought the motorhome. I look at their red shade and I was like, “Well, you know we can completely crash and burn, lose our jobs, lose our house and we can always rely on the motorhome to have a place to live.” I think that’s just a micro-chasm of what we’re talking about here, because a lot of people – the questions for retirement is, “Am I going to have enough? Will the money run out?”

That is really important when we’re talking about things like social security and where that plays in the grand scheme of things.

[0:18:11.5] TU: Tim, I want to come back to this decision on when somebody takes money out and what it means to defer, we’ll come back to that later episodes and more on the strategy side. But taking a step back into the how it works, thinking about the funding of it and the credits, you mentioned before, this is something that folks likely have already noticed on their pay stub. Tell us more about how this comes out to payroll taxes and what they can be expecting there?

[0:18:35.3] TB: Yeah, so the two main payroll taxes out there is Medicare and Social Security. Social Security is basically tax at a rate of 6.2% and sometimes you see it together at 7.65%, which is Delta, it’s the Medicare tax rate. Every year this changes, so the maximum social security contribution in 2022 is $9,114 and that’s based on what’s called the wage base or the taxable wage base.

For 2022, the taxable social security wage base is $147,000. If you multiply that by 6.2% that’s where you get the $9,114. What essentially that means in layman’s terms is, if I am a pharmacist out there and I am making $147,000 or I am Elon Musk and I am making billions, from Social Security you’re still treated as the same. Any dollar above that is not necessarily taxed from a social security perspective.

The wage basis and the maximum amount of earned income that employees must pay social security taxes on. Now, I think Medicare is uncapped, so you’ll pay a percent throughout the higher earnings so to speak. With the funding in mind and again, you’re setting aside that – those dollars, not necessarily directly for you but for the pool that you will one day dip into. Basically you are trade in those dollars for credits.

As you work, you build credits and for you to become eligible for Social Security, you need 10 years or 40 quarters, 40 credits that makes you eligible for retirement benefits. In 2022, you earn one Social Security or Medicare credit for every $1,510 in covered earnings each year and you must earn just over $6,000, $6,040 to get the maximum four credits for the year. The idea is that you’re building credits, building credits and then depending on when you actually start to draw on your benefit, you kind of convert those credits to what that benefit is and then there is also some things called like delayed credit.

For me and you Tim, and it is different depending on when you’re born but for anyone born after 1960, full retirement age for you and I, anybody born after 1960 is going to be 67 years old. For my dad who was born in the 1940s, he’s the old man in the group here so his for-retirement age is 66. But if you or I or really anybody decide to delay your retirement, so delayed retirement, the maximum you can delay it to would be 70 years old, you would receive delayed retirement credits, which are used to increase the amount of your kind of older age benefit credit.

You would earn additional dollars and it’s about 8% per year that you delay. If my for-retirement age is 67 and I decide to retire at 68, my benefit would increase by 8%, which if you think about that is very powerful. Not everybody gets 8% raises every year and then the other thing that’s important to just remind everyone out there is that it’s inflation protected. Again, this goes back, we’re going to talk about this more on a strategy perspective but it’s just very powerful in terms of how you approach this decision.

[0:21:53.4] TU: Tim, you mentioned that the delayed component, so you know, you mentioned 67 and essentially up to 70 depending on when somebody is born, but there is also the other side of it, right? If somebody decided to take it sooner than that, talk to us about that.

[0:22:06.7] TB: Yeah, great question or great point. Yeah, you’re looking at, you’re really looking at and what we’re really kind of breaking down here is how you determine your benefit. To back up on the credits, which we should have mentioned is that the credits are based on your highest 35 years of earning. You know, it looks at the top 35 and it goes back to that question of if you delay you’re later years, you’re probably going to be substituting like a year.

A year where you are making six figures from where you made tens of thousands because you’re a resident or something like that so yeah, that’s huge. Really, the three I guess phases or ages are going to be kind of the early retirement for everyone at 62. But what happens is that your benefit is based on for-retirement age. You have your early retirement, you have full retirement age, FRA, and then you have delayed retirement and that’s to 70.

For you and I Tim, our early retirement is 62 years old, our full retirement is 67 and then our delayed retirement is 70. Now, depending on where you’re at from a birthdate perspective, if you were born between 1934 or 1943 and 1954, then 66 is your for-retirement age not 67. If you are born in 1955, it’s 66 and two months, 1956, 56 and four months, I don’t know why they complicate these things like this but yeah, so that’s the big change.

Again, there could be legislation in the future that they’re going to say, “Hey Tim, just kidding. People are living longer, your full retirement age is not 67. It’s 68” that could happen or the earliest that you could retire from an early retirement is 63 not 62. It’s you’re early for us, it’s 62. It’s for your full retirement for us is 67 and for delayed retirement it’s 70 and again, those could change in the future but dependent on how you choose to then claim, so the example is if you begin taking your social security at 62 you reduce your benefit by essentially half a percent each month to your full retirement age.

If you take it 24 months, two years, every month you’re reducing it by half a percent, which can definitely add up. A lot of people they’ll say, “Hey, my job is not great.” Or sometimes I’m forced out of retirement, for a lot of people there’s just this misnomer that, “I am going to control when I retire.” That’s not necessarily the case. It’s something like 40% of people are either forced out of their job or because of a health issue of themselves or a loved one.

That’s also something to kind of take into consideration but it’s all based on this credit. And again, when I was prepping for this podcast, I went to my socialsecurity.gov and I put out my own social security statement and it outlines eligibility and earnings. It says, “You have the 40 work credits” so to receive benefits, it kind of told me what I earned last year but then you can click in and review your full earnings record now.

It goes back really from 2021 back to, I think for me, 1998 I earned in social security’s eyes like $351 but eventually that number will fall off in the calculation because I’m going to have, you know, I have 24 or 25 years of work and those lower numbers will knock off and then I’ll get a bit of benefit but the cool thing to see is, you know I can see the dollar amount of my benefit for early, full and delayed.

Right now and I can share it, so this is at for me it’s saying if I retire at 62, I wouldn’t be on track to earn a benefit of $1,603 per month. If I wait for 67, which is my full retirement age it’s $2,341 per month and then if I delay it to 70, it jumps to $2,902. And again, these are inflation protected, that’s really important to understand. That is basically the way that the credits work and how that kind of translates to a benefit.

Again, it’s something that I think and we could probably have a full episode of like how people kind of mismanage these decision of it’s, “Hey, my brother did it at this age” or my spouse or these are what people are doing in the workplace and X, Y and Z. And it’s really just like different parts of the financial plan, it’s really important that you take a look at this very intentionally because it can have major consequences in terms of your overall outlook for your retirement picture.

[0:26:39.6] TU: Yeah and I like what you said earlier is that, how you approach social security is the most important retirement income decision you’re going to make, right? Again, one of the reasons we want to do this episode followed up with other content, if folks haven’t yet checked out their social security account, I would encourage you to do so. It is really neat to kind of see and log in and start to dig into this deeper, you can go to ssa.gov/myaccount.

Tim, I was looking back too at my earnings record, it was fun going back like starting when I used to work for the family business, Ulbrich’s Tree Farm, back in my cashier days working at a top grocery store in Western New York, so fun just to see some of those earnings history and see where things are at in terms of that really full and delayed phases. Tim, the other thought that comes to mind and we’re not going to go down the Medicare pathway right now but if you think about that early benefit and you mentioned someone begins taking it at the age of 62, they reduce their benefit by 0.5% each month.

They’re also then is that potential gap of age eligibility for Medicare benefits, so you’ve got some other considerations also with just the intersection of this and the healthcare cost as well.

[0:27:45.5] TB: Yeah, I mean it’s so much. It’s so true like when we’re talking about the financial plan, it’s kind of like you can’t just treat one system of the body like you’re looking at the entire picture and it is so true in this kind of question as well as that there is so many – I mean, just even the overlay of the taxes and like, “Okay, what’s the best way to build that retirement paycheck from a tax perspective?” And then also you invoke things like Medicare and even like gifting strategies, if you are trying to minimize tax there.

There is just an array of questions that you have to answer and a lot of them are really less about the numbers and more about, “Okay, what does this look like for you?” And so many retirees go into retirement thinking like, “Hey, I’m just so done with work and I just want you to know” but then they all often return to work sometimes because of the money but sometimes because of like the – they don’t have the social infrastructure to kind of carry on in terms of like having a passion or a meaningful life.

It’s so funny because some of the similarities with the different phases of life in terms of like, “Okay, what’s a wealthy life for you?” And answering that question in your 30s and 40s and saying, “Okay, we can’t just stock away money and not live today.” But there is a balance to that but also when you reach the end of your work in life, what’s a wealthy life to you? That question still stands and a lot of people either don’t ask themselves that question or they struggle to answer it because for a lot of us unfortunately, a lot of us we really define ourselves by our career, our role, our professional roles.

It’s important to slow down and ask the question of, “Okay, what do I actually want to do? What do I want to get out of my 60, 70, 80s and beyond?” And then execute to that. It’s a common thread no matter where you’re at in the financial journey.

[0:29:51.1] TU: Yeah, I think this too is another good reminder as you are talking about this range from, I’ll just use 62 to 70, right? The early to then the full to the delayed benefits, obviously we can see the negative impact of financially just numerically speaking, if we pull the benefit early whereas if we’re able to delay that, that number goes up. And just another reminder that for folks that are able, to build up those savings outside of social security throughout their career, you take some of that pressure off, of getting into those early retirement years.

Tim, I know we’re going to come and do a lot more detail on some of the breakeven analysis and factors that go into, that but I know that a lot of pharmacists are listening to this and I know there’s a lot of math nerds that are just looking at some of the numbers of like, “Man, it seems so obvious that if you wait, you’re going to have more.” If you defer, you’re going to see that benefit go up but there’s really more behind that.

You know, you start to think about what is someone’s health situation look like, what are other savings that they have in place and I think that that is one of those areas. And you gave and commented on this just a moment ago, this is not one of those areas you say like, “My friend Gerald John is doing this and so therefore I’m going to do that as well” right?

[0:31:02.9] TB: Yeah, no and even with the health stuff there are again, we’ll get into this later but when you look at that and you’re like, all right, there is a history in your family where people will pass away in their 70s or 80s or whatever, so that might press the decision. But also sometimes depending on what the spousal benefit is, you might even decide to delay that because if that person has a greater benefit, the spouse takes over that benefit in the surviving, you know, the surviving spouse takes it.

There’s just a lot of nuance there that you know again, there’s breakeven, there’s the total benefit, all that analysis that goes into play here but you know at the end of the day, you’re really trying to manage and plan for the unknown and that makes it really difficult. I think it goes back to, you just want to be intentional. Like you said, it’s like don’t necessarily go with the herd mentality and have this question answered way in advance.

Sometimes there are pressures like the employment and like your outlook on employment, your overall happiness factor that really presses the issue. But at the end of the day, what we’re really trying to do is come up with a plan where again, you’re living a wealthy life and the money doesn’t run out. That’s paramount.

[0:32:25.3] TU: Great stuff Tim. Again, the hope for this episode is we’re going to lay a foundation around social security to talk about some of the history of social security, the funding of the benefits, the credit concept, how the benefit is determined, what are the different points of beginning to draw on that benefit. We’re going to come back in later episodes talk in more depth on the strategy side as well as common mistakes that folks might make in social security.

As we wrap up, I want to remind folks that we’re now approaching mid-February, which means we’re in the midst of tax season. Those tax forms are likely piling up on your desk, it’s time to have that tax filing and planning for the year top of mind and we’re excited at YFP tax that we’re opening up our tax planning services to an additional 125 pharmacists households. We do taxes as a part of the comprehensive financial planning for those that our clients of YFP Planning.

We are opening the doors to an additional 125 pharmacists households. Really proud of the team at YFP tax and what they have been building. I really believe that that team is not just focused on getting the return done, rather providing value care and attention that you and your taxes currently deserve. Those 125 spots are filling up quickly so don’t wait too long. If you’re interested in working with YFP Tax, head on over to yourfinancialpharmacist.com/tax to sign up. Again, that’s yourfinancialpharmacist.com/tax.

[END OF INTERVIEW]

[0:33:48.1] 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 of 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 analysis 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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