financial planning

YFP 356: Love and Money: How to Successfully Navigate your Finances with a Partner

Posted on April 25, 2024April 25, 2024 by YFP Media

Tim Ulbrich, PharmD (YFP Co-Founder & CEO) digs into how to successfully navigate finances with your partner and shares 25 questions you can use to frame conversations around money.

This episode is brought to you by First Horizon.

Episode Summary

On this episode, we’re talking about love and money! Discussing finances with your spouse, partner or significant other can be tricky sometimes. Tim Ulbrich shares 25 financial discussion questions to help you navigate these important conversations along with a free resource you can download to help get you started. From reflecting on your “money classroom” and the way you were raised to understand money to how you feel about debt, savings, and other important goals, Tim guides you through these important conversations. There is no one-size-fits all to managing finances in a relationship – but sharing the same vision and goals with your partner can set you up for success. This episode is brought to you by First Horizon.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Tim received his Doctor of Pharmacy degree from Ohio Northern University and completed postgraduate residency training at The Ohio State University. He spent 9 years on faculty at Northeast Ohio Medical University prior to joining Ohio State University College of Pharmacy in 2019 as Clinical Professor and Director of the Master’s in Health-System Pharmacy Administration Program.

Tim is the host of the Your Financial Pharmacist Podcast which has more than 1 million downloads. Tim is also the co-author of Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt and Create Wealth. Tim has presented to over 200 pharmacy associations, colleges, and groups on various personal finance topics including debt management, investing, retirement planning, and financial well-being.

Key Points from the Episode

Navigating finances with a partner, identifying money personalities, and setting goals. [0:00]
Financial planning for pharmacists, merging money personalities in relationships. [1:49]
Money personalities and setting financial goals. [5:50]
Financial goals, budgeting, and spending plan for couples. [10:39]
Financial goals, debt management, housing, transportation, and children’s education. [14:57]
Financial planning with a partner, including goals, investing, and retirement planning. [20:04]
Financial planning and management strategies for couples. [24:32]

Episode Highlights

“I think it’s really important that we spend time to reflect on and identify our money personality and how this does or does not match with our partner. For some of you that have been at this topic for a while, you know how emotional and how behavioral this whole topic of managing money can be. And so it’s important we spend time to reflect on and to get curious about what our money approach is.” – Tim Ulbrich [4:13]

“It’s really helpful that we reflect upon what is the approach that we have surrounding money? How might that have been influenced by the money classroom that we grew up in? The more we can understand that about ourselves, as well as our partner, and how we bring those characteristics into the relationship can be really helpful as we set a plan going forward.” – Tim Ulbrich [8:03]

“Is everything merged when it comes to the finances? Might we have some things separate? Some things merged? Of course, that’s an individual decision for everyone. But ultimately, on some level, we want to have a shared vision, even if some of those items might be separate.” – Tim Ulbrich [8:38]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich 00:00

Hey everybody Tim Ulbrich 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 we’re talking love and money how to successfully navigate your finances with a significant other spouse or partner. Easier said than done right? During the show, I discuss how to identify with your money personality and how this does or does not match with your partner strategies for setting and achieving goals together 25 financial questions and discussions that every couple should have? Hang with me. I’ll give you a resource and a link to download those questions and advice from the YFP community on what has and has not worked for them in their own journey, navigating this important topic with their partner.

Tim Ulbrich 00:45

Now before we jump into this week’s episode, I have a hard truth for you to hear. Making a six figure income is not a financial plan. Yes, you’ve worked hard to get where you are today. Yes, you’re earning a good income. But have you ever wondered, Am I on track to retire? How do I prioritize and fund all these competing financial goals that I have? How do I plan financially for big upcoming life events and changes such as moving, having a baby, changing jobs, getting married or retiring? And perhaps why am I not as far along financially at this point in my career as I thought I would be? Well, maybe the answer is that your six figure income is not a financial plan. As a pharmacist, you have an incredible tool in your toolbox: that’s your salary. But without a vision and a plan that it good income will only go so far. That’s why we started Your Financial Pharmacist where YFP we support pharmacists at every stage of their careers to take control their finances, reach their financial goals, and build wealth through comprehensive fee only financial planning and tax planning. Our team of certified financial planners works with pharmacists all across the United States and helps our clients set their future selves up for success while living a rich life today. If you’re ready to see how YFP can support you on your financial journey, you can learn more by visiting your financial pharmacist.com/learn again, that’s your financial pharmacist.com/learn. Alright, let’s hear from today’s sponsor First Horizon and then we’ll jump into the show.

Tim Ulbrich 02:16

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Tim Ulbrich 03:20

Hi there, Tim Ulbrich here flying solo this week as we talk about love and money: how to successfully navigate your finances with a partner. Now first things first, this is a heavy topic right? And I do not have all the answers. When it comes to our financial plan for Jess and I we have found the system- keyword system -that works best for us. But we are far from perfect. We’ve made our fair share of mistakes. We haven’t always been on the same page. And it certainly has required compromise and grace on both sides. So this is not a preach and teach episode. That would be very helpful. Rather, the intent is to give you some things to think about and conversation starters, to find the system that works best for you. Because at the end of the day, that’s going to be what matters most.

Now, before we jump into some of the tactical strategies, and some of the questions and conversation starters, I think it’s really important that we spend time to reflect on and identify our money personality and how this does or perhaps does not match with our partner. Right for some of you that have been at this topic for a while, you know how emotional and how behavioral this whole topic of managing money can be. And so it’s important we spend time to reflect on and to get curious about what is our money approach? What is our money, personality? What is our money classroom that we grew up in the household that we grow up in financially? And how does that perhaps shape how we manage our money today and ultimately how we merge two of those money personalities together as we try to work and get on the same page. So some questions to think about here as it relates to the money personality. Do you approach money in the same manner that you were raised? Have you reflected upon the money classroom that you grew up in? And maybe what worked and didn’t work? Was money in your household an open conversation? Was it a closed conversation? Was it stressful? Was it calm? What was the emotional tone surrounding money? Was there transparency around money? Or was it a taboo topic? What were the spending habits, what was said? And what were some of the unsaid lessons that you learned along the way? And how did all of this potentially contribute to the money personality and the habits that you employ today that you ultimately bring into your relationship? Right, good and bad. Probably true for all of us.

If you want some guidance on this, there’s a great resource, we’ll link to it in the show notes. The Money Couple has five different money personalities, they have a book and an assessment if you want to really dig in and go further on this topic. And they in that resource they referenced five money personalities, those five personalities are number one, the Security Seeker. Number two, is the Saver; number three is the Spender; number four is the Risk Taker; and number five is the Flyer. Now, anytime we do these assessments, right, we’re running a risk a little bit in terms of bucketing ourselves into one of these approaches, when often we may have a little bit of more than one of these. And that’s one of the things I like about this tool is they combine two of these, what they call a primary and a secondary to come up with your money profile. So for example, let’s say that you identify as a saver/security seeker. Okay, so just some quick definitions here a saver, pretty much their outlook is that as they share in their own resources, A penny saved is a penny earned. You make things happen by getting the best deal, right, you can often be someone that’s very thrifty. Characteristics of a saver would be someone who’s trustworthy organized with money, they also would have some real challenges potentially, including maybe obsessing over money, having a hard time letting go. And they would rarely spend compulsively, they really liked the plan. And they really liked that good deal. Now a Security Seeker, which here was the secondary personality, they have an outlook that better safe than sorry, right protection and security is the definition here. So these individuals make things happen by planning for the future. And they’re often very well prepared. So some defining characteristics here would be they can investigate things thoroughly do a lot of research challenges, of course, could be, you know, some of the potential and again, letting, letting go. And maybe finding that balance that we often talk about in the show of living the rich life along the way. Certainly also trustworthy with their finances, they want to make decisions by confirming that there’s a plan, right? So they’re not, they’re not gonna be very spontaneous, and they’re spending money like to have multiple options. This is just one example, one assessment. But it’s really helpful, again, that we get curious that we reflect upon what is the approach that we have surrounding money, how might that have been influenced by the money classroom that we grew up in, and the more we can understand that about ourselves, as well as our partner, and how we bring those characteristics into the relationship can be really helpful, as we then set a plan going forward.

Tim Ulbrich 08:27

So once we really think about some of those money, personalities, you know, I think it’s then that we want to really figure out how can we set and achieve goals together? Now we’re gonna get into a little bit about, you know, perhaps is it everything is merged when it comes to the finances? Might we have something separate? Some things merged, completely separate. Of course, that’s an individual decision for everyone. But ultimately, on some level, we want to have a shared vision, even if some of those items might be separate. And I think it’s so important, I’ve talked about this on the show before, that we start with the vision, and not necessarily start with the budget or the spending plan, right? Not start in the weeds, but really start on what is the dream that we have financially? What does success look like for us collectively as a unit? And can we agree upon that vision, that direction, that dream that we have for us financially, right? That’s a much, I say, easy but easier conversation than getting into the individual decisions. This is also the place where we really want to get all of those goals, all of those ideas out of our heads onto paper, we want to see what overlaps what doesn’t overlap. Obviously, there’s gonna be some compromise here along the way, but once we get them to be shifting from unsaid to said, right, so Jess can share her goals, I can share my goals, we can see what what is similar, what’s different, and then we can begin to start to compromise and prioritize those. That’s really where we can start to then begin to implement and execute on that vision. So for us, I’ve shared this before on the show, typically what we do is want once a year we’re looking at, hey, what does success look like for us over the next 12 months? Right? Keeping the bigger vision in mind? What does success look like for the next 12 months? And what are those things that we want to focus on spending? You know, so we’re looking at, hey, are we on track with savings goals for the future? And retirement planning? If not, what are some things that we want to surplus in the following year? What do some of the experiences look like for us in terms of vacations, home projects, things like that? What are the giving goals for the year right? These are the things that we need to begin to, again, get out of our heads onto paper so we can start to set a plan. Now, I think it’s really helpful here, especially if you have two individuals that are on completely different pages that this is really really where a third party can be very helpful. I know for Jess and I, our financial planner at YFP has been really helpful in getting us to have conversations not only together when we’re in the room with a financial planner, but also in between those meetings to make sure that this is an open conversation as we can possibly have. Now, I have some questions here that I think are good conversation starters. Right? I started the episode by saying this is not about telling you what you should do. This is really about helping to start conversations, stimulate some discussion so that you can figure out what the system is that works best for you. So I’ve organized these questions into different areas. And I have 25 of them, I’m just going to mention them briefly. And we have a one page resource that you can download for free that will have a list of these questions. You can go to yourfinancialpharmacist.com/25 – two five again, yourfinancialpharmacist.com/25.

Tim Ulbrich 11:43

Okay, so in the spirit of starting conversations, here are 25 financial discussions that I think are worth having. And let’s start with the first bucket, which is setting goals, budgeting and just the overall approach to managing the finances. So the first question is, have we discussed and agreed upon our short term, midterm and long term financial goals? Now you can define these differently, I think of short term goals is within the next 12 months, next year, mid-term, one to three years in long-term greater than three years. Obviously, you can determine the timeline that makes the most sense of you. And then furthermore, how can we best set, review and update these on a regular basis? So there’s that initial exercise, and then how often are we going to be reviewing these so that we can make sure we are able to implement those in the plan? Sounds simple, right. But everything starts with the vision and getting to some level of an agreement on the shared goals.

Second question here is have we developed and agreed upon monthly spending plan, budget, whatever you want to call it, that accounts for all of the income and all the expenses? And does this spending plan, budget, again, whatever you want to call it, does it represent and include the goals that we just worked through in the first question? Now, again, for some individuals, and I’ll share some data here in a little bit from our community, for some individuals, everything is merged. Some they have some separate, some is completely separate. So obviously, you have to work through this as it relates to how you treat the merging or lack thereof of the accounts. But do we have representation within our spending plan, approach, whatever that looks like lots of different ways to do that. So that the goals, there’s an actual plan to implement and achieve those goals.

Question number three, does one of us take more of the lead than the other when it comes to managing the finances? And if so, are both of us aware of our overall situation? How do we ultimately make sure that both parties are aware of the progress if one person is taking the lead. I have seen that that often, not always, often is the case where one person may take the lead. So if that’s the case, what’s the plan? What’s the strategy? What’s the structure so that both parties are aware of what’s going on? And the overall progress? Right, the overall situation?

Number four, I’ve alluded to this a couple times is the desire to merge all of our finances; to keep some separate, some merged; or to have everything completely separate. Now for Jess and I, we’ve made the decision that everything’s merged, I’m not here to tell you that you should do that, or that’s the only way. But really having that conversation of what’s best for us, is it all merge is a little bit of both, or is it everything that would be completely separate. Number five, do we need to check with one another before spending any money? If so, is it a certain amount? What’s the criteria for this? How do we determine this. Some, you know, couples might have a large purchase or something that would trigger hey, we need to have a discussion about this. So what are those criteria, if any exist when it comes to making some of those bigger purchases? So that’s the first group of questions around setting goals. budgeting and your overall approach.

Tim Ulbrich 15:01

The second group of questions is around debt management. Debt Management. So question number six here on our list of 25. is how much debt have we acquired thus far? Right? Do we know? Do we know the numbers? Is everyone aware of the debt that’s that’s accrued? And what will be our plan to pay off the debt? Do we both understand each other’s debt position and the feelings perhaps just as important, the feelings towards the debt? Right, for some people, I’ve talked about this on the show before for some people, there can be a significant aversion to debt? Others maybe that’s not the case. So if you have two individuals where you have opposite feelings on debt, that’s an important conversation to have. Are we treating this as our debt? Or is this separate debt? Right? When you think about things like credit card debt, student loans, car payments, or other things that especially may have been existing coming into the relationship. Number seven, again, on debt management, how comfortable are we with having debt? And I would encourage you to break this down further to different types of debt, right, including student loans, credit card, mortgages, car loans, etc. So not just a blanket debt good or bad, but how do we feel about different types of debt? And then final question on debt? Number eight on our list is do we view each other’s debt as our debt? Or is this your debt? Right? And how does that potentially approach how we pay that off? All right, third group of questions is around housing and transportation. So question nine on our list is how do we feel about renting property versus owning a home hot topic right now, given where the housing market is at, given where home prices are and where interest rates are at? And if we already own a home, are we okay with the current situation? Or is there potentially a desire to move? Right? Again, we want to get a lot of these questions and maybe things that we’re thinking about making sure we have an opportunity to discuss with one another. So if we don’t own a home already, how do we feel about renting versus owning a home? What’s that timeline? Like if we already own a home? Are we thinking we’re set? Or is there a potential or desire to move? Next question around housing transportation, number 10 on our list, if currently renting, and there’s a goal to own a home, do we agree on the location, on the purchase price, and the amount of downpayment that would be needed, right? That’s gonna have a big impact on the budget. And again, if things are separate, and not merge, how are we both contributing to that downpayment? And getting ready for that purchase? Number 11, as relates to transportation? Do we view our cars as a necessity? Is it a luxury where we lease? Are we gonna buy our cars? If we buy our cars? Are we paying them outright? Are we going to finance part of it? How do we view the transportation part of the plan? And again, let me pause here and reinforce what I was saying towards the beginning. I don’t really think there’s a right or wrong answer here. The goal is to really get you thinking about, hey, how do we feel individually? How do we feel collectively as a unit? You know, as I think about this question here on transportation, it reminds me of Ramit Sethi’s book, I Will Teach You To Be Rich. I’ve referenced that many times on the show before and one of the things he talks about he starts the book is this concept called Money Dials. And what he’s referring to there is identifying those things that derive the most significance and meaning for you as a part of the financial plan and have a plan to spend money, what he’s referring to is the dial, dial that up. And alternately for the things that you maybe don’t care as much about financially, dial that down, right. For some people, you know, transportation cars may be something that’s has significant value, and for other people, not so much.

Tim Ulbrich 18:35

Alright, next group of questions relates to kids, children. So number 12 on our list is how do we feel about one of the biggest expenses we often see in the financial plan – daycare? What’s our budget for this? And how does it fit in with other financial goals? Number 13, how do we feel about public versus private K through 12? education? You know, again, this might certainly link back to the home purchase and the location and and where you’re looking for home based on schools. And if it is private education is the goal, how will we plan for this and prioritize it with other financial goals? Number 14, again, in this area of children, how do we feel about paying for our kids college? This is a hot topic, right? You often see maybe people that are split on this. And how do we plan for this? Are we hoping to pay for it in its entirety? A partial amount? Are we banking on you know, scholarships or other funding other family to help taking on debt? What’s the plan for that? And then last question, as it relates to children, what ideas and strategies do we want to employ to teach our kids about managing money? Right? We started this episode talking about the money classroom we grew up in. And for those that have children in the home that you’re raising now, they’re obviously growing up in their own money classroom in your house. And so what strategies are we employing and how are we approaching teaching kids about money? What’s our philosophy about behind that, right. So this this gets to things like, you know, our philosophy around alarm allowances, and giving, and how we’re going to teach some of those lessons to our kids. And at what ages are they ready for those lessons?

All right, next group relates to saving, investing, and retirement planning. So question number 16, when it comes to the emergency fund, are we comfortable with three months? Right, your general rule of thumb recommendation three to six months of essential expenses? Are we comfortable with that? Three months, six months, something in between, something different? Have we discussed that? Again, are we on the same page with that?

Number 17, what financial goals are we trying to achieve by saving or investing? What does success look like, right? So we often talk about the importance of saving and investing for the future. But for what? What are we trying to achieve? And what does success look like? Number 18? What does retirement look like for both of us? Are there similarities? Are there differences? What’s the desired age? Right? What are the activities? What what are we working on? Which is the next question: what activities are we engaged in during retirement? What are we doing together? What are we doing separately? Right, beginning to envision so that we’re approaching that retirement phase with intentionality.

Next question, how much should we be saving and investing for retirement each month? And how do we balance and prioritizes with other goals? And then final question here on saving investing in retirement planning? What is our risk tolerance for investing? And again, if we have two different risk profiles? How are we approaching that as we’re saving, investing and planning for the future?

Final set of questions as a group, I’m just calling miscellaneous questions. Got four left on the list here. Number 22. How does each of us feel about giving? How much? How often?Where? How will we plan for this? And what priority? Are there certain things that we have to have achieved before we do this or not? Number 23: Do we plan to do the financial plan ourselves? Or are we looking to hire a professional to assist? Are we on the same page about this? If the goal is to hire someone, what are the criteria we’re going to use that will help us find the right fit? Who’s taking the lead in this conversation? What does that look like for us as a unit? When it comes to assisting family financially, whether that be caring for elderly parents, maybe that’s supporting a family member need or some other situation, how do we feel about this? Right? How do we feel about this financially, and the impact that it can have in other parts of our financial plan? And then finally, question number 25? How will we strike that balance between saving for the future and living a rich life today? What does it mean to us to be living that rich life today? And how are we prioritizing that in the financial plan?

So again, that’s 25 conversation starters, there’s a lot there, right, the different categories we talked about, you can download that list again, yourfinancialpharmacist.com/25. I hope you’ll reference that maybe print it off, and have some of those discussions with your partner. Next, I want to give some input not just from me, but from the YFP community on what has and has not worked for them in their own journey of navigate navigating this topic with their partner.

So I recently posted a poll on LinkedIn asking the following question, that for those that are working with a significant other spouse or partner on their finances, which of the following best describes your situation: is everything merged or all the finances merged? Are some things merged something separate? Or is nothing merged? In essence, everything is separate. And what we saw from that data was just shy of 50%- 49% responded that all of the finances were merged. 42% responded that some were merged and some are separate. And 10% responded that nothing was merged, and that everything was separate in their accounts. Now, some of the comments and advice that I thought were helpful to pass on and again, some some different perspectives here. Kelly had this to say lots of systems can work. But it all starts with transparency. It’s not uncommon for one person in the household to do the bill pay, and thus see more of the transactions. Periodic money dates can help facilitate conversation. A favorite topic in our house is identifying mutual goals and where we want to prioritize funding for the year, sometimes their goals are not aligned. And that is important conversation, as well. So Kelly, comes transparency. Having that open conversation having those periodic money does it dates and sometimes those goals aren’t aligned, and important conversation to get on the same page. Tracy said that we have a joint household account, where we contribute an equal amount each month to cover our household expenses, and some minor rainy day savings. We tossed around percentage based on income but landed on equal flat dollar amount. We also have separate personal spending accounts for ourselves, so we don’t feel like we have to justify personal spending to one another. We’ve divvied up who contributes and covers what to each savings bucket and who does the insurance via their paycheck all this to say after typing this that our marriage is basically a business. I thought that was some humor to add in there as well. Cassidy said my husband, I follow the 50-30-20 budgeting process right now. We have a joint account where 50% of our income goes towards household expenses and joint purchases, a joint high yield savings where we both contribute 20% of our paycheck for larger goals. And then 30% goes in our fun money personal checking accounts. So far it’s working great ensures that we’re both contributing an equitable portion of our income.

Final one that came in is someone shared just got married in summer of 2023. My husband wanted to keep our finances separate, except for one joint checking to pay utilities out of. This came from seeing his parents get divorced about six years ago and had always fought about money. He did not want that to be us. So going into the marriage, we plan to keep our own savings. I that’s a great example before I go further with this one of how that upbringing, right, how that money classroom can impact how we approach our money today. She goes on to say that we’re now nine months married, and we’re getting ready to buy a house with the need to pay the mortgage, we’re rethinking finances and will likely be combining more of our money. He prefers a separate checking account for each item, such as utilities and mortgage, we still plan to keep the money we had pre-marriage as our own stock savings, mutual funds, etc. We have a joint credit card for joint expenses and groceries that’s worked well. We still have separate credit cards. Being upfront about money has been so important to us. We’ve had several long conversations about money, pre-marriage, and within the last few months to get us set up for success. So it sounds like here, there’s even some transition, as they’re getting ready to purchase a home. They’ve been married now just shy of a year, maybe perhaps more that’s moving into the joint accounts, but a system that they’re still working through.

So I appreciate all of those that contributed providing different ideas. So again, the spirit of this right is to identify that system that works best for you. Right works best for you and your partner, really accounting where we started with reflecting on and getting curious about what is the money mindset? What’s the money personality approach that I have? And do I have a good understanding of that for me, as well as my partner? Really coming up then with those shared goals? That vision we talked about? What does success look like in the short, mid and long term, and then beginning to work through those individual areas of the financial plan.

Tim Ulbrich 27:19

Well, certainly last but not least, as many of you know, we have a team of Certified Financial Planners at Your Financial Pharmacist that we offer fee-only financial planning and tax planning, we work with pharmacists all across the country. And certainly we’d love to have the opportunity to work with you. And we’d love to have an opportunity to talk more to see whether or not the services are a good fit. You can learn more about our fee-only financial planning services again at yourfinancialpharmacist.com/learn. Again, that’s your financial pharmacist.com/learn. I think, as I mentioned a couple times that third party, right, that third party can be so helpful to facilitate some of these conversations and to begin to execute on the different aspects of the financial plan. Well, thanks so much for listening, and have a great rest of your week.

Tim Ulbrich 28:05

Before we wrap up today’s show, I want to again, thank this week’s sponsor of the Your Financial Pharmacist Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists and the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single family home or townhome for first time homebuyers and has no PMI on a 30 year fixed rate mortgage. To learn more about the requirements for First Horizon’s pharmacist home loan, and to get started with the pre approval process, you can visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacist.com/home-loan.

Tim Ulbrich 28:51

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

[END]

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YFP 355: 5 Financial Moves to Make After Graduation

Posted on April 18, 2024April 17, 2024 by YFP Media

Sponsored by YFP+, YFP Co-Founder Tim Ulbrich shares five key elements for building a strong financial foundation after graduation.

Episode Summary

On this episode sponsored by YFP+, host Tim Ulbrich outlines five key elements for building a strong financial foundation. Whether you are a pharmacy student looking ahead, a soon to be 2024 graduate, or a resident, fellow, or new practitioner trying to find solid financial footing, Tim shares what it means to build a strong financial foundation, no matter where you are in your career.

With the average pharmacist facing staggering student loan debt and often lacking financial knowledge, Tim shares practical strategies to help pharmacists to begin to navigate debt management, investing, insurance coverage and retirement planning.

About Today’s Guest

Key Points from the Episode

Financial moves after graduation, including debt management and investing. [0:00]
Financial planning for pharmacists, including student loan debt and income management. [3:52]
Financial planning for pharmacists, including assessing current financial state and setting long-term goals. [8:28]
Proactive budgeting to prioritize financial goals. [13:50]
Investing early and often for financial success. [18:24]
Investing for pharmacists, including retirement accounts and tax-advantaged savings. [23:39]

Episode Highlights

“Without a plan, pharmacists certainly may be income rich, but net-worth poor.” – Tim Ulbrich [6:48]

“I saw firsthand how good decisions early in the career could certainly accelerate the financial plan, as I now look back nearly 18 years as well as how some of those bad decisions had a lingering effect in our financial plan. That’s part of the reason why I’m so passionate about teaching this topic to pharmacists at all stages of their career.” – Tim Ulbrich [8:08]

“At the end of the day, money is a tool. And we’ve really got to strike this balance between making sure that we’re taking care of our future selves, making sure that we’re putting this foundation in place today, and also living a rich life along the way.” – Tim Ulbrich [12:21]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich 00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast for each week we strive to inspire and encourage you on your path towards achieving financial freedom. On today’s episode, I’ll be covering five financial moves to make after graduation. Whether you’re a student looking ahead, a soon to be 2024, grad, or resident fellow or new practitioner trying to find solid financial footing, this episode is for you. We’ll be talking all about what it means to build a strong financial foundation, including practical strategies that you can implement in your own plan.

Before we jump into today’s show, I have two exciting announcements. First up, make sure to sign up for our next YFP webinar on Thursday, April 25 at 8:30pm Eastern, where pharmacist and real estate agent, Nate Hedrick, The Real Estate RPh, co-host of the YFP Real Estate Investing Podcast, will be presenting on your checklist for buying a home in 2024. During this free webinar, Nate will walk you through how to know if you’re ready to buy a home. We’ll discuss the current state of the housing market and give valuable insights into the home buying process. You learn more and register at yourfinancialpharmacist.com/webinar again, yourfinancialpharmacist.com/webinar.

Second announcement last year we launched a nonprofit YFP Gives that aims to empower a community pharmacist to give to alleviate the indebtedness of the PharmD students and graduates, to help enhance the financial literacy within our profession, and to support other pharmacist-led philanthropic organizations and efforts. We’re thrilled to announce that our first round of the YFP Gives scholarships is now live! We’ll be giving out three $1,000 scholarships and applications are due on April, 30 2024. For those eligible for the scholarship include PharmD students and new practitioners within five years of graduation. You can learn more and apply at yfpgives.org/cholarship. Again, yfpgives.org/scholarship.

Alright, let’s hear more about our new online community YFP Plus, and then we’ll jump into today’s episode.

Do you ever feel like you’re trying to figure out this money stuff all on your own and aren’t sure where to turn? Maybe you’re overwhelmed with determining how to tackle your student loan repayment. Or perhaps you’re living paycheck to paycheck despite making a six figure income. Maybe you have a negative net worth and aren’t sure how to climb out of debt or make progress on your financial goals. Trust me, I’ve been there. When I finished my residency, I was starting at $200,000 of student loan debt and confused about how to best navigate the transition to new practitioner. I had a great income, but was living paycheck to paycheck and felt trapped. The good news is that you don’t have to continue feeling that way. At Your Financial Pharmacist, we want pharmacists to have the education, resources, and support they need to get a plan in place so they can stop feeling overwhelmed and they can use their six-figure income in the best way possible. That’s why we created YFP Plus an online membership community that empowers pharmacists to gain the knowledge and skills necessary to take control of their financial well being. Inside YFP Plus you have access to exclusive on demand courses. Like the prescription for student loan success, you have access to the right capital financial planning tool so you can track your debt assets and net worth to view your financial progress. You’ll have access to exclusive live events, monthly themes and challenges, a space to ask questions to YFP financial planning and tax professionals, and a community of like minded pharmacists on a similar financial journey as you. If you’re ready to get started inside YFP Plus to take control of your finances, visit yourfinancialpharmacists.com/membership. And if you sign up today, you’ll get a 30 day free trial. Again, that’s yourfinancialpharmacist.com/membership.

Hi there, Tim Ulbrich here welcome to this week’s episode of the YFP podcast. Excited to be talking about this very important financial transition, whether it’s going from student to new practitioner or resident or fellow to new practitioner, critical five year window, where we need to really be thinking about how we can best optimize the financial plan and get on some solid financial footing. So in the next several weeks, we’re about 12,000 pharmacy students that are going to be awarded the doctor of pharmacy degree joining them of course in the workforce will be those completing postgraduate training, whether that be residents, fellows, graduate students, and these graduates on average are gonna make about $120-$130,000 a year of course, depending on where they live in the area of employment they choose. And if we assume that they work a 40-year period with an average raise cost of living about one to 3% they’re going to earn approximately six to $9 million throughout their careers. Let me say that again: about six to $9 million of gross income throughout their careers.

Now if we assumed that about 30% of that income would be eaten up by federal income tax, FICA tax, which is Medicare and Social Security, state income tax, health insurance premiums, and a small contribution to an employer sponsored retirement plan, that leaves about four to $6 million of take home pay. So again, we start with about six to $9 million of gross income, we’re left with about four to $6 million of take home pay. Now I know that’s imperfect math, right? There’s a lot of assumptions that are in there, but just Just stay with me for a moment. We can debate how far a six figure income does or doesn’t go. But let’s agree that a pharmacist income on average, is about $50,000 above the average household income in the United States.

So if we look at the average household income in the United States, it’s about $75,000 per year, it was the average pharmacist’s income according to the Bureau of Labor Statistics, that’s about $130,000 per year, right. So by all intensive purposes, pharmacists make a good income. And if it’s managed wisely, it should be more than enough. So what’s the problem? Well, I’ve talked with hundreds of pharmacists who make a great income but feel like they aren’t progressing financially. They feel stuck. And yes, student loan debt is a big contributor, but it’s certainly not the sole culprit. And I know that because we recently had three-plus years worth of a pause on federal loan payments starting back at the beginning of the pandemic, and those feelings of making a high income, but not progressing financially didn’t go away during that time period. The main reason I see pharmacists experiencing financial stress is the omission of having an intentional plan in place that includes clear goals, and a system that prioritize and funds those goals on a monthly basis. It’s proactive, intentional planning. Without a plan, pharmacists certainly may be income rich, but net-worth poor.

That’s really what today’s episode is all about. It’s about having an intentional plan, and building a strong financial foundation early in one’s career. Now, I know the importance of this because I lived it.

So as many of you know, I graduated from pharmacy school in 2008. I did a year residency, in 2009. Came out of residency entered an academic position. And I remember vividly having that feeling of, wait a minute, I make a good income, but I don’t feel like I’m progressing financially. And the main reason for my journey for our journey as a family is that early on, we were navigating through a sizable amount of student loan debt, a little over $200,000 of student loan debt. And we would eventually get that paid off in the fall of 2015. That was a big milestone for our journey, certainly one that I’m excited about and excited and teaching others about as well.

However, we made that journey more difficult than it needed to be. I didn’t understand terms like Public Service Loan Forgiveness, there wasn’t great information out there. We paid more interest than we had to in the journey. We perhaps, weren’t looking at how other parts of the financial plan fit together while we are also pursuing that debt repayment. And because of that, I saw firsthand how good decisions early in the career could certainly accelerate the financial plan, as I now look back nearly 18 years as well as how some of those bad decisions had a lingering effect in our financial plan. That’s part of the reason why I’m so passionate about teaching this topic to pharmacists at all stages of their career. Here, we’re of course talking about those that are making that transition. Now let’s talk about what I mean by having a strong financial foundation.

So through my own experience, and in teaching 1000s of other pharmacists on this topic, I’ve come to appreciate really five key elements that are critical to building a strong financial foundation. Now let’s be clear, this is not five things that once we check the list, this is the finish line, right? Think of this as literally the first couple blocks that we’re putting in place on the foundation of our financial plan so that we can grow and thrive in the long term and do so with confidence. So let’s talk through what these five areas are.

Number one is completing a financial vitals check. So I believe the starting point is to complete an honest self assessment of where you are today with your personal finances as a pharmacist, right. no need for judgment, no need for shame. Where are we today? Because before we can implement a plan, right, we have to have a good idea of our progress made thus far and what are some of those opportunities that we could potentially improve upon.

So here are just a handful of questions to really help you consider areas of the financial plan that might require your attention. Number one, do I have an emergency fund in place, approximately three to six months worth of essential expenses? Number two, do I have any revolving high interest rate credit card debt, right? I’m not talking about the credit card charges that you pay off each month but that revolving debt that’s accruing. Perhaps 20-25% interest. Number three, do I have an optimize student loan repayment strategy? Critical as we look at many new practitioners and the average debt load that folks are carrying, this is often a key piece of the financial puzzle that we have to put in place, and then build around it. Do I have sufficient own occupation, long-term disability insurance that covers about 60% of my income in the event that I’m unable to work as a pharmacist? A few more questions. Do I have sufficient term life insurance to care for loved ones who depend on my income? If that’s applicable. Do I have adequate professional liability insurance? And do I know my retirement number? Have I thought about, certainly far away, but what is that number that we’re shooting for in the future? Am I on track? If not, how much should I be saving each month to ultimately achieve that goal? We have a lot of information, and resources in each one of these areas available at yourfinancialpharmacist.com.

We certainly have talked through many of these topics at length on the podcasts and the blog, so make sure to check out those resources. Furthermore, if you if you want to go through some of this in more detail yourself, we have a really neat tool available called the YFP Financial Fitness Test. We’ll link to that in the show notes. It’s a really fun interactive quiz that will take you through essentially conducting a vital check in and help identify some areas that you perhaps can improve upon, and that you might want to implement as you look at setting goals for the future. So that’s step number one, completing a vitals check

Number two. Step number two is setting the vision setting the vision. So after we reflect on the current state, right, the current situation, the Financial Vitals Check. It’s time to really establish a vision for the future. Now, this is the area where I think it’s really helpful that we let ourselves dream a little bit right, we just perhaps bogged ourselves down and kind of looking at the current state and the reality, maybe that didn’t bring the greatest feelings of joy. And so this is our opportunity to really let ourselves dream a little bit. Spending time reflecting on questions like what does it mean to be living your rich life? What brings you the most joy? As it relates to the financial plan? Are there experiences such as traveling, giving spending time with family and friends or something else? Right, at the end of the day, money is a tool. And we’ve really got to strike this balance between making sure that we’re taking care of our future selves, making sure that we’re putting this foundation in place today, and also living a rich life along the way.

One more final question to reflect upon, if you were to find yourself in a position where you were financially independent, the find that you are no longer required to work. How would you be spending your time perhaps for some of you? The answer is, hey, exactly like I am is great. Right? This is meant to help us identify what are those things that derive and give us the greatest significance, and meaning in our lives. And for every person, this certainly can look different. So that’s number two. Step number two, letting ourselves dream setting the vision, before we start to chart the path forward. Alright, step number three, is to develop the spending plan to develop the budget to develop the system that’s going to help us bring this vision to reality. Right. So in step number one, we identified what are some of the opportunities, what are some of areas that we might want to focus on. Step number two is really about the vision of where we want to go.

Step number three, is now about making that come to life. Now, while one spending plan method, budgeting method, whatever you want to call, it will never be right for everyone, I really believe that the zero-based budget is a great place to start, especially for those early in their career, those that are looking to get back on track. Reason being is that with a zero-based budget, you give every dollar you earn a job before the month begins. This is a proactive planning process. Now, I’m not suggesting this as a method that you stay with forever. This certainly can feel onerous at times. But as we’re looking at defining how we’re spending our income, making sure that we’re allocating income towards our goals, and that we have a good track on what that income is and how it’s being spent. This system is really going to help us shine a light on that. So the goal is again, we’re doing this proactively is to spend your paycheck essentially down on paper to zero, and to ensure that your financial goals can be funded rather than hoping you have money leftover at the end of the month.

Okay, so for example, let’s say that after step one, which again, step number one was completing the vitals check, and step number two is really setting that vision. Let’s say you identify three goals that you want to focus on over the next year, just as one example. Let’s say goal number one is to save $500 per month for an emergency fund, and up until it’s fully funded at $25,000. Let’s say that you want to save $300 per month in a Roth IRA to supplement your retirement savings. And finally, is the third goal. Let’s say that you want to save $300 a month and a travel account to fund one trip per year. Okay, so in that vision setting, you determine that travel was a was an item that was really important. So in this case, with these three goals, right, we have some money set aside in earmark for the emergency fund some for retirement savings in a Roth IRA, some in a travel account, when you go to work the budget through the budgeting process, you want to have those three areas represented just like any other expense, so that you prioritize these before the month begins.

Again, we’re working proactively really important, rather than hoping we’ve got something leftover at the end of the month. So just like we account for a mortgage, or rent payment, or utility payment, or a car payment, right, we want to think about our goals in the same sense, and making sure that we’re building our plan accordingly to prioritize and fund those goals. In my experience, and in talking with others, so much of the stress, so much of the feelings of overwhelmed and confused around the financial plan comes from having all of these competing priorities swirling in our minds, without necessarily a plan for how we’re actually going to achieve them. Right. And so what we need to do, and what we’re trying to do here in step number three is get those ideas out of our head onto paper. So we can list them down, we can prioritize them, and we can start to put a plan in place to actually achieve those goals and to see the progress.

Now, sometimes we realize that, hey, in this season, or in this moment, we’re not necessarily going to get to all of those goals. That’s certainly normal. But at least we have an expectation of what’s happening. And we’ve been intentional with proactively planning how we’re going to work through those different goals. Now, if you’re ready to try this out yourself, we’ve got a free budgeting template you can download, we’ll take you through this process that I’m referring to here. You can download that at yourfinancialpharmacist.com/budget, we’ll link to that in the show notes as well. Again, your financialpharmacist.com/budget. Alright, that’s step number three, developing the spending plan.

Step number four, is automating your plan. Now I’ve talked about this several times on the podcast, and I’ve referenced that this has really been one of the most transformational things that Jess and I, over the last 15-16 years since I graduated, have really evolved into that has had a significant impact on our own plan. So once we do the work in steps one through three, right. Once we’re able to complete that vitals check to identify what are some of those gaps, what their progress once we’re able to set the vision once we implement the spending plan. Now it’s time that we make sure we execute, right we actually achieve these goals. And that’s really what automation is all about. I

n his book I Will Teach You To Be Rich , Ramit Sethi says that automating your money will be the single most profitable system that you ever built. And I agree automation is so apparent, so effective, so easy to implement, yet vastly under utilized. It involves essentially scheduling the transfer of funds to the predefined goals, right? We just talked about that in the previous steps and doing so confidently knowing that we’ve already accounted for these in the budget, right, because we were proactively planning during that process. Sure, it takes a bit of time to set up. But once it’s set up, it provides a long term return on your time benefit. And perhaps equally, if not more important peace of mind knowing that you’ve thought about prioritize and have a plan working for you to fund your goals. Right. I just mentioned a couple moments ago that so much of the feelings of stress and confusion, overwhelmed come from that uncertainty come from the unknown. So this step is all about bringing it into the known and executing on the plan that we set.

Tim Ulbrich 18:54

So in terms of operationalizing this, one example certainly not the only way, my wife Jess and I, we have a high yield savings account. We use Ally Online Bank for all of our accounts. And inside of that high yield savings account, we essentially have several different buckets. And those buckets are named according to the goals that we’re working on. Right. So one bucket, for example, is an emergency fund. Another bucket might be for a vacation that we have earmarked, you know this summer or next year, one bucket is for the next car purchase one bucket might be for something related to the boys’ education or to the activities that they’re involved in. So all of that rolls up into one high yield savings account. So it’s liquid, it’s accessible, we can get it we can move it to our checking account if we need it. However, the key there is it’s earmarked and defined for the goals that we’re trying to achieve. Now. Just like I said, a little bit of a go, you know, this may not be a forever system that you have to develop. We have found it to be something that’s beneficial ongoing because it’s a visual reminder. It’s the visual aspect of hey, we set those goals, here are the actual buckets, right named for the goal that we worked on. And it allows Jess and I, I’d have some really good conversations. And of course, transparency into the system that we’re working on. This system it took us about 15 minutes to get set up. And again, you could just as easily achieve it through perhaps your own bank that you already have, or through tracking these in a simple spreadsheet. So, as I mentioned, the buckets are simply a visual representation, it really is just sitting in one high yield savings accounts. And it’s then earmarked to these different buckets. So that’s step number four is automating the plan.

Step number five, again, as we’re on this journey, towards building a strong financial foundation, is investing early and often. Investing early and often. Now, Albert Einstein is credited with saying whether he said it or not, compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it. Right, regardless of whether he actually said it’s really good advice, the time value of money is real. And the earlier you save, the less aggressive you’re going to have to be. Now easier said than done, right? Considering many competing priorities that new practitioners are facing. And I remember well, in my journey after graduating 2008, not only was it the student loans that were staring us in the face, right, it was a potential home purchase, it was the emergency fund, it was building up some additional reserves, and of course wanting to enjoy some things as well during that transition. So there’s a lot of things that are coming at you in this season of life. And shortly thereafter, we would start our family and certainly new expenses that would be there as well.

Now let’s take a look at an example of how powerful early investing can be. Okay, early investing. So if we assume and you can run your own numbers using a number of calculators, we have several on the YFP site as well. But if we assume a pharmacist is making, let’s say, $126,000 per year, if we assume that their incomes gonna go up on average, about 2% per year could be a cost of living adjustment could be a performance adjustment, a combination of both, we’re gonna assume that they’re going to put away 15% of their income. And we’ll assume that there’s an average annual rate of return on that investment of 6%. Now, we know the markets don’t work like that in terms of a clean 6% every year. But for the sake of the calculation, we’ll go with that we’ll assume no match from the employer, and that they have a planned retirement age of 60. Okay, so pretty normal situation. So I’m gonna make an average pharmacists salary that’s putting away about 15% of the year and they want to retire at the age of 60. Now, what we see is that if they start at the age of 25, saving 15% of their income with these assumptions, when they get to the age of 60, the math tells us they’re gonna have about $2.6 million. Now, is that enough is a whole another question, right, we’ve talked about that. On the show before we’ve done an episode on how much is enough, we’ll link to that in the show notes as well. So 25, if they start, we’ve got $2.6 million at the age of 60, a coordinator these assumptions now if we wait to the age of 30, right, because of student loans, because life’s expensive, there’s a lot of things going on that 2.6 turns in $1.8 million. An $800,000 difference already. If we wait to 35, we’re down to $1.2 million. If we wait to 40, we’re down to $800,000. Right. So that’s the power of time value of money. That’s what Albert Einstein was talking about with compound interest in really the value of investing as early as we can, knowing that the earlier we invest, perhaps the less aggressive we’ll have to be the later we invest, the more that we’re going to have to do to catch up.

So naturally, then the question is, well, where do I save? Right? And that depends, of course, there’s lots of different options. Everyone’s investing journey is going to look a little bit different. We have to really assess what’s the risk tolerance, what’s the risk capacity, what are the goals, but many pharmacists are going to be focused early on, especially in their career on tax advantage, retirement accounts, tax advantaged savings accounts. So these would be employer sponsored accounts like a 401k or a 403B offered through your employer. Of course, as the name suggests, there’s both Roth and traditional versions of those anytime you hear traditional thing pre tax, anytime you hear Roth and post taxt. There would also be opportunities to save and something like an IRA stands for individual. So these are not through your employer. Again, there’s a Traditional and Roth version of those. Lower contribution limit in 2024 $7,000 versus in the employer sponsored accounts $23,000. And then the other one I typically think of in this bucket would be an HSA or health savings accounts, which again, we’ve talked about on the show at length before we’ll link to those episodes in the show notes as well. So those are the five foundation and steps and I would encourage you with each one of those to learn a little bit more. Right and as I think about and zoom out here for a moment we think about being on this financial journey throughout your career. Right. So important. Remember, here we’re talking about laying the early bricks of the foundation. Again, this is not the finish line where we start to check these boxes off, but rather, it’s that strong foundation upon which we can then build and hopefully build wealth throughout our career and live confidently knowing that we’ve done some of the hard work early on. So just a quick recap, step number one, we talked about completing that vitals, check the self assessment. Step number two, we talked about setting that vision step number three, developing the spending plan. Step number four, automating that plan, right, that was all about the execution. And then step number five is investing early and often.

So let me wrap up by sharing some advice that I got from the YFP community. I recently reached out to the YFP community to say hey, what are some of the things what are some of the things that you think would be helpful as you reflect back on your journey, going from student to new practitioner student to resident to fellow to a new practitioner that you wish you would have either learned or you wish you would have followed that advice and let me just share you a handful of those response.

One person in the life he can be said it’s worth it to learn how to budget early even on a resident salary you can save.

Another person said there’s one financial hack I wish someone had whispered in my ear my own graduation, house hacking with a high value short term, or midterm rental model. We’ve talked about house hacking on the show before referring there to essentially living in a unit can be a single unit duplex, triplex quad and then renting out a portion of a single family house or if you have multiple units renting out other units.

Another person in the YFP community said I wish I would have learned about the different student loan payment options and how to lower my taxes as a W2 employee.

Another person share this advice don’t put off paying your loans if you’re not going down to forgiveness pathway, tackle them head on, and get them done with. Financial life only gets crazier down the road with the addition of a spouse and kids. Looking back, I wish I would have lived as a student resident lifestyle for two years or more and paid extra to knock out those loans early. And then finally, someone else said if you do income based repayment for your student loans, don’t do forbearance during residency, your payments will be low, and you’ll be finished a year earlier.

So just a few pieces of advice from those in the YFP community that I’ve made that transition. I hope you enjoyed this episode. Thank you so much for listening on a regular basis. Again, we have several of these topics we talked about before we’ll link those into the show notes. And I hope you have a great rest of your week. Take care.

[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 is not intended to provide and should not be relied on for investment or any other advice. information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archive newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guaranteed 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 orphanage pharmacists podcast. Have a great rest of your week.

[END]

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YFP 351: Legacy Planning 101: How to Build Your Legacy Folder

Posted on March 21, 2024March 21, 2024 by YFP Media

Tim Ulbrich discusses the importance of creating a legacy folder to organize essential financial documents for access during emergencies and peace of mind.

Episode Summary

In this episode, YFP Founder and CEO, Tim Ulbrich, delves into the critical aspect of establishing a “legacy folder” to efficiently organize essential financial documents and accounts. This folder serves as a vital resource in emergencies, streamlining access for loved ones and averting confusion or delays. Drawing from personal experience, Ulbrich shares how he and his wife maintain their financial plan and essential documents in a shared electronic folder and a secure physical safe at home, ensuring accessibility and peace of mind during unforeseen circumstances.

Tim explores the contents of the legacy folder, which encompass a comprehensive checklist, electronic copies, and hard copies of vital papers such as birth certificates and social security cards and other critical documents like insurance policies and estate planning materials.

Learn how to proactively organize your financial affairs to safeguard against unforeseen events, ultimately fostering financial peace of mind and security.

About Today’s Guest

Tim Ulbrich is the Co-Founder and CEO of Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 15,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. To date, YFP has partnered with 75+ organizations to provide personal finance education.

Key Points from the Episode

Building a legacy folder for financial peace of mind. [0:00]
Creating a “legacy folder” for financial documents. [2:36]
Important documents, insurance policies, estate planning, and car titles. [6:50]
Organizing financial documents for emergency situations. [14:59]

Episode Highlights

“So when it comes to why having a legacy folder is important. Getting organized with your financial records plays a significant role not necessary in terms of moving the needle on your net worth but in making sure you and others have access to all the information that you need to make informed decisions.” – Tim Ulbrich [2:24]

“Now, what is the legacy folder? So essentially the idea of a legacy folder, whether it’s a physical copy and electronic copy, or combination of both. It’s a place where you have all of your financial related documents. So in the event of an emergency, others will be able to quickly assess your financial situation and get access to all of the documents and accounts that pertain to your finances.” – Tim Ulbrich [4:07]

“Don’t underestimate the peace of mind and the clarity that can come from having this information collected.” -Tim Ulbrich [5:25]

“Once you get organized with your information, you’re going to be walking from that point of confidence, you’re going to feel prepared in taking action on other parts of your financial plan.” – Tim Ulbrich [16:49]

Links Mentioned in Today’s Episode

Episode Transcript

[INTRO]

Tim Ulbrich 00:00

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’m talking through Legacy Planning 101: How to Build your Legacy Folder and why it’s important. To assist with implementing this important step and your own financial plan, make sure to download the YFP Legacy Folder Checklist at yourfinancialpharmacist.com/legacy. This checklist includes a list of 15+ financial related documents that you can have a record of in your legacy folder. It helps you identify key parts of your financial plan that you may or may not have in place but need to get started. And it helps give you peace of mind knowing that in the event of an emergency, all of your financial documents are organized in in one location. Again, you can access that free checklist at yourfinancialpharmacist.com/legacy.

Tim Ulbrich 00:51

Now before we jump into today’s episode, I have a hard truth for you to hear making a six figure income is not a financial plan. Yes, you’ve worked hard to get where you are today. Yes, you’re earning a good salary. But have you ever wondered, am I on track to retire? How do I prioritize and fund all these competing financial goals that I have? How do I plan financially for big upcoming life events? Whether that be moving, having a child, changing jobs, getting married or retiring? And why am I not as far along financially at this point in my career, as perhaps I thought I should be? The answer your six figure income is not a financial plan. As a pharmacist, you have an incredible tool in your toolbox your salary, but without a vision and a plan that good income will only go so far. That’s in part why we started Your Financial Pharmacists back in 2015. At YFP we support pharmacists at every stage of their career to take control of their finances reach their financial goals and build wealth through comprehensive fee only financial planning and tax planning. Our team of professionals including certified financial planners and a CPA, work with pharmacists all across the US and help our clients set their future selves up for success while living their rich life today. Ready to see how Your Financial Pharmacist can support you on your financial journey? The next step is to book a free discovery call with our team by visiting YFPplanning.com Again, that’s YFPplanning.com Alright, let’s jump in today’s episode.

Tim Ulbrich 02:18

Hi there, Tim Ulbrich here. Welcome to this week’s episode of the YFP Podcast. I’m flying solo this week to discuss legacy planning 101: how to build your legacy folder and why it’s important. Now this episode is going to be a brief one. But I hope you can walk away with a specific action item or to relate it to your own financial plan. Whether that be to create a legacy folder if you don’t already have one or if you do to make sure that you look at it and update that information if it’s been a while. So when it comes to why having a legacy folder is important. Getting organized with your financial records plays a significant role not necessary in terms of moving the needle on your net worth, but in making sure you and others have access to all the information that you need to make informed decisions. Think for a minute about all the various financial accounts, documents, records, insurance policies, tax returns that you have right, the list quickly grows to be one that is overwhelming. And the more you operate in your own system, the easier it is to navigate for you. But unfortunately harder for others to unravel, should they have to do so in the future. Right? Think of a situation where in the event of an emergency, you have this beautiful system you’ve created, you know where all your accounts are all your files, all your passwords, but unfortunately, others aren’t able to readily access that and to make sense of that information.

That’s where the legacy folder concept comes in. I actually first heard of this idea, it’s not my idea, I first heard of it when taking Dave Ramsey’s Financial Peace University class, this was probably 15 years ago through our local church. And I remember walking away thinking, wow, that is so obvious, yet so important. And something that Jess and I hadn’t yet done at that point in our financial plan. Now, what is the legacy folder? so essentially the idea of a legacy folder, whether it’s a physical copy and electronic copy, or combination of both, which is what we have, and I’ll share more information about that. It’s a place where you have all of your financial related documents. So in the event of an emergency, others will be able to quickly assess your financial situation and get access to all of the documents and accounts that pertain to your finances. We just went through updating this – Jess and I did in our own financial plan, shifting everything to an electronic version with the exception of a couple things that we keep in a safe at home, so that in the event of something happening to Jess or I or both of us, those caring for our boys along with our financial planning team at YFP readily have access to all the necessary information that they would need.

So when I think of the importance of this, you know, it really is peace of mind but there’s a secondary part that we often don’t think about, which is it forces you to get organized right? When you go through this process, and I’ll talk about the different sections of our own legacy folder. When you go through this process, you quickly might realize, wow, I’ve got some areas of the plan that I need to clean up, I need to gather some information. And this like many other parts of the financial plan, sure, it takes a little bit of time to get set up. But once you have it set up, right, we’re then in that update or maintenance mode. And again, don’t underestimate the peace of mind and the clarity that can come from having this information collected. So what’s included in the legacy folder? Well, I mentioned our checklist before and if you didn’t already download that make sure to download the YFP legacy folder checklist, you can access that again, at yourfinancialpharmacist.com/legacy that will give you a good guide.

There’s no one right answer to this. So I’m going to talk through what we have in our legacy folder. And you can see maybe some of that makes sense. Or maybe you have other documents and sections that you would want to include. So here’s how we have it organized in a combination of a Google Drive a shared drive, and a safe at home with the password the master password to our One Password, which is the the password account that we use the password management account that we use, I have the master key password in a safe at home, along with some hard copies of some documents like birth certificate, social security card, etc. Those things are in the safe, everything else is stored electronically and anything that’s in the safe as referenced as such in the electronic documents so so keep that in mind to combination of an electronic folder we used to have this all in a paper copy it was in a blue folder, we used to joke with our my parents and our in laws that hey, if anything ever happens to Jess or I – get the blue folder! For obvious reasons, having everything in a hardcopy wasn’t ideal in terms of updating that as well as making sure that the integrity of documents stay in place.

Okay, so section one is what we call important documents. Okay, so these are birth certificates for Jess, for me, for our four boys, these are our social security cards for us and the boys, this is our marriage certificate. These are our passports. And these components, we keep in a fireproof safe at home, obviously, because the hardcopy is important to have. So that’s section one important documents.

Section two is insurance policies, and information. So this is something that we have to update. Some of these we have to update annually, others not so much. So for example, long term disability policies or term life policies unless something changes with those policies, you know, we’re not updating those on a regular basis. But this includes things like auto insurance policies, homeowners insurance policies, or umbrella insurance policy, or health insurance policies, long term disability insurance policies, and our term life insurance policies. And we have a couple of different term life policies and long term disability policies. So all of that is included here in section number two. Now, what I have done typically in the electronic version, is I’ll list these out. And then I have the the actual policy hyperlink. So it can be easily reference to get to the actual policy, right, whether that’s a term life, disability, or another type of insurance policy. So that’s section two insurance policies and information.

Section three is estate planning documents. So we have an electronic copy on the Google Drive folder, the shared folder, and then we have a hard copy of these as well, because of the wet signature that’s needed on these and each state is different. Ours is a wet signature with a note notarized copy. So we have a hard copy in the safe at home. So these include our revocable trust agreements, this is our healthcare power of attorney, this is our living will, our last will and testament, et cetera, a lot of work to be done here. Now, if you’re hearing those terms, and thinking, Wow, maybe I need to get my estate planning documents in place. We’re gonna be talking more about that on the podcast, but I would reference you back to Episode 222. We’ll link to that in the show notes, when we brought on a couple of attorneys to talk about why estate planning is such an important part of the financial plan, as well as Episode 310, when Tim Baker and I talked about dusting off the estate plan, so this is not a you set it and you’re done.

Again, most of the work is upfront. Sure, there’s an investment of time and money to get these documents created. Again, the value is in the process of getting these created. And then you’ll have to update these periodically. So Jess and I often joke that our youngest son, Bennett, he wasn’t named individually in our documents when we created the so I guess that’s how it goes right when you’re the fourth son in the family. So he’s represented – it does address future children. But it’s just funny that he’s not called out individually. So we’ve got some updating to do there. So that’s section three – estate planning documents. And again, we keep a hardcopy in the safe. And then we have an electronic version of that available as well.

Section four is car titles. Now I’m not sure how valuable these are based on the current conditions of our minivan and our other vehicle, but, you know, calling these an asset would be a stretch but nonetheless, they have some value. Okay, so we have the car titles, readily available in section four so that someone could quickly sell or transfer the title of the car if need be. That’s section four car titles.

Section five is all documents related to our homeownership, okay, this is the deed on our home. This is the HELOC that we have open in the event, essentially, we have this as a backup emergency fund or if we need to tap into some of the equity in the home. So this is the HELOC documents. This is another copy of our homeowners insurance just to have it all in one place as well. So any important document related to the home, obviously, information about the mortgage, all of that is here in Section Five.

Section six is probably the biggest document I think, or close to the biggest section, which is a summary of all of our financial accounts. It’s our net worth tracking sheet, which I’ve talked about before on this show. And it’s all of our social security statements. Now I was just talking with a group of pharmacists last night that I was presenting to and I was talking about, hey, how many of you have pulled your Social Security statements to see your projected benefits, and I kind of got this impression that it was very few if any, right. So if you haven’t done that, it’s a good action step you’re going to do if you go to ssa.gov, to look at your Social Security statements, it’s got good information on there on projected benefits, and you can see your work credits. It’s pretty cool.

But this is a section where I have a table of contents that explains every account we have, right. So at Ally Bank, we have our high yield savings account, we have our checking account. Here’s where we have our Roth IRAs. Here’s where we have our 401 K’s. Here’s where we have a Roth 401 K. For every single financial account that we have, what is the account name? What is the institution? Where’s the link to that account? And what are we using that account for. And then as I mentioned before, we use One Password to store all of our password information and shared between Jess and I and the master key to that Password account is inside of our lock safe at home. So essentially, in the lock safe, you get to the One Password document through that you can then access all the individual financial accounts.

Now I know I’ve talked about this before, but I really believe in the value and the importance of not only having a good idea of the summary of all of your accounts. But this is a good place to also be tracking your overall net worth and your trajectory of your financial health. Right net worth is your assets what you own minus your liabilities, what you owe. Tom Stanley talks about the importance of tracking your net worth in the book, The Millionaire Next Door, and he talks about those that develop and build wealth over time they think differently, right? What he’s talking about there is that they realized that their income is a good tool. But their income is only a tool if they’re applying that to building their assets and paying down their liabilities, which ultimately is translating into their net worth.

So Jess, and I track our net worth on a monthly basis. It’s a very simple spreadsheet. If you want to see what that spreadsheet looks like I have that in the toolbox, yourfinancialpharmacist.com/toolbox along with a couple of the resources that I use, you can make a copy of that make it your own, very simple- every financial account we have, it’s the value of the asset. It’s the amount of liability assets minus liabilities we track that month over month, I think about that as the 20,000 foot view of kind of where we’re progressing financially, of course, the real work to be done is on a much more granular level. So that’s Section six, summary of financial accounts, net worth tracking sheet, and social security statements.

Section seven is our tax returns, this is our tax returns. On the personal side, this is a tax returns on the business side. So for us that would be the business, Your Financial Pharmacist as well as the business YFP Tax. And then for the property that we own, we have a separate LLC for the property as well. So for any business filings or extensions, or important communications, documentations. Obviously, it’s important to retain your tax records for everyone. But here to have those readily available, as well whether it’s needed in the event of an emergency, or if you’re working with a tax professional or someone you need to reference that information that’s good to have. So that’s section seven tax returns.

Section Eight is all information related to business records. So this is a summary of the business entities, I have a quick summary of what are the different entities and then of course, all of the legal documents, including the incorporation documents, the operating agreements, the buy/sell agreements, really important that you not only have these in place, but you have these readily available and accessible in the event of something happening. So any important document related to the business is there. And then as I mentioned, I kick off this section with a quick summary. So that in the event that someone needs to look at this, they can quickly understand what are the entities, what’s my ownership in the entities, and then what are the important documents within each entity that’s included in the legacy folder.

Section nine is just a miscellaneous section. So this could be utilities information or other information that is not easily fit into one of the other buckets in the first eight sections. Pretty simple. Right? So yeah, it takes time. And I think even recently, when I went through a pretty major update of this, I want to say it took me you know, three, four or five hours just to update documents, things that I had to scan to get electronically and making sure I had the right setup, creating some of the explanation in the summary documents. But not only as I mentioned, is it helpful for whoever is looking at this information? Hopefully that never needs to happen. But it’s also helpful for you as you go through this to identify like, oh, maybe there’s some gaps in here in the financial plan that we could use as an opportunity to make some adjustments or changes as you’re looking at goals for the next year.

So in terms of who has access to this, of course, Jess and I have access. Also, my in-laws have access to this who would in our state planning documents become the caregivers of our boys in the event of an emergency so important for them to have access and awareness of it, as well as our financial planning team at YFP right. So I know that in the tragic instance, if Jess and I were to get in an accident tomorrow, and something terrible would happen, I know that instantly my in-laws, who would be in charge of the boys and I know our financial planning team who would be helping them and making decisions, they have access to all of this information. Now, it doesn’t mean it’d be easy. There probably are still questions, maybe things that I’ve missed or haven’t thought about. But it’s a really, really good start again, gives us peace of mind knowing that we thought through this in great detail.

So in closing, right, simple yet effective, simple, yet effective. And that’s so true for so much of the financial plan. Sometimes we overthink this, we overcomplicate this, yeah, there’s work to be done. There’s professionals to be hired, certainly on the financial planning side, on the estate planning side, on the tax side, but the gathering of documents and information. This seems like a bigger mountain to climb than it actually is. And I think for obvious reasons, right? Who likes to think about, you know, some of these circumstances that might be tragic, where someone would need to access your information. It also might expose areas of the plan really like ah, I don’t really like the progress that we’ve made, we’ve got opportunities to improve. So for those reasons, it seems like a bigger mountain to climb. But I promise you that as you go through the process, it likely is easier than you think. And once you get organized with your information, you’re gonna be walking from that point of confidence, you’re gonna feel prepared in taking action on other parts of your financial plan. If you have questions on this episode, as always, feel free to reach out to us [email protected]. Again, make sure to download the YFP Legacy Folder checklist. As you follow along in this episode, you can get that at yourfinancialpharmacist.com /legacy. Thanks so much for joining this week. We’ll catch you next week. Have a good one.

Tim Ulbrich 17:17

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

[END]

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YFP 349: Your Top 3 Questions Answered by a CERTIFIED FINANCIAL PLANNER™

Posted on March 7, 2024March 6, 2024 by YFP Media

YFP’s Tim Baker addresses key questions from the community, covering retirement savings, cost of living, and the importance of the nest egg calculation.

Episode Summary

On this week’s episode of the YFP Podcast, host Tim Ulbrich is joined by YFP Co-Founder and Certified Financial Planner, Tim Baker, to dive into some of the most common questions from the YFP community. He covers topics ranging from debt repayment to investing and retirement planning in three key questions:

How much do I need to save in order to retire? How do I determine what is enough?
The intricacies of cost of living and understanding the income you’ll have in retirement.
Why the nest egg calculation is crucial in financial planning.

Our discussion also delves into the pros and cons of paying off low-interest debt, such as student and auto loans, versus investing. Tim Baker also shares the strategies for prioritizing debt repayment, retirement savings, and saving for a house down payment.

In a particularly insightful segment, Tim and Tim tackle a question from a listener with a $200,000 student loan balance, where Public Service Loan Forgiveness (PSLF) isn’t an option. Tim Baker shares his perspective on weighing the decision between paying off the loans and pursuing forgiveness over 20-25 years, including the potential tax implications.

Join us as we navigate the complexities of financial planning and empower you to make informed decisions for a secure financial future.

About Today’s Guest

Tim Baker is the Co-Founder and Director of Financial Planning at Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 12,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements.

Tim attended the United States Military Academy majoring in International Relations and branching Armor. After his military career, he worked as a logistician with a major retailer and a construction company. After much deliberation, Tim decided to make a pivot in his career and joined a small independent financial planning firm in 2012. In 2016, he launched his own financial planning firm Script Financial and in 2019 merged with Your Financial Pharmacist. Tim now lives in Columbus, Ohio with his wife (Shay), two kids (Olivia and Liam), and dog (Benji).

Key Points from the Episode

Debt repayment, investing, and retirement planning.
Retirement savings and investment strategies.
Retirement planning and nest egg calculation.
Retirement planning and the “Nest Egg Exercise” to connect long-term goals with current actions.
Prioritizing debt and investing strategies.
Prioritizing debt payoff vs. investing for financial freedom.
Financial planning and prioritizing goals.
Managing $200,000 in student loans without PSLF.
Student loan debt and financial planning.

Episode Highlights

“I think what, what sometimes happens, Tim, is that we try, we try to do a lot. We try to do a little bit of a lot of things versus a lot of like one or two things. Yeah. So I think working with a planner to help you prioritize is going to be really important.” – Tim Baker

“So I think the best thing, and we we’ve done this a lot, and when we speak, Tim, the best I think way to determine if we’re on track to retire is to do a nest egg nest egg calculation” – Tim Baker

“But I do think that that push and pull between today and tomorrow is really important. So let’s focus on that trip to wherever; let’s focus on the down payment for a real estate property or whatever that is, like those things, I think, have to be part of the plan as well.” – Tim Baker

“The cons of paying off debt, I think, is the opportunity costs of, like, what you might miss in terms of if you were to invest that, especially if the interest rates are really low, and then just kind of just overall money,less money for investments. The pros, I think, of investing, is potentially higher returns, although not guaranteed, compounding growth, potential tax benefits, if you’re putting in things like 401Ks and IRAs.” – Tim Baker

Links Mentioned in Today’s Episode

Episode 272 – How Much is Enough
YFP Planning – www.yfpplanning.com
YFP+ – yourfinancialpharmacist.com/membership
Subscribe to the YFP Newsletter
YFP Open House on March 14, 2024 at 8:30pm EST – yourfinancialpharmacist.com/openhouse
YFP Disclaimer
Tim Ulbrich on LinkedIn
Tim Baker on LinkedIn

Episode Transcript

Tim Ulbrich 00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, YFP Co-Founder, Director of Financial Planning and Certified Financial Planner Tim Baker joins me to answer your top three financial questions. During the show we tackle pros and cons of paying off low interest rate debt versus investing strategies to optimize student loan repayment for those not pursuing Public Service Loan Forgiveness and how to determine how much one needs to save for retirement. Before we jump into the show, I want to make sure that you’re aware of our next YFP Open House that I’m hosting on Thursday, March 14 at 8:30pm. Eastern. If you’re wondering how working one-on-one with a financial planner can help you achieve your financial goals, the best place to begin is by signing up for our open house. You can do so by visiting YourFinancialPharmacist.com/openhouse.

During this open house, we’ll help you gain clarity on your vision for living a rich life and how the financial plan can become the engine for achieving that vision. We’ll also help you determine how much is enough when it comes to retirement planning whether or not you’re on track. I’ll be taking the group through nest egg calculation. You can learn about the nuts and bolts of hiring a financial planner including what to look for different types of planners that are available and why fee-only planning matters.

And finally, we’ll cover an overview of YFP services, including our financial planning, and tax and accounting services. Make sure to sign up to attend live. We won’t be recording this workshop. For those that attend, they’ll receive an interactive workbook as well as a free resource: Where Should My Next Dollar Go? that will help you assess your overall financial well being and provide clarity on how to efficiently deploy cash, avoid overspending and prioritize various goals. Again, you can register for this Open House on Thursday, March 14 at 8:30pm Eastern by visiting YourFinancialPharmacist.com/openhouse. Alright, let’s jump into today’s episode.

Tim Ulbrich 02:04

Hi there, Tim Ulbrich here. Welcome to this week’s episode of the YFP Podcast. I’m excited to welcome Tim Baker back to the mic as we’re gonna put him on the hot seat with some rapid fire Q&A with some of those common questions that we get from our community, including those around debt repayment, investment, and retirement planning. Hey, Tim, it’s been a while since we’ve had you on the show, what’s new, what’s exciting?

Tim Baker 02:24

What’s new? We’re in the throes of tax season. So I’m, we’re busy there. I’m talking to a lot of potential clients coming on board. Baby number three is about a month away, Tim. So we’re preparing for that. I joke we have about 1000 projects that we have to complete before the baby gets here. So you know, kind of maneuver in my my wife’s lifts list here. So but yeah, all good. Thanks. No complaints.

Tim Ulbrich 02:55

Well, we’re excited to jump into these questions. I know it’s a busy season for you, busy season here for YFP as you mentioned in the midst of tax season. And, you know, we’ve been, we’ll talk at the end of this episode about our YFP Plus community, our new community that we’ve been offering now for a few months. And it’s been really exciting to see the questions and the engagement that that group has, and one another jumping in answering those questions. And we wanted to pull three of the most common questions that we get, whether it’s inside of that community, whether it’s, Tim, questions that we get when we’re speaking that come up on repeat. And so they may be variations of these, but you know, common questions around things like hey, how much do I need to have saved for retirement? What are the pros and cons of paying off debt versus investing? That’s probably the most common question that we get. And, you know, what should I do with my student loans? And how can I best optimize the repayment strategy? So let’s jump into these one by one. Tim, the first question that we have is a big one, but how much do I need to save in order to retire? How much is enough? And how do I begin to determine what that number is?

Tim Baker 03:57

Yeah, so I mean, it depends. Just gotta get that out of the way, right. I mean, this is such a multivariable thing. I think it’s just really hard to determine, you know, without a, you know, pretty deep level analysis to be honest Tim, you know, I know, you know, I’ll talk through some rules of thumb here and things like that. But, you know, like I was talking to a couple last night, and, you know, I think the the wife, the pharmacist was, like, you know, I kind of want the same level of comfort in retirement that I have today in terms of like my standard of living and the husband, the spouse, was like, I could live in a tent and be completely content. You know, so like, so like, that’s, that’s a big thing. You know, like if, if what your need is in retirement, you know, you could have enough saved today, Tim, like it’s it really don’t know. So the variables there, some of the variables could be you know, the standard of living the time in retirement. There’s a lot of clients that we work with that like, will say like, Hey, like I don’t know how long I’m going to be around because of my family history. So we, you know, we put that in, in in play, taxes, inflation unexpected, you know, expenses, a lot of that can be medical, even the inability to work so that, you know, a lot of people, when they’re when they’re doing this calculus, they’ll say, Oh, I’ll work till 70. Or I’ll work part time. And the stats say that 40% of the people out there are going to going to stop working earlier than they think that they do. So you know, what I always do, there’s, there’s lots of fancy ways to kind of calculate this. And you know, if you’ve ever heard of Monte Carlo analysis, this is where we, we simulate portfolio returns 1000s of simulations and say, with, you know, X percent probability of success, we typically want, anywhere from 70 to 80% probability of success, you might say, Tim, why not 100%. Typically, if we’re, if we’re lower than, you know, 70%, we’re going to adjust the plan accordingly, in real time to get it to the end of that.

So I think the best thing that and we we’ve done this a lot, and when we speak, Tim, the best I think way to determine if we’re on track to retire is to do a nest egg nest egg calculation. And this was really born out of, Tim, like, back in the day, when I started advising people on their on their, you know, retirement stuff. What I learned from a mentor is we would say, hey, based on your based on these assumptions, you need $3.5 million to retire. And then we would just move on to the next thing. And I would see the, the look in people’s eyes were like, that number just didn’t hit the mark at all, like it was just like, it was kind of equated to like student loans where it’s just like Monopoly money, that doesn’t make any sense to me at all. So what I started to do is I would take that number, and then I would kind of use another time value of money calculation to discount it back to a number. So if you’re the client, Tim, a number for Tim in 2024, that actually is digestible to you, that’s palatable to you that says, okay, like that makes sense. And typically, what we’re doing is that we’re comparing, you know, what you’re putting into your 401 K, your IRAs, what you already have, you know what your allocation is, so we can kind of make some assumptions on performance returns, how long you’re going to work. And then we can say, hey, you’re on track by this amount of dollars per month, or you’re off track by this amount of dollars per month. And obviously, that that hill gets steeper, if we’re off track, the closer that we get to our target. So, to me that that’s a huge thing to actually connect the dots to, like when I ask people like, are they on track? A lot of people say I have no idea or they’ll say, like, I’m using a calculator, that typically is not a great indicator of where they’re at. So, but I think a lot of this goes back to kind of, you know, move the answer forward is like, you know, what do you need, you know. A lot of the estimates, you know, a lot of the estimates will say, you know, a lot of retirement planners will say, hey, you need 70 to 80% of your pre-retirement income in retirement. And that’s typically the reason for that. It’s like, you’re typically saving 20, 30% of your income, pre retirement, like so leading up to the years of retirement. And you’re not doing that in retirement. So, but a lot of that, Tim, also misses the mark, right? Because it’s like, alright, well, if I’m, like, 20-30 years from retirement, what does that even mean to me? Right. But if you take, you know, I did a kind of a, an example here, if you’re making $125,000 today, and you have a 30 year career ahead of you, and you get a 3% cost of living adjustment every year, in 30 years, that equals $303,400.00. Three or three 400.

Tim Ulbrich 08:55

Almost hard to believe, right? When you when you put the numbers on that.

Tim Baker 08:58

Yep, But then if you look back 30 years, like look back at, like, what a total cost of like a house was or like, what the… you know what I mean? Like, so you have to, you know, it’s perspective, right? So, so 30% of that $303 is about $212. So, essentially, what you need is $212 for 30 straight years, so every year $212. And then we had to, you know, account for inflation and things like that.

Tim Ulbrich 09:22

$212,000?

Tim Baker 09:24

$212,000. Right. So you need a portfolio. So if you just do it in simple terms to earn 12 times 30 Like, that’s kind of like, that’s a very, you know, linear way to look at it. But then you have to, you know, factor in things, you know, like variable expenses and things like that. So, what a lot of people will point to which, I don’t love it, because I think it can steer people wrong, but I think at least gets a like a foundation of where to think about this is the 4% rule. So the 4% rule is, you can withdrawal 4% of your savings in the first year retirement adjusted for inflation ever year thereafter, to ensure that your saving, you have enough saved for 30 years. So the way to kind of backwards plan to that is if you multiply your annual retirement expenses, so let’s say you need 40, that let’s say you need $60,000 per year, let’s say 20,000 of that comes from Social Security, then we need $40,000. $40,000 times 25 years, so we’re just doing the 4% inverted is a million dollars, or a million dollars times, you know, point 0.44% is that $40,000. So that’s a way to look at it. But again, like, I don’t know, if that does a great job of, you know, planning for longevity, you know, there’s a lot of there’s a lot of errors in that, you know, in that assumption, but I think it’s a good place to start thinking about this. So, I mean, it’s a, it’s a really big question that has a lot of, you know, at anytime that you look at something over, you know, 2030 years, I guess, if you’re closer to this, maybe maybe the questions a little bit easier to answer, but, you know, looking at expenses, you know, looking at budget, the budget never goes away, you know, people are like ugh budget, you know, scenario analysis, I think all of those things kind of play into this.

Tim Ulbrich 11:10

Again, this is why I love as you mentioned, the the nest egg exercise, you can see the connections that people start to make in that exercise. Now, of course, especially if we’re looking over a long horizon, right, 20-30 years out, or even if it’s 10 years out, like things are going to change, this is not a one and done, you know, type of thing. We’ve got to be looking at it on a regular basis. But when you’re able to take people from that overwhelming shock number, right, 3 million, 4 million, 5 million to as you said, Hey, here’s what we need to be doing this year and actually, this month. Like this is what we need to be doing based on what we have saved, based on a set of assumptions that we obviously have to think through and think about risk tolerance, capacity, all those kinds of things, based on what we choose to assume or not with Social Security, you know, based on what you’re getting through your employer, all these things are going to feed into where we at currently, and what do we need to be doing per month. And, you know, I did this recently, during an Open House that we did in February, I’ll be doing it again, in our next open house coming up on on March 14, again, you can register for that yourfinancialpharmacist.com/openhouse.

And what’s fascinating about that is I can see this come to life, when people start to just see how these numbers are calculated and see the assumptions in place. Because, again, we’re actually making it mean something today, right? When we look at a number per month, we can start to see how that does or doesn’t fit in with the budget, we might not like that number. But we can start to actually work with that. And in fact, sometimes we find out through this exercise that people are over saving, you know, and there’s a conversation to be had there about, hey, how do we feel about it? What other goals are happening? And might we shift around, you know, different priorities? And then you can toggle some of these factors like, Hey, I said, I wanted to retire at 67. But what happens if it’s 62? Or 58? Or, you know, hey, I’d like the work that I’m doing, and I don’t really see myself going from full time did nothing for 30 years. What if I’m working part time and having an income? And these changed things significantly when you look at these calculations.

Tim Baker 13:08

Yeah, I mean, if I do say so myself, I think it’s a great tool. I think it was born out of like the misconnection between that big number in the future and what we’re doing today. And I think to your point, like being able to, like toggle those levers and pull those levers, you know, whether it’s, you know, working longer working less, you know, dialing back things, you know, down up things like I think it’s really cool to see. And to your point, yeah, we’ve had a lot of clients that have definitely, you know, we talk about, you know, living a wealthy life today and will live in a wealthy life tomorrow. Sometimes the calculus shows that they’re really focused on living a wealthy life tomorrow, in spite of today, meaning like, you know, I think it’s rare for a financial planner to say like, Hey, you’re saving too much for retirement. But I do think that that push and pull between today and tomorrow is really important. So like, let’s focus on that trip to wherever let’s focus on you know, that, you know, down payment for a real estate property or whatever that is, like the like those things, I think, have to be part of the, of the plan as well. So yeah, it’s a great question to ask. It’s just really hard to, to to answer without, you know, a lot of detail. A lot of, you know, what’s the balance sheet look like? What are the goals and, you know, go on from there.

Tim Ulbrich 13:14

It is.

Tim Ulbrich 14:34

If listeners want to dig deeper on this topic, first love to have you join us at the Open House. Second, we’ve covered this as a stand alone topic on the episode on the podcast before Episode 272. Tim and I talked about how much is enough and how do you determine that. We’ll link to that to the show notes. Make sure to check out that episode as well. Our second question we have as I mentioned before, probably the most common question that I get when I’m presenting is Hey, what are the pros and cons of paying off low interest debt, such as a student loan or auto loan versus investing. Furthermore, how do you think about prioritizing strategies for paying down debt, saving for retirement and saving for a house down payment? Tim, I’ll add to this before you jump in here that this is a really common question that we see, especially among, you know, those within that first 10 years of graduation, right. They’ve got a lot of things that are coming at them. I’ve got, you know, a bunch of student loans, I’m looking at buying a home, you’re telling me that I should be investing in saving for the future? I need an emergency fund. How do I begin to prioritize and weigh all these things? And, again, before you say, it depends, like, I think this is an example question where the value of planning is so important, because we got to get all those things out of our head on the paper, so we can start to plan. So what are your thoughts here?

Tim Baker 15:46

Yeah, I mean, I always look at debt as like a spectrum. I think you have, you know, good debt, which, you know, I would I would categorize as, like a mortgage. I would still put student loan debt in there, because, you know, a mortgage is a, you know, typically appreciating an asset that you can, that you’re living in, raise a family. Student loans, typically, you know, the price of doing business to become a pharmacist, you know, higher levels of of income, you know, post degree. But then as you go like, like auto loans, again, again, these are used assets that are typically depreciating. You’re typically paying higher interest than you have in the past, but it serves a function of like getting you to work. But then as you go, it might be things like, debt for furniture or other types of personal loans. And then credit card debt is typically at that, you know, other end of the spectrum of bad debt, where it’s, you know, you’re typically, this is the purchase of of wants not necessarily needs, or, you know, it’s there because of a lack of an emergency fund or kind of planning, planning for those unexpected things. So, you know, I think like, where you sit, where you draw the line between good debt and bad debt, it’s going to different be different for everybody. You know, typically, it’s, it’s the car to the right is good debt. So car, student loans, mortgages, are okay. And then everything for the left is not. Some people will put cars like a bad debt. So I think it just depends on what your again, what your goals are, what your what your aspect of debt. You know, I was asked recently by a prospective client about like, you know, hey, was watching something that Dave Ramsey said about paying off, you know, a mortgage that’s less than 3%. And he’s very, paints with a broad brush and said, like, you know, really any debt, you’re kind of a slave to the master is kind of how he describes it. And I think like, there’s a psychological thing of this, like, if you if you feel like that debt, is preventing you to be financially free, that I would treat that differently than something else, you know, like, I have no qualms about sitting on my two and a half percent mortgage for 30 years, I just don’t. So I think if we look at this, like the pros of paying off debt, versus invest in, you know, the paying off debt, it’s a guaranteed return, right? So if your debt is 6%, that’s, you know, you’re not necessarily gonna get that in the market consistently. So it’s a guaranteed return. I think it reduces financial stress. So eliminating debt can reduce stress and kind of simplify your finances. You do, I think, if you are completely debt free, I think you can you operate differently, you think you look at the world a little bit differently than if you have, you know, multiple liabilities. That’s kind of, you know, weighing on you and we see this with student loans, Tim, right. Like, you know, I feel suffocated, because I have this $200,000 in debt. The cons of paying off debt, I think, is the opportunity costs of like, what you might miss in terms of like, if you were to invest that, you know, especially if the interest rates are really low, and then just kind of just overall money, you know, less money for investments. The pros, I think of investing is potentially higher returns, although not guaranteed, compounding growth, potential tax benefits, if you’re putting in things like 401Ks and IRAs, The cons are again, market risk, there’s no guarantee. And, you know, complexity, like you know, if you’re just paying off debt, you know, a lot of people will make investing more interesting or sexier than it needs to be I look at as an as an investment as it should be super boring, but not everyone does that. A lot of people don’t do that. So that’s, that’s kind of my, there is no right or wrong answer. I kind of have my own biases.

When I’m working with a client, I’ll look at their risk tolerance. I’ll look at what their goals are. I’ll look at like, what are they saying to me? If they’re saying things like, this debt keeps me up at night, I’m gonna treat that very differently than if someone’s like, yeah, like it’s whatever. But there is a mathematical component to that as well. In terms of prioritize and financial strategies or just get the financial, like, what do we do, you know, for paying down debt versus saving, you know, I was speaking to, you know, a prospective client the other day, and they have real estate, they have some investments, they have a brokerage account, no emergency fund. So like, we’re we’re doing steps, six, seven, and eight, before we’re doing step one, really. So building an emergency fund, having a high yield savings account with, you know, those non-discretionary, you think expensives, just stowed away. Super important. That’s, that’s a foundational thing. I think from there, it’s also like the consumer debt, so like credit cards, you know, furniture debt, whatever that looks like, I think is really important, because it’s typically higher nterest that you want to get get out from underneath.

I would also put taken advantage of the employer match up there, like, you know, most of the time, I think that is really, really important to get the free money. But still see people that don’t take advantage of that. And then I think looking at higher interest debt, paying that off. So, you know, maybe that is a car, you know, we’re seeing, you know, car rates, I think you you mentioned it in YFP plus community, just what those rate rates are. Shocking, you know, they’re high. So I assume, yeah, I would I, I would pay that off before I would go into the market. So I think that that to me, and again, like the one thing that the questioner asked, you know, it’s like, what about saving for retirement, again, I kind of look at, get the match. And then I look at it as that as you are navigating these other things to me, in the back of your mind, it should be a race to 10%. Like, get the match, which may be 5%. But then you really want to get to 10% as quickly as possible, and then assess from there. And then I think, like, to me saving for a house down payment. That’s a really tough one to prioritize, Tim, because oftentimes with this one, like, like you’re, you, you rationalize it, you know, you rationalize your decision. So like, it’s a super emotional decision, once you start going down the path of looking at houses, being a Zillow warrior, actually go into houses, like those timelines get cut overnight. And I always joke, like, I was talking to a prospective client. And they were like, Yeah, I want to buy a house in the next two or three years. And I talked to them two weeks later, and they were under contract. So to me, like, if that’s important for you, I would put that to the top, you know, put that at the top of the list, you know, and prioritize that. I think what, what sometimes happens, Tim, is that we try, we try to do a lot. We try to do a little bit of a lot of things versus a lot of like one or two things. Yeah. So I think working with a planner to help you prioritize is going to be really important. And it’s hard to do. Sometimes it’s hard to do that when you’re stuck inside your own head, or even with like a spouse. So sometimes that you know that that third party objective viewpoint to help you guide guide that conversation, I think is important. But again, there’s really no right or wrong answer here. It’s just tailoring to like when I say it depends. What I mean by that is, you know, it depends on what your balance sheet are, like, what your balance sheet looks like, and what your goals are. And unfortunately, you can’t like look at a neighbor or a colleague, because like you’re going to be different. You are a unique snowflake. So you know, your your experience, your life experience, your your finances are going to be different than than everybody else’s. And I think, you know, developing a plan that navigates that is super important.

Tim Ulbrich 22:39

Yeah, Tim, the visual that comes to mind, as you’re talking and I alluded to this, when I asked the question is, you know, we so often live with all of these competing priorities that are swirling in our minds, right? Guilty as charged. And it really is a step that often is hard work. But it’s really important because we’re a third party can be so helpful for us to kind of get out of our own way and make sure we’re looking at all the factors, making sure we’re not thinking of things in a silo. But it’s like, we got to put all the puzzle pieces out, we got to get them out of the box. So we can start to figure out how they actually come together. And then to implement the plan, looking at our cash flow, looking at our goals and things to actually begin to execute on that. But we tend to go into execution mode, without really considering all the pieces and parts and how they impact one another. And this sounds easy, but it’s not right. You know, in this question, you know, we’re thinking about paying down debt, you know, and that could be more than one type of debt. We’re thinking about, hey, when might we buy a home we think about saving for retirement, when you look at the percentage of take home pay that these things will take up it is huge. These are these are big decisions. And we’re not even talking about other types of goals, right vacation, travel, what else is going on the financial plan, so I feel like there’s such an important step here of, before you start running in any one direction. Hey, let’s get on with This down on the paper. You know, you did this for Jess and I back in the day, like, let’s create a prioritized list of these. What’s the target? What’s the goal? How much do we need? What priority, how much per month? And then we start to actually create the buckets and the mechanism and the thing to actually make these come to life. And when you’re doing that, and you’re automating that, I can’t even adequately describe the feelings that come when you know that that system is in place working for you.

Tim Baker 25:26

Yeah and I think like to go back to the first question, like, we’ve had conversations with clients that like, you know, they’re saving so much for retirement, and they’re like, we can actually do a little bit less than get into the house sooner. Right. So like, like, if you think about it, like, my, my Pop Pop back in the day, like he had a pension, there was no such thing as 401k is like, all of these other things that have like, like, made financial, you know, even my parents, like, it’s very different. Now, you go into the workforce, and you have 30,000 things that are like, like, vying for your attention and your your dollars. And it’s just different than what it was before. And now, like the onus, especially on retirement is up to you versus like, your employer. But it’s also like, a lot of the advice that that you’re getting is from, like, the old generation of like, hey, buy a house, make sure you’re saving for it, and those are all good things. But the world is different now. And I’m not saying that, like, that’s, that’s bad, that’s bad advice. But like, you got to kind of have to, like, you know, walk to your own tune, so to speak. And I think like, a lot of people get get anxiety because they’re like, I’m not like, I’m not doing enough here. I’m not doing enough here. And, you know, I think like, if you’re doing a plan, you’re doing enough, right.

And I think part of the part of the great thing about plan is that you are slowing down in the day to day of like busy living and objectively looking at your situation and reflecting, self reflecting or forcing to reflect of like, Hey, are we on the track that we’re supposed to be on. And also to like, celebrate the wins, like, you know, when we start with a client, you know, the the first two meetings that we go through is what we call Get Organized, where we’re building out a nice clean balance sheet of all the assets that we own, minus all the liabilities that we owe. That’s our first data points. Think of that as like the before picture. And then the second meeting is what we call Script Your Plan is all about, okay, now that we know where we’re at, where are we going, so let’s talk about you want to buy a house, you want to have a family, you want to be able to retire at this age, you want to be able to, you know, build your real estate empire, you want to be able to do XY and Z. And once we have those two foundational thing in place, the answer “it depends,” then transforms to this is what I think you should do because I know what your balance sheet looks like, I know what your goals are. And this is the you know, the the objective advice that we think is in your best interest. So like, that’s going to be different for everyone. And I think like that, you know, tracking that from data point one to three, you know, two years, three years in the future, we start to see quantifiably the benefit, we think, you know, net worth is the best measure of that, the benefit from a net worth perspective, but then also the qualitative benefits of like, wow, like, I took that trip, I am spending more time with my family, like we had a family sooner than I thought, we bought the house. You know, I thought it was gonna take us five years, we did it live in less time. So to me, those are the benefits of, of, again, working on a plan, working with a planner to help prioritize all these things, right?

Because, you know, we talked about this in the in the tax world, we feel that working with one of our CFPs and a CPA side by side and stacking years of intentional financial planning and intentional tax planning will get you to where you need to, you know, be quicker. But you know, I was working, I was working, talking to one of our planning clients that’s considering tax, and they have a tax person, but they’re just you know, and it’s a question of filing separately and filing jointly. They’re just looking at it from the perspective of tax. They’re not thinking about how that affects how the filing status affects the student loan payment. So to me, you can’t look at these things in a vacuum. They they’re all interconnected. And I think as you go, that becomes, you know, more true and more obvious. So, again, I’m biased though, right?

Tim Ulbrich 29:33

It’s great stuff. And that’s why I’m glad you brought up the quantitative, qualitative stuff because yes, it translates into actual dollars and cents net worth is the indicator that we’re, you know, looking at most assets, what you own minus liabilities what you owe, but it’s also is the qualitative stuff, are we achieving that living a rich life and also as I alluded to, just the mental clarity and the peace of mind that comes from like, I know that I’ve thought about these or I know that me and my partner or spouse I thought about these together. And we have a plan like targeted dollar amount to that. But that really is incredible. And for folks that want to learn more about our one-on-one financial planning service, you can go to YFPplanning.com. Let’s have a conversation with you to learn more about that service, learn more about what you have going on in your own individual plan and see whether or not that service is a good fit again, YFPplanning.com. From there, you can click on the link to book a free discovery call. Alright, Tim, question number three. If PSLF, Public Service Loan Forgiveness, is not an option for me, what should I do with $200,000 of student loans? How do I wait paying them off versus pursuing 20 to 25 years of forgiveness, which would then result in what we call what others call the tax bomb? So what are your thoughts here?

Tim Baker 30:49

Yeah, and again, forgive the continued commercial, Tim, but like, I think when you’re dealing with six figures worth of debt $200,000, I do think some type of an analysis is really important, especially with like, the moving goal posts, that are the student loan repayment plans, and then the strategies that are out there. So I think, you know, this is a math equation that comes from the analysis, but I think you have to also overlay how you feel about the debt, right? So again, if you’re like, like, I need to get through this, like, ASAP, like, it’s a weight on me versus like, it is what it is, I think that with the math equation is going to color how like, I would advise you as your planner. So I would say back in the day, you know, when we would look at a potentially non PSLF, you know, strategy. So, just to remind everyone PSLF, you know, was implemented in 2007. And the so that means that, you know, the first the first time someone was able to be forgiven was 2017. So you had to, you had to work, you had your loans had to be federal, you had to be in the right type of a repayment plan, you had to work for a non-profits 501C3, the government. You paid, you know, 10 years worth of payments didn’t have to be consecutive, and then you were forgiven tax free. You can, you’re eligible for forgiveness, you’re still eligible forgiveness outside of PSLF, we call it non PSLF. The, it’s a little bit different, you still have to have the right loans and the right plan, it doesn’t matter who you work for. So you can work for a for-profit. But instead of paying it for 10 years, you are paying it for 20 or 25 years of their graduate loans. And then that forgiveness amount is taxable in the year forgiveness, whereas PSLF, it’s a tax free event. So in before, you know, the new, the new plan, the save plan, typically the calculus was if your debt to income ratio was higher than two to one. So meaning I made 100,000 and I had $300,000 in debt, my debt to income ratio was three to one in that case, then a non-PSLF strategy was on the table. Because by the time we looked at $300,000, and a standard or even a refi, by the time we looked at that compared to a an income driven plan, plus, you know, a couple $100, or whatever that was invested for a tax bomb, what you paid per month, and what you paid in total was less than what you would pay in standard.

Now with the save plan and the payments a little bit different that it’s it’s it’s changed a little bit. So I would say that, you know, and the other thing that’s changed, too, Tim, is that, you know, we’re, if if we were looking at non-PSLF, we were also looking at like, typically a refi. So like if we, if our rates were 6% Wait it, you know, you might be able to go out. And for the same 10 year, find a 4.5% or 5%. So you’d get a little bit of a better rate. That’s changed too, right. So now what we’re having a way is a non peel PSLF strategy, versus staying in the federal system with potentially a better interest rate, but meet just maybe keeping the standard, you know, the standard plan. So if you have $200,000 in debt, the standard plan is going to be $2,171 for 10 years. So I think the play here is potentially looking at a refi which I don’t know if you’re necessarily going to be you know, I would look at a 10 year if you can go a little bit more aggressive seven year, five year. But your your, you know, your your payments going to go up accordingly. So, again, the goalposts have changed a little bit here. You know, I would say that, you know, I would say that probably a non-PSLF strategy here if I’m assuming you’re making $125, $130, is probably not the way to go. So probably something in the standard, maybe even being more aggressive in the standard or, again, looking at refis if rates come down, you know. I’m not sure what the 10 year if you do an apples to apples, but there are some benefit, there are still benefits to staying in the federal that I wouldn’t want there to be a pretty, pretty significant interest rate decrease for me to move off into a private loan. And that’s irreversible. So before Tammy, we would just say, Hey, this is kind of the rules of thumb, this is the way to look at it. But it’s a lot different because of the new save plan, the interest rates, etc. You know, so that’s basically where we’re at today.

Tim Ulbrich 35:35

Yeah, I think as you pointed out, the income of this individual is a really important piece of information we don’t have, right because if they’re making $180k, versus they’re making $95k, that’s going to impact that debt to income ratio. And to your point with the new save plan, that ratio, in effect has gotten more favorable. What I mean by that, is because of the change in the plan, the debt to income threshold could potentially be lower and it might make sense to pursue a non PSLF pathway. And, you know, let’s zoom back out, right? We’ve been kind of preaching on not not getting into the silos have to decisions, when you’re talking about hey, do we go more aggressive? Do we not that gets back to conversations about cash flow? What does the budget actually support? What other goals are in mind? You know, are we someone who graduated in their mid to late 20s? Or is this someone that pharmacy’s a second career, and they’re behind on investing in retirement – all of those things, just a few examples are going to impact, right, what decision we make with the student loans and how it ties into other decisions that are happening in the financial plan. So, Tim, great stuff.

These are just a few of the types of questions and conversations that we are seeing inside of our new online community called YFP Plus if you’re not already familiar with YFP Plus, we’d love to have you check out that community. Inside you’ll find exclusive on demand courses, We’ve got weekly live events, we have monthly themes and challenges. So for example, this past month in February, we were talking all about preparing for Uncle Sam and taxes bringing in Sean our CPA into the community. For the month of March, it’s all about FIRE: Financial Independence, Retire Early. We’ve got several events lined up throughout the month, the space to ask questions of our financial planners and our tax professionals and to be in a community of other like minded individuals. It’s really an incredible community. We hope you’ll check it out and use our 30 day free trial to determine whether or not it’s a good long term fit for you. You can do that by going to yourfinancialpharmacist.com/membership to get more information on YFP Plus. Again, yourfinancialpharmacist.com/membership. Thanks so much for joining us. We’ll see you next week. Take care.

Tim Ulbrich 37:37

[DISCLAIMER]

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

[END]

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YFP 318: Midyear Tax Planning and Projections

Posted on July 27, 2023July 25, 2023 by Caitlin Boyle

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

Episode Summary

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

Key Points From the Episode

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

Episode Highlights

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

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

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

Links Mentioned in Today’s Episode

Episode Transcript

EPISODE 318

[INTRODUCTION]

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

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

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

[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[END OF INTERVIEW]

[0:35:15] TU: As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide, and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.

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

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

[END]

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

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

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

Episode Summary

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

Key Points From the Episode

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

Episode Highlights

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

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

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

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

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

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

[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[0:20:04.7] NH: That’s right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[END OF INTERVIEW]

[DISCLAIMER]

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

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

[END]

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

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

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

Episode Summary

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

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

Key Points From the Episode

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

Episode Highlights

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

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

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

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

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

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

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

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

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

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

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

[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[00:08:22] TB: Correct.

[00:08:22] TU: Okay.

[00:08:23] TB: Yep.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[00:15:03] TB: Yep.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[00:29:43] TB: Yep.

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

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

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

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

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

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

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

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

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

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

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

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

[OUTRO]

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

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

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

[END]

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

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

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

Episode Summary

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

Key Points From the Episode

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

Episode Highlights

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

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

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

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

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

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

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

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

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

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[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[END OF INTERVIEW]

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

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

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

[END]

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

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

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

Episode Summary

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

Key Points From the Episode

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

Episode Highlights

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

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

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

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

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

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

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

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

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

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

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

[SPONSOR MESSAGE]

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

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

[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[0:20:21.4] JW: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[0:26:12.5] JW: Right.

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

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

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

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

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

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

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

[0:28:59.2] JW: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[END OF INTERVIEW]

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

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

[DISCLAIMER]

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

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

[END]

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

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

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

Episode Summary

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

Key Points From the Episode

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

Episode Highlights

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

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

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

Links Mentioned in Today’s Episode

Episode Transcript

[INTRODUCTION]

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

[INTERVIEW]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[0:17:43] AM: That’s right.

[0:17:45] KRH: Yes.

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

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

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

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

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

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

[0:21:57] AM: One way it happens is that you don’t pay enough taxes during the year. Typically, what we do here is we do tax projections with tax professionals’ mid-year to see, are you on pace to paying your fair share of taxes? If you’re not, of course, we have to adjust that through your employer. Of course, that’s how to get in front of it, just to see, are you on pace to pay your fair share from this year’s taxes?

[0:22:24] TB: Yeah. Probably what happened, because Joe’s employment is new, he left his old employer, is that the withholding was never set up correctly. Kelly, we know the tax bills, there are things that you can do to reduce that, but at the end of the day, you can’t circumvent that, right? Part of the problem that maybe why they’ve amassed more cash recently if we make that assumption is because we weren’t withholding enough to pay the IRS as we were earning those paychecks.

[0:22:56] KRH: It’s an excellent first red flag like, “Oh, there’s more in my paycheck than I expected.” That’s probably the first place I would go is withholding. I do think working with the tax professional can be very helpful. I think the purpose of a projection is to minimize that huge surprise like, there’s going to be things that change. Over the course of a year, an average client household might change a job, which we have here, additional family member, the kids going to college, contributing to the 529 accounts can have an impact on the state tax.

Doing a Roth conversion, at first, I was like, oh, maybe that bill was somebody decided to move a pretax into a taxable account and didn’t have professional advice on what might happen. Lots of things happen over the course of the year. A projection is not going to get to the penny, but it could help eliminate a big unpleasant surprise that would give a couple of months to change the withholding to look at the retirement contributions and get prepared.

[0:24:09] TB: Yeah. Shout out to Sean Richards at YFP Tax. These are some of the things that he’s going to be doing with clients, a projection to get in front of some of those surprises. The tool that we have here gives a rough number based on last year of like, “Hey, at the end of this, Joe and Jane, we think that you’re going to have to pay about $42,000 in taxes. If we’re halfway through the year and you’ve paid around 20, 21,000, we’re good.” Again, very much broad strokes, but definitely would want to work with a tax professional to make sure that those types of surprises are mitigated because even things can happen at the very end of the year. It could be that Jane got a bonus that was higher than she thought and we have to make sure that the right amount is withheld.

The other thing that we see for some of these tax surprises is like, if you do have side hustles, you’re making 1099 income and you’re not paying tax on top of that, it might make sense to withhold more from your W2 paycheck just to soften the blow a little bit. That would be one thing that hopefully we’re not going to replicate in the future and get in front of. The last area guys I want to just focus on is the insurance piece.

We’re not going to get into disability, because I don’t think we have a whole lot of detail on that. But when you look at the life insurance right now, they’re really just showing a life insurance policy through Joe’s employer that’s about 50,000. Jane has 162,000 through her group policy. Obviously, I think with college on the docket, a mortgage, young kids, this is probably insufficient where we probably need to look at policies. Angel, how would you purchase with the client?

[0:25:49] AM: There are a couple of ways, but I mean, I like to use rules of thumb to begin with. I mean, typically I like to look at our clients’ income, make sure they have either 10 times or 15 times insured, but there’s a formula that we use where it’s very need-based. We look at final expenses, the nationwide average. We look at liabilities that are happening, things like mortgages, things like student loans or other liabilities included in that. Definitely, because you have children, we like to throw in maybe about $100,000 up front if something does happen, if somebody predeceases the other, to make sure that your kids go to college and get educated. Then after that, we just throw in a couple of years of income to make sure that there’s a readjustment period and that any savings that you would have made while you were alive go into an account or your spouse can not take a dip in lifestyle.

[0:26:46] TB: Yeah. I think you can definitely use the rules of thumb. I would probably sleep more comfortably at night if they had probably a million dollars each at a minimum between the two of them on top of their group policies. I think you can very much break it down by liabilities, adjustment period, all that stuff. I think some work to be done definitely with that. How about Kelly, if we look at the other part of wealth protection, believe it or not, they’re pretty decent. I think when the twins were born, they went through a lot of the state documents. Anything that you would call out here, maybe outside of just updating documents and just making sure that they’re good, that you would want them to work on from a state plan perspective?

[0:27:26] KRH: I’m excited that they have any documents in place, so that was a huge check mark. I don’t know if it’s just our discomfort with this conversation, it slightly surpasses the life insurance in terms of discomfort, but these documents are very important, especially with two young children, but even with a two-person household like, it just makes things so much easier. I’m amazed at the number of stories, I don’t know if it should relate to us, even though it’s famous people that are in the news, just how difficult it is to get through. I feel like there was just a recent article about another famous person in the news who passed away suddenly unexpectedly and his wife has been navigating for months, even though the state laws are friendly for the spouse.

Always making sure that they’re up to date. Certainly, the guardian is big with having younger children. In this case, they don’t have a trust. That is a conversation with an attorney to see if – oh, actually living trust would be good to add to that. Sorry, I did not see those were not checked off. Yeah, that would probably be the one thing on the list just to make sure if anything is needed there. We are not attorneys at YFP, so we would default to legal expertise, but we can help provide guidance on looking into resources, documents needed, how to have those conversations with each other and with a professional.

[0:29:07] TB: Yeah. I think this is a phased process, right, Kelly? It’s education of, “Here. These are the things you probably need.” Then bugging clients to get them in place. Then probably the last phase is, I think next level is make sure that you have a legacy folder. It’s all in one spot. The people that know that the people, the guardian, the executor know where to find this stuff. But to your point, it’s a tough one for us to really execute, because unless you have some experience with this, because again, not many of us want to think about our premature death or disability. Definitely the will, the power of attorneys for property, for health, the living will, even a basic beneficiary check, just to make sure that all of the things are where they should be. This tool actually has, I think a pretty good list of the different accounts out there and who’s the beneficiary and who’s the contingent beneficiary.

Going through that every couple of years, I think is a good, good practice. Probably, just some little bit of touch up to do much more work on the life insurance side from a wealth protection perspective, but pretty okay from the estate plan. We just need to brush it up and make sure it’s current and well-rounded. We’ll leave it there. Kelly, Angel, thank you so much for joining me for this sixth installment of the case study. Hopefully we changed up a little bit. Hopefully this will be meaningful for our listeners out there and really looking forward to doing the next one with you.

[0:30:37] AM: Thanks for having us.

[END OF INTERVIEW]

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