3 Silent Killers to Your Investments
On this episode, sponsored by Insuring Income, YFP Co-Founder and Director of Financial Planning, Tim Baker CFP®, RLP®, talks about the three silent killers of your investment pie and how to keep your investment portfolio fit.
Episode Summary
In this episode, YFP Co-Founder & CEO, Tim Ulbrich, PharmD, sits down with YFP Co-Founder & Director of Financial Planning, Tim Baker, CFP®, RLP®, to discuss the three silent killers of your investment pie: taxes, inflation, and fees. After a brief discussion about the most recent success of YFP Speaking Engagements, Tim Baker gets into the weeds on strategies to ensure financial security and freedom by protecting your investments. Tim and Tim discuss, in detail, how to keep your financial portfolio fit through evaluating your fees, investment choices, and the utilization of tax planning. Tim Baker explains some of the most common fees associated with investment plans and that often, investors do not know what exactly they are paying in fees. He shares the impacts of inflation on your portfolio over time and how to ensure financial security after retirement. You will also hear Tim Baker speak on his personal experiences as a CFP® and how tax planning permeates all parts of the financial plan, despite many planning firms not offering tax planning as a service. Tim Baker shares his answers to frequently asked questions like: why is inflation overlooked concerning the financial plan? What is the solution to inflation? How can market stability and fees negatively impact your retirement investments?
Key Points From This Episode
- An introduction to today’s topic.
- The importance of including tax in your financial plan.
- How tax permeates all parts of your financial plan.
- Tim Baker shares some of his experiences regarding tax, working as a financial planner.
- Some examples of simple tax reduction strategies.
- How to ensure the withdrawal of investments after retirement in terms of tax.
- A discussion on inflation trends.
- Why it is important to consider inflation in your financial plan and investments.
- We learn how investments can help you get ahead of inflation.
- A detailed discussion on the issues and impact of fees on your investment.
Highlights
“I think what you can’t do is just not participate. I don’t think you can stuff your mattress and hope one day you wake up, and you’re going to have enough to retire.” — Tim Baker, CFP®, RLP® [0:21:32]
“I think it’s really important that we understand those dynamics and know that we’re not always going to be in a low inflation environment.” — Tim Baker, CFP®, RLP® [0:24:30]
“It’s really important to understand how inflation can play a role in your ability to sustain yourself in the future.” — Tim Baker, CFP®, RLP® [0:24:34]
“I think a lot of people are unaware of what they’re actually paying, and the transparency is a real thing that needs to be overcome.” — Tim Baker, CFP®, RLP® [0:24:09]
Links Mentioned in Today’s Episode
- YFP Planning: Financial Planning for Pharmacists
- Schedule a free Discovery Call with YFP Planning
- Insuring Income: Get Quotes and Apply for Term Life and Disability Insurance
- Book a Speaking Event
- Email Your Financial Pharmacist: [email protected]
- YFP Tax
- YFP 233: Tax Moves to Consider Before 2022
- YFP 248: How 3 Pharmacists Had $700,000 of Student Loans Forgiven
- YFP 239: Two Financial I’s You May be Overlooking
- YFP 208: Why Minimizing Fees On Your Investments Is So Important
- Are You Making This $1 Million Mistake?
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRODUCTION]
[00:00:00] TU: Hey, everybody, Tim Ulbrich here. Thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.
This week, I had a chance to sit down with YFP Co-Founder and Director of Financial Planning Tim Baker, to talk about the three silent killers of your investment by taxes, inflation and fees or easier way to remember as Tim, mentioned on the show, is how to keep your investment portfolio fit by evaluating your fees, investments and tax planning. A few of my favorite moments from the show include hearing Tim, talk about common tax mistakes he sees pharmacists making, and why he decided early on to bring a tax practice in house with the financial planning services. Why inflation is often overlooked? But an important part of the financial planning consider. What the antidote to inflation is? Why those nearing retirement should be looking closely at inflation and the volatility of the market? Finally, the common types of fees associated with the financial plan. Why these fees can have such a large impact on your investment portfolio?
Now before we hear from today’s sponsor, and then jump into the show. I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 240 households in 40 plus states. YFP Planning offers, fee-only high touch financial planning that is customized for the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner, may help you achieve your financial goals, you can book a free discovery call at yfpplanning.com. Whether or not YFP Planning financial planning services are a good fit for you, we know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.
Okay, let’s hear from today’s sponsor Insuring Income and then we’ll jump into my interview with Tim.
This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term life insurance and own occupation-disability insurance. Insuring Income has a relationship with America’s top-rated term life insurance and disability insurance companies so that pharmacists like you can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage, supports clients in all 50 states, and make sure all of your questions get answered along the way. To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics, visit insuringincome.com/yourfinancialpharmacist. Again, that’s insuringincome.com/yourfinancialpharmacist.
[INTERVIEW]
[00:02:41] TU: Tim, excited to have you back on the show.
[00:02:43] TB: Yeah, Tim. Glad to be back. What’s going on?
[00:02:45] TU: It’s been an exciting start to the year.
[00:02:47] TB: Yes.
[00:02:47] TU: Lots of exciting things going on at YFP. We’re heating up the season of some of the speaking engagements that we’re doing for the year. Grateful for those opportunities, I think the team is humming and moving forward. It’s been a good, good first quarter of the year. You’ve got an exciting trip coming up tomorrow. I think you’re leaving, right, International.
[00:03:05] TB: Yeah, going international. My wife Shay, shout out to her. If she listens to the show, sometimes, sometimes not is running the Paris marathon. A couple of weeks ago she actually had fractured her foot in a misstep. She’s been doing a lot of cycling and pool work and things like that. She got the news a couple of weeks ago that she could run again. So she’s, yeah, she’s raring to go, heading out and excited to visit Paris again. It’ll be her first time and yeah, just enjoy some one-on-one time without the kids. It’ll be nice. I’m excited. I feel we’ve been so cooped up, because of the pandemic, haven’t really been traveling as much. Yeah, I’m pumped up.
To go back to that thing Tim, I was shocked. I think when we actually sat down, and you tallied up the reach that YFP has had or the last couple years with, I think it was 72 different schools and associations that we’ve been speaking with and doing presentations and things like that. I think that was a little bit shocking to me but awesome to see that number and see it continue to grow.
[00:04:12] TU: Yeah. We’re so grateful for that opportunity. We’ve partnered with just over 70 different organizations. It’s been Colleges of Pharmacy, State Associations, National Associations, Fellowship Programs, Residency Programs, some of the businesses that are out there and entrepreneurs, so super grateful for that opportunity. I think the reach to that has allowed us to have as we as we look to help more and more pharmacists on their mission towards achieving financial freedom. We’re looking to grow in that list here. If anyone is listening that, is looking to have a session on personal finance, financial education, we’d love to engage the YFP team, the YFP Planning team, so you can reach out to us at info at yourfinancialpharmacist.com.
Tim. Today we’re talking about silent killers to your investment pie. We’re talking about things like tax inflation fees. We’ve talked about these separately on the show, but I want to keep coming back to these, we’re going to bring these together. We talked so often about the hard work of building your investment pie, right? Ultimately, we’re going to be paying ourselves out of retirement paycheck, we’ve got to do the hard work to save early, save often, take advantage of that time value of money. We might be underestimating the impact the silent killers like tax, inflation, fees that may not be as obvious or as front and center, but certainly can have an impact on our financial plan.
We’re going to go through these one-by-one in three parts. We’ll start with the taxes, we’ll then talk about inflation, we’ll talk about fees, we’ll reference previous episodes, we talked about these for folks that want to dig deeper in any one of these topics. Again if you’re going to do the hard work, and you’re going to build that investment pie, we want to do as much as we can to maintain the integrity. Tim, let’s start with tax season. Could it be better timing, were about half a month now, away from the IRS tax deadline, the YFP tax team is knee-deep and making sure we get the tax filing and returns, and a shout out to that team if they’re listening to this episode. Here we are, it’s front and center for lots of folks, maybe they’re looking at the returns that they filed, and maybe they got it spot on, maybe they saw opportunities to improve, maybe they got a big refund, or were surprised by a bill that was due. So just talk to us about why this topic of tax is so important.
[00:06:25] TB: Yeah. I’m actually looking at the title of this, I see, Tax Inflation and Fees. I think if we were to go in reverse order FIT, this is I think, really about keeping your investment portfolio fit. We’ll go tax inflation fees as we talk here, but I think the reason we kick off with taxes because it just permeates everything, Tim. Every conversation that we have related to the financial plan, there’s a tax conversation close by, unfortunately. One of the numbers that always sticks with me is that we mentioned speaking over the course of a pharmacist career they’re going to make about $9 million. The actual dollars that flow into the bank account is closer to six. That’s alarming, because you’re like, all right, where’s 30 – where’s a good chunk of that go?
That 3 million, that delta, a lot of that is being soaked up by Uncle Sam, the taxman. What we see related to tax is that there’s typically a lot of dollars left on the table in terms of what you can do to mitigate the amount that the government is taken from you. Again, I think everyone wants to pay their fair share, but no one wants to overpay if they don’t need to. Yeah, and I think for us, as a group I harken back to the day when we were starting, I have launched Script Financial now, YFP Planning, and even before that in my first job and financial planning, financial services. A lot of traditional financial planning firms do not do taxes. I found that to be very problematic, Tim, because, again, I think they’re just so closely aligned with what you’re doing on the planning side, that there needs to be some coordination on the tax side.
Shortly after I launched Script Financial, we started to do taxes for our clients. It’s not a fun thing to do, the tax work, Tim, as we know, right now, it’s it can be hectic, you’re trying to cram so much work in a small window of time. It’s like trying to manage a lot of projects on a tight deadline that you have inputs and outputs from a variety of people. However, the reason that we do it is, because I think the value that it brings to the overall plan. I’ll give you some examples. When I would do planning for pharmacists, one of the biggest thing a lot of the pharmacists that we are working, with the tail that wag s the dog are the student loans, right?
The student loans one of the major strategies there is the forgiveness strategy, particularly PSLF, or even non-PSLF, because in that strategy, one of the main techniques you could do if you’re married is to file separately to disallow the income of the spouse that doesn’t have loans and really just work off of the AGI and the student loan payment is off of one the spouse versus two. The problem is this, Tim. I say this like I would build out these dope, that’s the official term, dope, financial planning strategy related to the student loans. Then the client would say, “Hey, Tim, do you guys do taxes?” We’re like, “Nah, we don’t, but go work with his accountant across the street. They’ll hook you up.” We like what they do. But the problem is that, because most financial planners don’t understand student loans, so I think the stat out there that I saw is that 33% of financial planners will work with clients on their student loans.
That doesn’t mean they necessarily understand them, but they’ll at least address them. That means the overwhelming majority don’t even really look at it. The problem is that because advisors don’t understand student loans, typically the accountant that they work with don’t understand it, and in 99 out of 100 times, for most people file in anything, but filing jointly for a married couple is wrong, but we just happen to work with a lot of pharmacists that it does make sense because of the huge benefit you get from maximize the forgiveness. I just got fatigued by building out this great debt plan, and then it being messed up by the lack of technical expertise on the tax side of things to see that through.
Then I think the other piece of this is we’re planners, right? I want a plan. I remember, again, back in the early days, I would hire a tax person to do my own personal taxes, and I’m a business owner. So when I got a good referral from someone, I met with them, they’re like, “Oh, yeah, we’ll be able help diagnose some things with your business and all this.” I’m like, “Great, that sounds awesome.” Then a couple months rolls around, I’m like man, it’s April 14th, where are my taxes? I sent out an email, and I get an email back, and it’s a PDF of the tax return some DocuSigns to sign, and then an invoice. I equate, it seems like a paper route, right? It’s like, here you go. Chuck the paper out the window, you figure it out. I just didn’t like that, because again, I was looking for things that and I’m a nerd like that.
Again, as a business owner, I want to make sure like, am I doing everything to mitigate my tax exposure. I just got zero guidance, zero planning based on – planning advice based on last year’s activities. I really wanted that. To me, I think there’s a lot of people that want that and are trying to figure out ways to get in front of the taxman. Then finally, I think just the reason that we did it is like I said before, is I think it’s just the coordination of your financial plan. It’s not just the debt piece. We would work with clients in my last firm where there probably needs to be a healthy conversation regarding the investment portfolio, just that this wasn’t had. I understand. I get it, during tax season it’s really hectic.
You’re just trying to move the return through, but at the end of the day, the reason that we make sure that everything goes through the lead plan of the CFP, it’s a check to say, “Okay, does this jive with everything else that we’re trying to do.” Not this debt, but the investments and whatever else is on the client’s plate just to make sure that there is a clear intention of, hey this reporting period and Q1 all the way up to April 15. This is really a reaction to what happened last year. But then what are the things that we can do or what are the things that we learned from this year that we can apply to the present year in this case, 2022?
I think if you stack just the financial plan, I think if you stack years of doing that, you really shrink that delta, that 9 million to six. I think you really start to shrink that in terms of what you’re keeping in your pocket. I think for most people out there that’s worth the conversation and with the planning.
[00:13:11] TU: Yeah. Tim, just to that point that the delta significant and of itself 9 million to 6 million, and you and I both agree, like taxes have value, right? They provide services we all appreciate. We want to pay our fair share. It’s not just the delta, but also how can that delta be put to use, and what is the effect to that?
[00:13:26] TB: Yeah, exactly. I think that there’s just a lot of – from things that we see with clients, there’s just a lot of meat on the bone. There’s a lot of opportunity to, hey, have you thought about this? Or as an example, HSAs those are our every week, we talk about them a lot, but a lot of people don’t necessarily fund them. Even things related to children FSAs, particularly for dependent care, making sure money goes through their, education planning. Sometimes there’s this singular focus on things like Roth IRA and conversions, and backdoor and all that kind of stuff. It’s like, we shouldn’t even be having this conversation yet. I think some of it is overconfidence for the taxpayer of what’s important and what’s not.
We see a lot of things with taxable accounts, Robin Hood, things like that, where there are, there’s a focus there that really shouldn’t be or disallow losses due to wash sale rolls or things like that. We’ve seen lack of record-keeping for side hustles as we’re talking about Schedule C, income expenses, lack of coordination for charitable giving with a larger deduction these days. There’s a bunch strategy where you should be bunching your charitable giving versus doing a consistent year over year. Cryptocurrency, we could have a whole thing on that, Tim. Cryptocurrency and then just the overlay of, hey, there’s a huge refund or a huge tax bill, that I think sometimes it’s due to either a lack of planning or a lack of follow-through on the planning or just an understanding of how withholding or the W4 works.
This is a sample of things of what we see and I think again if you can start to work through some those issues, Tim. I think you start to see. Again, it’s hard to quantify year over year, but these are just little tweaks here that I think we talked about the investment portfolio being a rocket ship, sometimes like fees and things like that is drag on that. I think the same thing could be the case with taxes and your net worth, your financial plan.
[00:15:20] TU: Yeah. It’s great stuff. The compound effect of those changes I think about someone who unlocks things like the HSA or is able to really look at some of the bunching strategies or other things that you mentioned dependent care FSA, etc. or priority of investment and making sure you got that, right. It’s not only getting that advice, recommendation strategy put in place today, but what does that mean going forward in the compound effect of that. We talked about lots of that. We had our director of tax, Paul Eikenberg, on Episode 233, we’ll link to that in the show notes. We talked about some of the common tax strategies, tax mistakes that pharmacists should be thinking about.
I’m glad you brought up the student loans to kick off that conversation. Just last week, we had three PSLF success stories, and through those stories, we heard about some of the optimization strategies and of course, one of that would be the filing status, which folks may mess up if they’re not getting good advice there. Tim, one of the things I’m really excited about and shout out again, to the tax team that’s been hustling this season, is you and I think are really behind this vision and approach of, yeah, “We got to file the IRS as we have to do it, or else they’re going to come knocking on our door, that’s great, we’re going to keep doing that, but we’re going to do that, really, if it’s a part of the planning and the strategy.”
So you gave that story of April 14th, here’s the DocuSign, sign it, here’s your bill, that’s great. I mean, that’s stuff that’s been done, it’s in our rearview mirror. Let’s talk about what we can do going forward to really optimize the plan and perhaps avoid some of the mistakes that were made throughout the year. So we’re excited about really shifting away from just that filing to more that year-round planning, that strategy, that mid-year projection, that pivot, how do we really optimize this with the financial plan? Well, this tax season, we’ve closed the doors in terms of new folks that we’re going to be doing tax returns. Again, we’ve only got about 15 days, couple of weeks left in the season. We are going to start to build out a list of folks that are interested in more that year-round planning optimization and you can go to yourfinancialpharmacist.com/tax and get more information there.
[00:17:19] TB: Yeah. I think the other thing that can take into consideration here is right now, we talk a lot about the accumulation of the portfolio and how tax is related to that. I think the other thing is really looking at the withdrawal. When you’re a pre-retiree, and again, simple if you have a million dollars in your traditional 401K, a million dollars, saying a Roth IRA, and a million dollars in a taxable account. Unfortunately, all of those dollars are not yours, particularly the traditional Uncle Sam so has to take the bite of the apple. But one of the main things that we look at when we’re trying to structure a paycheck that is going to be able to sustain that retiree for the course of their lives is the tax and minimizing the tax burden and how we draw on each type of account and the best strategy for it. A lot of that is a tax conversation.
To me, it’s something that, it’s again, permeates every part of the financial plan, but it’s also every stage of life. There’s even conversations of okay, how do we structure, how much in this bucket or this bucket, as we are accumulating to get in front of that when we are starting to say, “Okay, I’m 65, I’m retired. We’re going to use 30 years as I’m going to live to 95, just to model this out. How do I draw from each bucket? Overlay things like social security and everything else, to make sure that I – the biggest I think stressor for a retiree is, “Am I going to have enough money? Is the money going to run out? I don’t want to be destitute or have to rely on family.” It’s really trying to, and again, if we can hold on to more of those dollars, that still have to be tax or take those moneys when you’re in a lower tax bracket, or whatever that is. It’s really important to have that coordination. It’s a frequent conversation. It’s not just, hey April 15th, come and gone, and it’s something that we continually look at and make sure we’re on top of.
[00:19:15] TU: Well, thanks for being a wet blanket, Tim. If I’ve saved a million dollars, I might actually not have a million dollars.
[00:19:20] TB: Yeah, yeah. Sorry about that.
[00:19:20] TU: Good plan. That’s a good summary of taxes. We’re going to keep coming back to this topic. So important for all the reasons we mentioned. Moving on to the second one is you mentioned in this concept of making sure and investment portfolios fit. The IB inflation. I think, normally we talk about inflation, and it’s like, nah, yeah, whatever. Especially for folks that are in the first half of their career, we have not seen inflation at the rate that we are seeing it right now.
[00:19:46] TB: Yeah.
[00:19:46] TU: Certainly it has been higher than that historically, but it’s well above what we had expected be on an annual rate. So we’ve got as of January if you look at the yearly rate we’re hovering around 7%. We talked about this in episode 239: Two Financial I’s You Might be Overlooking: Inflation, I-Bounds, will link to that in the show notes. Since that episode, I would say this has been exacerbated by the unfortunate situation in Ukraine. We see oil prices going up. We see the market volatility that’s happening. Tim, we know inflation is real, we’re feeling it in the moment. Jess and I were just talking about this and in terms of month to month with this is playing out to be in terms of expenses, but still, hard, I think sometimes put our finger on it, and the impact it can have on the plan. Why is that? Why is it so important as we think about the integrity of our investment pie?
[00:20:34] TB: Yeah. I think inflation is really one of the main reasons why we need to invest. I say that if you’re looking at the markets, and right now, the markets are very volatile, up and down, negative in some cases. What you feel is that you want to take your investment ball and go home and be like, “I just can’t take the swings, Tim.” –
[00:20:54] TU: I’m feeling right now. I’m not going to lie, Tim.
[00:20:55] TB: Yeah. I don’t looking at my accounts and seeing X and then the next day and seeing X minus 10%, 20%, 30% if we have a major correction. I get it. I think, if you’re 20, 30 years from your retirement date, and that’s the purpose of your portfolio. I think you really have to train your heart and your mind to be like, “Okay, it’s going to come back. Let’s not worry about it now.” I mean, if you’re in retirement now, and you’re relying on that, and we don’t have a good bucketing strategy, or what have you to sustain those losses, then I think it’s more problematic. But yeah, you can’t – I think what you can’t do is, is just not participate. I don’t think you can stuff your mattress and hope one day you wake up, and you’re going to have enough to retire.
I think the inflation piece is one of the main reasons why we need to invest. One of the examples I gave is that $4 latte that you buy at your local coffee shop in 2020. If you use historical rates of inflation over the next 30 years 2050, that same latte will cost $10. But I don’t know, that’s a great, good enough example, Tim. Let’s put it another way. If you make $120,000 as a pharmacist today, and we fast forward 30 years and we’re using historical rates on inflation, which is typically most planners are using about 3%, which we know this year is high. It’s low because we’re seeing seven-plus.
$120,000 today as a pharmacist in 30 years, that would be equivalent to $291,000. Think about that, $120,000 today would be equivalent to $291,000 in 30 years. From a planning perspective, if we’re trying to build out a portfolio that can generate a paycheck that is some discount at that 291 because we know that social security is going to be there. It’s going to be limited than what it is today, so we can take a little bit off for that. Then you’re probably not saving some of that 291 would go to retirement savings, but if you’re going into retirement, you’re not going to be saving for retirement.
There’s some discount to that, but the idea is that, let’s say it’s $200,000, or let’s say it’s $180,000, whatever the case is. We have to be able to build a sustainable portfolio so then, Tim, if you’re my client at 65, 30 years from now, or whatever the number is. You’re going to say, “Hey, where’s my $200,000? At 66. “Hey, where’s my $200,000.” All the way up until 95 or whatever we’re planning as nobody knows when they’re going to pass away.
That is really important, because the investments particularly an equity portfolio, in your accumulation phase is going to be really important for you to stay in front of inflation, and the taxman, quite frankly. So yeah, and just a backup, we talked about this in the “Two I’s”, when we talk inflation, it’s really, inflation is the decline of purchasing power of a given currency over time. What it basically means is that a basket of selected goods and services in the economy will increase over a period of time. Sometimes that is due because the government is printing money, which is certainly true. In our case, we talked about quantitative easing and things that. It could also be supply and demand. So one of the things that you didn’t mention outside of the Ukraine crisis is all of the boats that are at the Port of LA or that are still need to be unloaded because of pandemic or whatever, that’s causing a lack of the supply demands, making prices go up.
I think it’s really important that we understand those dynamics and know that we’re not always going to be in a low inflation environment. It can’t go up it has this year because of X, Y, or Z. Even back, if you look back in the 80s, in the early 80s, inflation was 13 and a half percent, and mortgage rates, as a result, were close to 17%. If you think about we know rates are going up now, there’s been a steep decline, and I think the government is trying to do what they can, but the fact is, we have printed a lot of money in the past that could rear its ugly head. I think the way that we can mitigate the impact of inflation is really to invest in equity stocks, and hold it over a long period of time, Tim.
We know that we’re talking about 20 plus years, we know that the stock market is fairly predictable. Typically, over a 20 year period, the stock market will return about 10% on average, and if we have just that down for inflation that’s seven. So this year, that might not do a whole lot for you, because that’s the rate of inflation, so you’re breaking even at that point, but to me, it’s really important to understand that how inflation can play a role in your ability to sustain yourself in the future. Again, we’re feeling the pinch now, because inflation has gone up so high, and so much in a shorter period of time, where we’re starting to really notice.
Tim, I’m sure with four boys, you’re noticing it with your food bill, or even we’re seeing in at the pump. Those are things that you were seeing it with housing prices, right? Those are things that get our attention, but we’re probably not thinking about how this affects us in 10 years, 20 years, 30 years, depending on your timeline for retirement.
[00:26:15] TU: Yeah. As a shout-out to your 76 years, you got to trust the process.
[00:26:18] TB: Trust the process. Yeah.
[00:26:19] TU: When you say investing is the antidote to inflation, a lot of people hear that in the moment and they see the volatility, and they’re like, “Ah, it’s the opposite of what I’m thinking.”
[00:26:30] TB: Right.
[00:26:30] TU: We’ve got to zoom out. I think this is where the power of accountability and a coach and having that long view is so valuable. Tim, I’m also thinking about the folks that are listening that are, “Hey, I’m nearing retirement.” Or I thought I was going to make that decision here and the next year or so and here we are when I’m going to be going into retirement in a high inflation period. I’m going into retirement, while there’s also a lot of volatility in the market. Just talk to us for a moment and another episode for another day about the timing of that decision of retirement when we start to draw from our portfolios, and how in high inflation period, and a high volatility period could have an impact on that.
[00:27:07] TB: Yeah. It’s probably – so what we’re talking about here is sequence risk. Sequence risk is essentially where what you’ve accumulated over the course of your career takes a hit. We’re talking 20, 30% which could be very well beyond the horizon for us in terms of a correction of the market. So now you’re will use a million dollars, let’s say your portfolio was a million, and then it bottoms out to $700,000, but then you’re also taken $80,000 a year, or whatever the number is.
So in two years, and three years, you could see where your portfolio is almost half of what it was when you actually went to retire. You’re like, “Well, I had a million and now I have $560,000.” Or whatever the number is, that’s where you really see a higher rate of failure to the portfolio failure meaning that the money runs out, that balance goes to zero before you reach your end of plan year, which a lot of people use 30 years, so if you retire at 65, 95. It’s the combination of the portfolio being down, and then drawing down the portfolio at the same time, you almost can’t make it up.
I have a little bit experience, it’s just a proxy. I remember, my first job out of the military was with Sears Kmart. It actually took over – I was a trainee for my first year. Then I took over for a lady that retired. This was right around ‘08, ‘09, and that’s when the market just completely got, the market was completely down, because of that subprime mortgage crisis. I think she actually had to go back to work because her portfolio took a beating and then she was actually drawing on it. She quickly realized that she needed to not draw on that portfolio. So really, in these periods of time right leading up, you could probably say about five to 10 years before retirement, maybe in five to 10 years after retirement, that’s where you need to be the most conservative. It’s the eye of the storm.
In for some people, it makes a heck of a lot of sense not to retire than – and try to push it off, sometimes it’s unavoidable. Sometimes 40% of people retire sooner than they think either because of illness for themselves or for a family member or, or it could even be being pushed out of the workforce. Sometimes it’s out of your control, but when you overlay these decisions with things security, when to claim that and all that, it’s super important. You could do everything correct for 30 years leading up to retirement and then that those first couple of years in retirement be blow up your playing completely. That sequence for us at its finest.
[00:29:59] TU: We’re going to come back to some more episodes, we have planned out on building that retirement paycheck in consideration as you’re making that transition from all the hard work you’ve done, and now making sure we’re able to sustain that. We’ve talked about taxes, we’ve talked about inflation, certainly not least, but last on our list is fees. We know that fees can have a major impact on how much wealth one is able to build and something that many folks may not realize of how big that implication can be. We went into detail about fees on Episode 208, Why Minimizing Fees On Your Investments is so Important, we’ll link to that in the show notes.
Tim, summary here of fee something that we harp on over and over again, that folks may not be aware of those fees often are not as transparent as perhaps we’d like them to be. So as we continue this theme of some of the silent killers of the investment pie. Talk to us about fees.
[00:30:52] TB: Yeah. There’s no such thing as a free lunch, right, Tim? When you’re investing or if you’re working with an advisor, there’s typically a costs associated with that. I think the thing that I think bothers me as an advisor, but then also as a consumer is the lack of transparency, right? We know even in healthcare, there’s people get upset about what is the actual price or even we talk about PBMs, and things like that. I think a lot of it comes down to transparency, and what’s going on behind closed doors. To me, and we see this a lot and actually, we recently, we have clients that are prospective clients booked time with us to see if they would be a good fit.
We’ve added a button that they can upload a statement so we can talk at a high level, if they’re working with advisor what they’re actually paying, because most people either have the notion of, I’m not paying anything, which that’s actually a common belief or they know that they’re paying something, they just have no idea and often is the case that they’re paying a lot more than what they think. I always go back to this story. I remember, so my first job out of the military with Sears then I had another job with a construction company. I was like, “You know what, I want to do something completely different, go into a new industry.” I was like, “Hey, Mom, I think I’m going to become a financial planner.” I think verbatim, she said to me, “That’s the dumbest idea I’ve ever heard.” I’m like, “Why?” She’s like, “Well, we work with this as advisor and we don’t pay them anything.” I’m like, “That can’t actually be true.” Years later, when I understood the landscape a little bit, actually peeled back the onion, and they were paying over $8,000 in fees, unbeknownst to them so.
To me, I think, it’s fees are aren’t necessarily a bad thing. I think it’s the transparency around that I think needs a lot of work. Really, the fees that we’re talking about here, Tim, that are most common are things advisor compensation. These are things that you would, these are fees that you would pay or commissions that you would pay to an advisor to either provide financial planning or investment advice to you. One of the more common things that we see is an assets under management fee. This is like, “Hey, Tim you have $500,000, and I’ll manage for you, I’ll charge you 1% in the fees. 5000 I’ll bill that right out of your investment accounts.” That’s very common.
To be honest, that’s one of the reasons that pricing structure is one of the reasons why when we do find younger pharmacists that are working with advisors, so they’ll either be shut out, meaning the advisory would say, “Hey, young pharmacists, I’d love to be able to help you, but I can’t.” It’s not really because they can’t, because they don’t have those assets for you to manage that – in term of that that 1%. They’re either shut out of the market, or they’re sold, I would say less than suitable products, so they can make a commission and do some work with them. They kind of wait for the assets to build over time.
This is where, if you’re out there, and you’re in pharmacy school, or shortly thereafter, someone tried to sell you a life insurance policy, a disability policy, those are the next best thing for a lot of advisors that can earn a commission, “help the client” and then stay in touch with them until they have some assets for them to manage. It can be the same things like, “Oh, well invest your Roth IRA, and we’ll sell you in A-share mutual.” I was looking at a statement where there’s both an AUM fee but then A-share. Any share mutual fund is a front loaded commission. You pay five and a quarter percent on that and the advisor gets the commission and goes from there.
There’s lots of other fees there, Tim, related to advisors, hourly flat fee, there’s could be a hybrid unrelated to the investment portfolio, but still in mix, there are things like Life Insurance Commissions, Disability, Annuities, we recently saw a non-traded REIT, which is really sweet for the advisor, because that’s sometimes 6, 7, 8% terms of commission. So that’s a big piece. I think a lot of people are unaware of what they’re actually paying and the transparency is a real thing that needs to be overcome.
[00:35:08] TU: Great summary. We’ll get rolling back to Episode 208. Why Minimizing Fees in your Investments is so important. I think the transparency is one piece, Tim as you mentioned also just the tendency, we have to underestimate the impact of something like 0.1, 0.2, 0.3 right? As we look into individual investments.
[00:35:24]TB: Yeah, absolutely. I think if you’re not working with an advisor, there are other things that are present probably the biggest one is expense ratio, Tim. Justin probably – Justin was our director of business development, working with another advisor for years, before he came on to YFP. His portfolio, his all in expense ratio was about – it was almost 1%. 0.91 to be exact. What the expense ratio, it’s what the fund takes. If you have ABC mutual fund that’s managing billions of dollars, they might take 0.91% to pay for the mutual fund manager, the analyst, the fancy office on Wall Street, pay for information. They do that to keep the lights on. You basically buy that to get exposure to lots of different stocks and bonds, because that’s what a mutual fund is, or an ETF.
0.91% on a $100,000 portfolio is $910 per year, whereas if you do something YFP portfolios, .05, so why would I pay 1000 bucks if that guy pay 50 bucks and have similar results and things like that, but so that the expense ratio is a huge one. Platform fee, some, when I was in the broker deal where we would charge $50 or whatever, just to have an IRA open. There’s things like annual account fees, closing account fees, retirement, especially in a low interest rate environment like you’re just trying to eke out fees, because you can’t make money on the float, but things trading costs, all of these things add up.
Again, this can just be drag on a portfolio. Those are the four big ones I would say is advisor, compensation, trading costs, platform fees, and then internal to the funds that you’re in expense ratio. What we try to say to clients is like we try to minimize those as best we can, because at the end of the day, we want that portfolio to grow uninhibited as best we can. So there’s no such thing as a free lunch.
[00:37:25] TU: Yeah. That folks are going to pay for advising fee, and we’re not shy about the fees that we charge and the value they bring. The point being is you want the value to bring, right? So as you look at the coaching, the accountability, the holistic nature of comprehensive financial planning. There’s a fee there, and it’s transparent, you want to understand it, you want to feel good, that’s the return on the investment. We’re talking I think about in terms of minimizing other fees or fees that maybe don’t add value, or that are not transparent, so really evaluating closely the impact that those can have on your overall investment pie.
I’m going to link to a blog post from way back when, that I wrote, we looked at two different individuals that were saving about $1,000 per month between the ages of 30 and 65, because of some of the difference in fees and things expense ratios, or other hidden fees, they ended up with a nest egg that was about a million dollars difference. Again, the impact that we can see over the long run and what those fees can have.
For folks that want to learn more about the financial planning services that are offered by the team at YFP Planning, perhaps you’re working with a planner and interested in a second opinion. Want to have an analysis of that statement just to get some different thoughts as well or if you haven’t worked with the planner, we’d love to have a conversation as well. Folks can book a discovery call to learn and see if that’s a good fit with our Director of Business Development Justin Woods, also pharmacist and you can do that by visiting yfpplanning.com. Tim Baker as always great stuff and wishing you and Shay the best as you get ready for your trip to Paris.
[00:38:54] TB: Yeah. Thank you my friend. Good to be on the episode here. I think some good stuff to be – to chat about and probably even expand on in future episodes. So yeah, I appreciate you having me back on.
[OUTRO]
[00:39:05] TU: Before we wrap up today’s episode of the Your Financial Pharmacists Podcast, I would like to again thank this week’s sponsor, Insuring Income. If you are in the market to add own occupation, disability insurance, term life insurance or both, Insuring Income would love to be your resource. Insuring Income has relationships with all of the high-quality disability insurance and life insurance carriers that you should be considering and can help you design coverage to best protect you and your family. So head on over to insuranceincome.com/yourfinancialpharmacist or click on their logo or link in the show notes to request quotes, ask a question or start down your own path of learning more about this necessary protection.
As we conclude this week’s podcast and important reminder that the content on this show is provided to you for informational purposes only and is not intended provide and should not be relied on for investment or any other advice. Information to the podcasts and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.
Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements that are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements.
For more information, please visit yourfinancialpharmacists.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.
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