The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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Listen every other Wed. on KQV 1410 AM, at kqv.com or click below for our archives. Gain FREE access to the best information available from the country's leading IRA experts including Ed Slott, Bob Keebler, Natalie Choate, Barry Picker & Jane Bryant Quinn.

 

 

The Best of The Lange Money Hour
Jim Lange, CPA/Attorney
Episode 100

Please note: Some of the events referenced in our audio archives have already passed. Please check www.retiresecure.com for an updated event schedule.

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TOPICS COVERED:

  1. Ed Slott - Take Control of Your Finances
  2. Paul Merriman - Advice for Young Investors
  3. John Bogle - Corporate Management and Conflict of Interest
  4. Roger Ibbotson - Active Investor vs. Passive Investor
  5. Neale Godfrey - Talking to Kids About Money
  6. John Bogle - Advisors Lack of Fiduciary Responsibility
  7. Roger Ibbotson - Humans Are Hardwired To Be Bad Investors
  8. Joe Hurley - Would A 529 Plan Affect Financial Aid?
  9. Jane Bryant Quinn - Advice for People Age 76 and Older
  10. Ed Slott - Your IRA Money Needs a Knowledgeable Advisor
  11. Charlie Smith - Let The Numbers Tell You What To Do
  12. Natalie Choate – Utilizing Partial Roth IRA Conversions
  13. Robert Kass - Providing for Your Pet’s Future
  14. P.J. DiNuzzo - Separate Your Buckets of Assets
  15. Ed Slott - It’s What You Keep That Counts
  16. Jane Bryant Quinn - Social Security Claim, Reverse Mortgages and One-Life Pension
  17. Grant Oliphant - Satisfaction through Philanthropy
  18. John Bogle – What Caused The Financial Havoc of 2008-2009?
  19. Jim Lange - Personal Story on Roth IRA Conversion

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.


David Bear:  Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks.  I’m David Bear, here with CPA/Attorney and author Jim Lange.  The format for today’s show will be different as we note something of a Lange Money Hour milestone: our 100th show, and rather than a single guest, we’ll have a dozen.

Jim Lange:  One of the things that we wanted to do with The Lange Money Hour is to provide our listeners with some of the finest information from some of the top experts in the area of IRAs and retirement planning, and also investing.  My associate, Carol Palmer, looked through all 100 shows that we’ve done, picked some of the best clips that she liked, I picked some of the best clips I liked, and we’ve put together this compilation. 

David Bear:  It includes wise words from such experts as John Bogle, Ed Slott, Roger Ibbetson, Jane Bryant Quinn, Larry Kotlikoff, Paul Merriman, and others.

Jim Lange:  Well, I think virtually all the information will be of interest to all listeners.  We tried to provide some order, basically according to life stages.  That is, the early investor, the later investor, the retired investor and estate planning. 


1. Ed Slott - Take Control of Your Finances

David Bear:  Let’s get right to the first clip from program number two, with Ed Slott telling people to take control of their financial lives. 

Jim Lange:  By all objective measures, Ed Slott is America’s favorite IRA expert.  He’s sold more books, charges higher fees for his speaking, and is well loved by both consumers and financial advisors.  Ed agreed to be on the show, and actually has been on every year, and he starts with some general advice about getting your plan.

Ed Slott:  In my book, my theme is to take control of your money, of the things you can control, and you can control your tax liability, and the planning for what I consider the most important part of the game, which I call in my book “Stay Rich for Life,” the winning half of the game.  And those are things you can control, and it’s time to take control.  Don’t just leave everything to advisors. You’re going to have to step in and get educated so you can demand more from your financial advisors and get your plan.  Doing nothing now is not an option. If you don’t do anything, you’ll get a plan, but it’ll be the government plan, which, let’s face it, our tax system is a penalty on savers. The government plan will wipe you out so you either make a plan now by taking action or you get a plan. The plan will be done by you, or to you, and it’s your choice. I’m saying to act now.  Take action in small consistent steps.

David Bear:  That’s certainly good advice for an investor of any age.  Who’s next?


2. Paul Merriman - Advice for Young Investors

Jim Lange:  Well, Paul Merriman is kind of the elder statesman of index investing.  His workshops are famous, and he has been a real source of education and inspiration for both young and old investors.  Paul has some contrarian ideas for young investors.

Paul Merriman:  This is for the young listeners.  When the market is going down and everybody’s complaining about how horrible it is, you young people should be celebrating.  There is nothing better for a young investor than the market to go down for the first decade that they’re putting money away for their retirement.  That’s contrary to what their parents and their grandparents are telling them.  Their grandparents and parents are saying they want the market to go up.  No, they want the market to go down.  And it’s that kind of counterintuitive thinking that makes investing successful, but it’s hard for people to do emotionally. 


3. John Bogle - Corporate Management and Conflict of Interest

Jim Lange:  Well, we’ve had many famous experts on the show, perhaps none as famous or well known as John Bogle, the founder and long-time CEO of Vanguard.  John is not only an expert in many financial areas, but also has some quite outspoken opinions about some of today’s problems in the financial markets. 

Jim Lange:  You also talk about the conflict of interest between corporate and mutual fund management and people who are supposed to have a fiduciary duty towards shareholders.  Could you expand on that idea of fiduciary and conflict of interest, and why you think our system is, to some extent, broken, partly just because of that conflict of interest?

John Bogle:  Well, to begin with, you have to think of this as what the economists would call an ‘agency problem.’ Are the agents representing their principles?  In this case, for the first time in human history, we have two sets of agents facing each other.  On the one hand, we’ve got corporations, and their agents are their management.  The principles are the shareholders.  There’s a great temptation for the managers, the chief executives and so on to run the company for their benefit, short-term benefit often, stock options, compensation, bigger to get more money.  They do mergers a lot.  So, they’re the agents, and the issue that’s raised over there is they really aren’t representing their principles, the shareholders of the corporations.  Over here, we have another set of agents, and these agents actually control about 70% of all the stock in America.  There are financial institutions, and when I came into this business in 1951, these financial institutions investing money for others controlled about 8% of all shares of stock in America.  Today, they control 70%.  These agents, these large institutional money managers for pension funds and mutual funds are representing too much themselves and not enough for shareholders who have given them money, or the pension beneficiaries who they owe a duty to, to create a retirement fund.  They’re looking after their own interests.  They’re charging high fees.  They don’t want to get into corporate governance.  The absenteeism from the corporate owners, from corporate governance issues, how the corporations are being run, is just striking, and in the long run, totally counterproductive because someone has to look out to make sure that these corporations themselves are being operated in the interests of their shareholders, and here we have the agents representing all of these shareholders, only 66% more or less, of the stock of every single corporation have the absolute power to change the system, and they do almost nothing.  Zero.  They sit back and endorse management proposals, endorse mergers, endorse compensation, and pay little attention to the interests of the shareholders behind that.

Jim Lange:  Well, I guess corporate management isn’t the only people that you indict.  Specifically chapter two, ‘The Double Agency Society and Happy Conspiracy’, you name ten.  You call them ‘gatekeepers.’  And they include Congress, the judiciary, the SEC, the Federal Reserve Board, the rating agencies, the financial press, security analysts, corporate directors (who we’ve been talking about), and institutional stockholders, who, in your own words, have played in betting a new culture of speculation, particularly in the period of the great crash of 2008-2009 and it’s aftermath.  Is that a fair indictment of so many well-respected institutions?

John Bogle:  Well, it’s certainly a broad indictment!

David Bear:  We’ll hear from John Bogle later in the show, and you can also get videocasts of Jim’s interview with him last fall at the Lange Financial Group website, www.retiresecure.com. 


4. Roger Ibbotson - Active Investor vs. Passive Investor

Jim Lange:  Roger Ibbotson is perhaps the most famous expert on asset allocation.  One of his famous quotes is, “Asset allocation is the strategy advocated by modern portfolio theory from maximizing gains while minimizing risks in your investment portfolio.”  Roger is a Yale University professor, chairman and founder of Ibbetson and Associates that was purchased by Morning Star.  One of Roger’s less famous quotes is “Retire Secure! is a very practical investment guide on how to defer taxes and efficiently plan for your retirement and your estate.”

David Bear:  A nice blurb for your book!

Jim Lange:  Are you more of a fan of active or passive, or do you like both, depending on the situation?

Roger Ibbotson:  Well, you know, this gets to the core question of ‘are markets efficient?’  That is, can you beat the market?  And there is, of course, some evidence that people can beat the market.  Academics are always fighting about well, how efficient are markets?  And, of course, if you believe markets are really efficient, the correct way is to be passive in your investments.  If you believe markets are inefficient, that there’s all kinds of mis-pricing in the market, then it’s actually not clear what you should do. If markets are inefficient, that means that there would be a lot of distortions in the markets. But then you have to ask yourself: Am I the one who can take advantage of these distortions, or am I the one who’s going to get ripped off by these distortions? And you can think of it like a giant poker game here.  If markets are inefficient, and they are to some extent, then some people are going to win and some people are going to lose. Now, do you want to get into that giant poker game, the passive investor avoids the poker game, and basically rides up and down with the market. The poker game is all about Alpha. It’s all about beating the market, or getting beat by the market. And so, the active investor is the one who joins the poker game. Now, what you have to ask yourself is: Even if you believe that there are enough distortions that there’s a lot of money to be made in that poker game, poker, by its nature, is a zero-sum game. That is, that whoever wins money takes it out of the hide of those who lose money. The markets go up and down, and we all ride the waves of whatever happens in the market. But if you actively invest, you’re not going to actually participate directly in the ups and downs of the market because you’re going to make your very specific bets, and you’ll either do better or worse.

Jim Lange: I sometimes think about if you’re at a poker game, and you can’t spot the sucker, it’s probably you.

Roger Ibbotson: That’s a very good way of putting it because that’s the danger for most of us, as individual investors. Most individual investors are not the ones to take advantage of the distortions.

David Bear:  We’ll hear from Roger again a little later in the show.  Who’s next?


5. Neale Godfrey - Talking to Kids About Money

Jim Lange:  One of the problems that many of our listeners have expressed, and I personally have in my own life, is how to talk to my daughter about money.  Neale Godfrey is an expert on teaching leaders and listeners how to talk to their children about money.  She was a guest on the 68th episode of The Lange Money Hour

Neale Godfrey:  I want you to put it in perspective, but I also want you to sit down with the bills.  Part of welcome to planet Earth is what I call the bill paying game.  Lay the bills out on the table.  Now, if you can’t afford stuff, I don’t mean you personally, but one of your listeners, don’t scare the kids to death, to let them think that you’re so far underwater with everything.  But if it’s a realistic budget and you guys are doing okay, lay it out on the table.  What I do for younger kids is I literally count it out.  I pay my paycheck in cash and I count it out, and everyone goes, “Wow!  That’s a lot.”  And I count out what goes to the government, then I count out what goes for rent or mortgage and utilities and phone and cable and on and on and on.  Here’s what goes into savings.  Here’s what goes into my retirement.  Here’s what goes into my emergency fund.  Here’s what goes for the vacation, whatever it is.  And by the way, here’s what’s left over.  That’s the budget.

Jim Lange:  And do you tell them that there’s money for their college?

Neale Godfrey:  I do, absolutely, and I also tell them the expectations.  I can afford a state school.  I cannot afford a private college.  Private college costs, and lay it out, you know, $50,000 a year.  Do not set expectations.  What I think is the worst thing in the world is to have kids get into one of the private schools in our country, and then, as a parent, you turn around and go, “You know what?  I can’t afford it.”  That’s not fair.

David Bear:  Having raised three children myself, I can attest that that’s excellent advice.  Who’s next?

6. John Bogle - Advisors Lack of Fiduciary Responsibility

Jim Lange:  One of the problems that consumers face is the potential for conflicts of interest from the people who are giving them advice.  Personally, I’m what’s known as a ‘fiduciary advisor,’ which means I not only have the moral, but also the legal obligation to give the advice that I think is in my client’s, not my own, best interest.  That is contrary to many, if not most, advisors who might have a fiduciary duty to their employer, not to their client.  John Bogle has some important thoughts on conflicts of interest.

John Bogle:  Take a good example, is the security analysts of the mutual funds.  They should be interested.  If the management of a corporation that they follow research for is failing, they should be taking an initiative to get that management changed to vote either to change it by throwing out the board, the directors, whatever it might be, and they can do that.  They have the power to do that and they don’t do anything!  They seem to be much more interested, the security analysts, in the price of the stock.  That is to say, again, the speculative aspect of it.  They want the company to give them earnings guidance.  It makes the analysts look good when a company says “I’m going to earn 87 cents this year” and they earn 88, something like that.  They want that guidance to be realized, because if you get halfway through the year, or ¾ of the way through the year, you start playing financial engineering games and you write off things faster or more slowly, depending on, you know, which way you want the earnings to go.  You really basically cannot trust, in a very fundamental sense, the earnings estimates produced by these corporations.  So, that’s why I indict the accountants.  Where the heck are they?  And let me give you one example of this: these corporations, all in their annual report, they have to report on what earnings they expect from the pension plans that they oversee for their employees, and virtually unanimously, they report 8%.  That’s kind of what a historical return might have been, but they ignore the fact that history is meaningless.  History is yesterday.  What’s important in projecting for the next ten years or so, what the pension plan is going to earn, along with the intermediate term government bond yields less than 2%.  Don’t forget, we got to get to 8% here, and a reasonable return for stocks might be 7%.  Then you take out the costs of investing.  One of the fascinating subfacts is that all these projections are based on stock market returns without recognizing the obvious.  We don’t get the stock market returns.  We get the stock market returns, less cost, and they totally ignore cost.  I mean it’s shocking.  I think it’s fair to say there’s not a prayer that these companies can earn that 8%.  Their shortfall is going to be great, they’re going to have to put up a lot more funding for the pension plan, and it’s a very troubled part of American business.

Jim Lange:  And I guess what happens when you understate the pension liability is that you are, in effect, overstating assets, understating liabilities, that would cause a company to be valued higher than it should?

John Bogle:  That’s the trick!  Corporations have actually done this.  If you got a little earnings shortfall, you say “You know what?  I think it’s reasonable to assume that my pension plan is going to earn not 7%, but 8%,” and all of a sudden, you made half a billion dollars, or something.

Jim Lange:  And I guess it’s just not corporations.  I think we’re seeing that at the local, state and federal government.

John Bogle:  The federal government is not that much of a problem.  Certainly, the state and local governments are.  They’re using the same 8% before the costs of investing, before thinking about current interest rates.  I mean, today’s interest rate on a bond has basically a 90%+ probability of being the actual return that bond will deliver you over the next ten years.  Not very surprising because all of the return on a bond comes from interest, and the interest doesn’t grow.  You’ve got a little contract there to get your coupon twice a year for the next ten years, and the bond will then be, if you’re lucky, retired at par.  So, there’s no extra long-term difference.  All you have to do is know the yield.  So, we know what the bond portfolio’s going to earn and they seem to ignore all that.  So, it’s a very, very games-playing, manufacture the numbers kind of game that the auditors, which is where we started here, ought to say, “Whoa!”  Now, they may say, “We don’t have any responsibility for that.”  What are they there for?  What are they there for?  You know, if it’s true that they don’t have any responsibility, they better take some responsibility because the corporate managements are gaming this number.


7. Roger Ibbotson - Humans Are Hardwired To Be Bad Investors

David Bear:  That’s good advice, but what can an average investor do? 

Jim Lange:  Human beings are hardwired to be bad investors.  That is, we are programmed to run when we are in fear.  Unfortunately, that’s a bad reaction when the market is down.  Likewise, when things are very good, we want more of it.  Unfortunately, that’s the wrong reaction when stocks are at their peak.  Roger Ibbotson understands this phenomena very well.

Roger Ibbotson:  Think how you felt back in March 2009.  That’s after the market had fallen about 45%.  People were really scared at that point. The stock market had fallen so much. Now, it turns out that if you had gotten out then, you would have missed this huge rise that just happened. And actually, we’ve recovered almost all of the losses that actually occurred in that financial crisis, from the stock market. The market is about back to where it was. The tendency is when you’re most scared is actually sometimes the best time to be in the stock market.


8. Joe Hurley - Would A 529 Plan Affect Financial Aid?

David Bear:  In Episode 61 of The Lange Money Hour, our next guest, Joe Hurley, author of “The Family Guide to College Savings,” offered our guests some insights on 529 Plans.

Jim Lange:  Is putting money in a 529 plan going to hurt any of their chances of receiving financial aid?

Joe Hurley:  Well, the financial aid rules are kind of funny.  I mean, they’re difficult to get a handle on in many cases.  529 plans that are owned by a parent, or even by the student directly, have very little impact on financial aid.  They’re treated as an asset of the parent.  They’re assessed in the formula that computes the expected family contribution at a low rate of 5.6%, as opposed to, let’s say, a custodial account for the child which is assessed at a 20% rate, and any distributions that come from the 529 plan are not counted as income in that financial aid formula.  For grandparents, it’s a little bit different.  If the grandparent owns the 529 account, then the asset value does not get reported on the financial aid application at all.  So instead of 5.6%, it’s 0% of the value affecting the student’s financial aid.  The potential problem, though, is that if a grandparent takes distributions from a 529 plan, on the following year’s financial aid application, that distribution has to be added to the student’s income, and it gets reported on the financial aid application, and that income can have a negative impact on eligibility.  So, some grandparents actually prefer to make contributions to a 529 account that’s owned by the parent rather than themselves just to get better financial aid treatment, and I know I’ve made it sound complicated and that’s because it is complicated and you might have to push the pencil a little bit about doing that.


9. Jane Bryant Quinn - Advice for People Age 76 and Older

Jim Lange:  In 2001, I wrote an article that I sent to my e-mail list called “The Ideal Beneficiary of Your IRA.”  Jane Bryant Quinn was so impressed with the article that she interviewed me for roughly six hours to do a one-page article that appeared in Newsweek.  That article was then followed by articles in The Wall Street Journal, Financial Planning magazine, Journal of Retirement Planning, and many others, but she was the first journalist to really understand the power of what I consider the best estate plan for married couples.  She, of course, is one of America’s top financial writers, and has some words of wisdom to some of our senior listeners.

Jim Lange: If I can get back to something else in your book, one of the things that kind of surprised me is when you talk about advice for people aged 76 and older and you correctly note people 76 and older tend to be depression era mentality type folks who by nature are not great spenders and you say the heck with the kids, spend, spend, spend!  And I think of you as this kind of very prudent advisor who would probably recommend you should do wills and beneficiary designations etc., but you’re encouraging seniors to spend some of their money rather than to hang onto it for their kids.

Jane Bryant Quinn: Well, you know, I sound as if I’m anti-kid.

Jim Lange: No college, no inheritance.

Jane Bryant Quinn: Spend your kid’s inheritance, right? I wish to say I have two children and six step children so I’m very much aware of what kids need and how you can help kids, but I have a couple of feelings about this. First, you know a lot of parents help their adult children during their lives.  And so I consider this kind of a down payment on their inheritance if you will, sort of getting the inheritance or some of their inheritance early when they can especially use it. I just hate to see older people scrimping and saving because they think that it is essential that they leave something to their children. Most likely they will leave something to their children anyway because they probably own a paid up house.  Their children will get that and there will be other assets that the children will get.  I mean this is a time when you should say, “This is what I was saving all of this money for.  This is a time when I really want to be comfortable and enjoy the last ten or fifteen years of my life.”  And so that’s why I say that, and I guess it sounds a little slick but sometimes you really do have to encourage people to say, “You know?  You really can afford to take that cruise” or “There are things you really can afford to do.  Don’t be afraid to spend the money.”

Jim Lange: Well, I find that most of my clients tend to really be savers. I agree with you completely that they should spend some money, and if they want to do something for their family, maybe to take their family on a cruise or have a family vacation, which is a great experience for their family also.

Jane Bryant Quinn:  But we also have a growing and terrible problem with parent debt because parents are taking out these private loans to go to school.  They’re taking out PLUS loans from the government…

Jim Lange:  They’re mortgaging their houses.

Jane Bryant Quinn:  And you’re seeing higher and higher amounts of debt, part of its student debt, part of its mortgage debt, for people going into retirement.  And at a certain point, that becomes very difficult to pay.  If you’ve got a lot of parent loans that you took from the government, they will go after you.  You know, they can garnish not only your wages, they can garnish your Social Security, they can garnish your disability.  You can’t get rid of the loan in bankruptcy.  To take out loans to send your child to college when you are close to retirement age is very dangerous unless you really have a lot of money.  And if you have a lot of money, you should pay cash. Do you know, the number of bankruptcies of people in their seventies and eighties are going up.  The treasury is starting a larger scale program to garnish Social Security for people who had their student loans, or their parent loans, and didn’t repay.  There’s about 150,000 Social Security accounts being garnished right now up to 15%.  So, there’s a point at which going into retirement with a large loan is just crazy, and if you want to take out loans to help your child go to a school, you want a loan that you know you can repay over ten years, maximum, but ideally, repay it before you retire.  You’re probably looking at having to work longer.  There’s another angle to this.  You know, if you don’t have enough money to retire on, and at some point, you are broke, who is going to take you in? Your child is going to have to take you in, and there is an increased number, I did a column on this for the AARP, an increasing number of parents going to live with their children, not because they’re frail and alone and old, but because they’re broke.  And that’s a terrible, terrible, embarrassing situation for the parents to be in, and it’s a tough situation for the children to be in, and I know you don’t think about that if you’re eighteen or nineteen and you’re going to college, but you really need to say, “I want to be sure that my parents are in good shape when they retire.”

Jim Lange:  I’ve had a relatively hard time getting some of my more frugal clients to spend money, but one area that clients do seem open to spending more is by taking their family on a vacation.  That’s where the entire family, the kids and the grandkids, go somewhere, perhaps the shore, perhaps a cruise, and the cousins get to know each other, and in my opinion, that is a more important legacy than saving a couple dollars on not spending that money on travel, and ultimately leaving your children with additional money instead of additional memories.

10. Ed Slott - Your IRA Money Needs a Knowledgeable Advisor

David Bear:  Of course, it’s also important to protect that money, as Ed Slott reminds us in this clip from Episode 65.

Ed Slott:  Remember, I always say an IRA is like an eggshell.  You break it, it’s over.  This has got to be handled with knowledgeable hands, and you have to be careful.  You know, I hate to keep harping on it, but really, this is not do-it-yourself stuff.  If anything, the do-it-yourself part would be for you to get educated so you raise the bar and expect more from your advisor.  Remember, the more educated you are, the more you can demand from your advisor, and the more you’ll be able to know to evaluate.

Jim Lange:  And I’ll tell you the thing I thought you were going to mention is the difference between a rollover and a trustee-to-trustee transfer.

Ed Slott:  Oh yeah, that’s another.  I mean, you could go on and on with these problems, but yeah.  That’s another issue.  People take the money out and they don’t know about the withholding tax, and all of a sudden, they lost 20% of their money, and now they have a tax and possibly a penalty, or they don’t get the money in in sixty days.  You know, there are so many issues, and I call some of these errors fatal errors, which means you lose your retirement savings.  Here’s one that happens a lot because people don’t pay attention.  When I say people, consumers who don’t know any better because they’re not experts, and advisors who claim to be experts and aren’t.  The once per year IRA rollover rule, people do a second rollover, could be…I had a case many years ago and it was $1,000,000.  A guy did twenty rollovers.  He kept moving the money for lower CD rates and nobody told him you could only do that once, and he had to pay tax on $1,000,000.  It was the end of his IRA.


11. Charlie Smith - Let The Numbers Tell You What To Do

David Bear:  Wow, Ed Slott used an eggshell for an IRA analogy.  Another guest, Charlie Smith of Fort Pitt Capital Group, thinks investing is like a bar of soap.

Charlie Smith:  My old boss used to have a saying that investing is like a bar of soap, that if you play with it too much, it’s going to disappear.  And I think there is a certain amount of truth from the idea that you build a portfolio that’s appropriate for your risk tolerance and then you let it work.  If you have the fortitude to be contrary, go ahead and exercise it, but most people don’t.  People are social animals.  They want to do what their neighbors and their friends are doing.  And when their friends and neighbors have gotten off the reservation, they want to follow because it feels more comfortable.  As Warren Buffet has said millions of times, investing is not about comfort, it’s about doing what the numbers tell you to do.  And as an investment advisor, I get paid more for my ability to follow the numbers and do what the numbers tell me to do than anything else.  You know, the ability to keep your head when the crowd around you is either euphoric over a market condition or down in the dumps about a market condition.  The ability to objectively look through that and let the valuations tell you what you should do is where value gets added.


12. Natalie Choate – Utilizing Partial Roth IRA Conversions

Jim Lange:  Well, Ed Slott is certainly the best-known IRA expert.  Perhaps the Dean, and the most technical IRA expert, is Natalie Choate, author of probably the most authoritative IRA book on the planet, called “Life and Death Planning for Retirement Benefits.” 

Jim Lange:  Going through some of your best and worst ideas, which I just think is such a wonderful resource, I thought we could talk about a couple of them, first in the issue of Roth IRAs and Roth IRA conversions.  After retiring before age 70 ½, do partial Roth IRA conversions to use up lower income tax brackets.  I thought it made a lot of sense.

Natalie Choate:  Right, that’s a good one because the Roth IRA, I think everybody agrees, it would be wonderful to own a Roth IRA.  I mean, you’d have an account that was totally tax-free, and you’re not required to take any distributions out during your lifetime.  With your regular IRA, you are forced to take money out at age 70 ½ and older.  So, it’s not a question of Roth IRAs good or bad, it’s a question of what’s the price tag?  You know?  It would also be nice to own a chateau in France.  It would be nice to own a Rolls Royce, but they’re too expensive.  And a Roth IRA is expensive because when you transfer money from your traditional IRA to your Roth IRA, that is a taxable transaction, just as if the money was distributed to you.  So, if you’re in a high tax bracket, you’re really going to think twice before you say, “Well gee, I’m going to transfer my million dollar IRA to a Roth, and that’s going to cause me to pay $350,000 of extra income taxes that I could’ve deferred.”  So it’s a big decision.  But there are some retirees who are in that sweet spot between age 59 ½ and age 70 ½, and they’re retired, so the income has gone down, but they haven’t hit 70 ½ when they will have to start taking money out of the IRA every year, and they may be in a much lower tax bracket than they were when they were working, and in a lower tax bracket than they will be in after 70 ½ when they start taking money out.  They can do partial Roth conversions each year to just use up those lower tax brackets.  If you’re living on $75,000 of taxable income, you could convert $300,000 from your IRA to a Roth, and that would give you $300,000 more of taxable income, but you still wouldn’t even get into the top bracket.  So, that’s the idea.  You know, it doesn’t apply to everybody, but if that describes you, you should think about that.

David Bear:  Natalie also had some good words to say about your book, Jim, “Retire Secure!”

Natalie Choate:  I would like to give a return plug, Jim, for your book, which Jim, you wrote the bible for non-professionals, for the lay-audience, and the way I like to explain it to clients and my non-professional audiences is that my book is for professionals, therefore it’s probably too simplistic for their needs and they should turn to Jim Lange’s book “Retire Secure!  Pay Taxes Later.”  Jim, you’ve done a great job with this subject and I turn to your book for a few things like the different types of retirement plans, which I don’t really cover in my book.


13. Robert Kass - Providing for Your Pet’s Future

David Bear:  But your retirement planning concerns shouldn’t include just your immediate heirs.  As Robert Kass tells us, it’s a good idea to plan for your “hairy” heirs.

Jim Lange:  All right.  So, you know, one of the things that you talk about in the book is providing for your pets, and you actually go into a lot of detail, but why don’t we just start with the basics?  Why is it necessary, and what have you seen in practice in terms of providing for a pet?  What should those listeners be thinking about, and why is it necessary to provide for your pet’s future?

Robert Kass:  Well, the first thing that’s happened is that clients have come to us asking if we could help them make these plans.  They consider the pets a part of the family, and they realize, in their cases, for example, that there won’t be anyone else to take care of the pets and they want to make some provision.  So, we’ve had to think this through with them and look for examples of what has worked and the problems that have come up.  And as we talked to more people, and particularly people who see the book, they share stories with us that are shocking to pet owners where, you know, someone has passed away and the family just takes all of the animals to the vet and asks for the vet to euthanize them, or another case where a fellow did want to make provisions, and did, in fact, write in a will which he drafted himself, that he leaves his pet cat Fritz to his nephew John and $5,000 to take care of the cat, and when he passed away, John came to the executor for the $5,000.  The executor said, “Where’s the cat?”  And he said, “I took care of it.”  So, yeah, when you’re a pet owner and you hear that, you say, “This can’t be,” but these are stories that we hear from people, and you have to respond by saying “If you care enough about your pets, then you need to do something.”  And it’s not only about when you die.  It’s about, you know, the everyday occurrence if you get in a car accident and you end up in the ICU for three or four days.  Does anyone know there’s a pet at home?  It could be real basic.


14. P.J. DiNuzzo - Separate Your Buckets of Assets

Jim Lange:  P.J. DiNuzzo and I actually have a joint venture whereby he does the actual investing using low-cost index funds.  Our office does the strategic work, such as Roth IRA conversions, how much money you can spend, when you should take Social Security, estate planning, tax planning, etc., and we combine our services for a combined fee of 1% or less.  But it is fair warning to say that I am not objective to P.J. DiNuzzo.  He is, in my opinion, the finest, hardest working financial advisor I’ve ever met, and I’ve met thousands. 

Jim Lange:  Let’s say that somebody comes to you and they’re a new investment client.  How would you advise them in terms of investing, and what differences would you make in investing, let’s say, after-tax dollars, IRA dollars or Roth dollars?

P.J. DiNuzzo:  Yeah, Jim.  That’s a very pertinent question that you’re asking.  Our average retiree has approximately three different strategic asset allocations/strategies.  The bucket that has the taxable assets generally is more conservative.  The bucket with the IRA assets has material percentage of growth, and then the bucket that has the legacy assets, as we refer to it, has a comfortable level of growth for the client of maybe 60% in stocks.

Jim Lange:  Do you actually have separate accounts for what you would call, let’s say, the short-term bucket and the medium or five-year bucket and then the longer range money, do you actually separate that money out or is it just mushed together?  In your mind and in the client’s mind, they know that certain parts are available at different times.

P.J. DiNuzzo:  Yeah, Jim.  At our practices, we literally separate those buckets of assets.  We tell clients that when they come into the office, if they can consider if they’re going to monetize or liquidate their entire portfolio as taxable assets, IRAs or Roth IRAs, they bring that money into the office in $20 bills or $100 bills in a wheelbarrow or two, or the more wheelbarrows the better, and we’re going to stack that money from the floor up to the ceiling, and we tell them the base level, the bottom of that stack is going to be what we refer to as their cash reserves.  Money kept at the local bank for paying the electric bill, the gas bill, etc.  We want our clients to have twelve months in that area, or their sleep at night number, which may be a lot higher than that.  Then the next level, when we look at the other dollars on the stack, that would be what we refer to as their risk capacity.  That’s going to pay for their food, clothing, shelter and transportation.  Now, we want our clients to have those assets invested a lot more conservatively than their middle-of-the-road assets.  The next level would be what we refer to as risk tolerance.  We joke around sometimes and tell clients that you probably don’t need to have, as much as you may love your dog or cat, you don’t need to have, like, the dog or cat food with guaranteed income.  Hey, that money can float around a little bit.  Let’s let it grow one or two or three percent more per year in the market.  And then, if we look at the very top of your stack up by the ceiling, we’d recognize that this stack at the bottom of the floor, your checking account’s located in your cash reserves, you get withdrawals coming in every month off of the risk capacity, the risk tolerance, you’d say you know what?  Like, I’m never relatively speaking going to touch my money off the top of this stack.  So, that’s legacy assets for my children, grandchildren, charities, etc., and that money’s extending well beyond my time horizon.  You know, when I look at it, there’s probably potentially even a fifty, sixty, seventy-year time horizon, and if there’s one thing that amazed Albert Einstein and it certainly amazes me, it’s the miracle of compounding.  You take a look.  If I can compound the top of that stack, one, two, three, four percent more per year over decades, your children, grandchildren, charities, etc. are going to be very happy that you did that.


15. Ed Slott - It’s What You Keep That Counts

David Bear:  Next up is another Ed Slott clip you selected. 

Jim Lange:  One of the reasons why Ed is so well liked is his ability to tell a great story and literally charm his guests. 

Jim Lange:  This story just sticks in my mind so clearly.  Could you tell us about Bill Buckner and the lessons that our listeners can take from Bill Buckner?

Ed Slott:  Well, Bill Buckner, for baseball fans, is infamous with, you know, failure at the critical moment. But without going through all his statistics, turns out he was one of the greatest baseball players that has ever played. But, when it counted at the end of the game--and that’s why I use the analogy with planning for your retirement savings--it’s what you keep that counts.  You could have a great career saving and building and investing and having more and more. But if you strike out or if you drop the ball like Bill Buckner did at the end of the game, the distribution strategies, the planning, your family will remember the same thing about you that they remember about Bill Buckner – that you dropped the ball, you blew it when it counted, even though for 30 years you did everything right, and that’s the big problem with retirement planning.


16. Jane Bryant Quinn - Social Security Claim, Reverse Mortgages and One-Life Pension

David Bear:  Jane Bryant Quinn returned as a guest in Episode 98 and had many pointed comments about the art of retiring.

Jim Lange:  The other decision that I think can work very badly for, let’s say, the dependent spouse is the issue of when to take Social Security, and I know that you have some strong opinions on that.  What would your advice, in general, be for people’s plan…?

Jane Bryant Quinn:  Yes.  My advice, in general, would be please don’t take Social Security at 62, because you’re going to get a 25% reduction if you are the wage earner, or if you have, on your own benefit, you’re going to get a 37% reduction if you’re taking a spouse benefit.  So, wait.  Don’t take Social Security benefits if it is at all possible financially until your full retirement age, which is 66.  Now, at 66, there’s really something fabulous you can do to stretch the total benefit that you will get as a couple over your lifetimes.  The husband can file for retirement benefits at 66 and then he gets his full retirement pay, but he can suspend them, meaning he doesn’t collect.  If he doesn’t collect, his retirement benefit continues right up to age 70, gaining 8% a year plus the inflation rate.  So, at 70, he can retire with a much higher benefit than if he took it at 66.  But, because he filed at 66, his wife can file for…at her full retirement age, can file for spouse benefits on his account.  So now, she’s collecting spouse benefits, but her own worker benefit is now still increasing 8% a year plus the inflation rate.  So, theoretically, they could both claim their separate benefits at age 70 and do much better than if they had claimed them earlier.

Jim Lange:  Well, by the way, I happen to strongly agree with you, and I’ll add one little piece of information to the party, that if you hold up on your Social Security, and if you are retired, that will also give you more room to do Roth IRA conversions, and I ran a couple numbers that show the difference between taking Social Security at 62 with small Roth IRA conversions and waiting until 66 and then do apply and suspend, and during your lifetime, even if you just live until age 86, you yourself (forget your kids for the moment) are better off by $219,000 in today’s dollars, and then, if you don’t spend all that money and you die and you eventually leave it to your children, your children are actually better off by $519,000.  So, I would agree with you.  The other advantage of waiting is when…it’s again going back to the issue of protecting both spouses, if you wait, and then, let’s say, either one of you dies, the survivor will then get a higher income for the rest of their life, which is protecting them.

David Bear:  And then, this warning about the risks of inflation.

Jim Lange:  Well, I think one of the problems that people underestimate is inflation, and everybody talks about the market and interest rates, etc., but I don’t hear a lot of discussion about inflation, and you have a very good discussion in the ‘How to Retire in Style’ in your book “Making the Most of Your Money Now.”  And you make, what I think is, a wonderful analogy.  So, I’ll ask you: why is inflation like Harvey the Rabbit?

Jane Bryant Quinn:  Well, you have to remember that Harvey was invisible, and only Jimmy Stewart could see him, but Harvey’s performance was so riveting that the rabbit stole the show.  And I think of inflation as the rabbit, as Harvey, simply because you don’t particularly notice it, especially at low rates, but it’s creeping along there anyway.  It’s a little bit invisible to you, but over time, it reduces your spendable income, and this is why you continue to invest in stocks for growth even at a younger retirement age, and this is why, when you look at what you’re withdrawing from your 401(k) or your IRA, wherever your money is, that you need to plan for an inflation adjustment as you withdraw just to keep your purchasing power steady.  They’ve been doing some studies about consumer price inflation and older people, and some say that the inflation rate is much higher for older people because of medical care.  Other studies have suggested that it’s not because older people simply aren’t making as many purchases as they used to, so it’s not entirely clear that inflation is higher for older people than it is for younger people.  But, at any rate, inflation is there and you have to consider it when you’re planning what your income is going to be in the future.

Jim Lange:  Well, you actually have a great chapter in “Making the Most of Your Money Now” that talks about housing choices and some of the different options that retirees have.  You talk about a reverse mortgage and I get the impression that you like the idea of the reverse mortgage, but you don’t like the fees that come along with it.  Is that a fair characterization?

Jane Bryant Quinn:  I think it’s a fair characterization with an exception, and, you know, there are exceptions due to unusual circumstances.  First, you know, a reverse mortgage is something where just…your listeners probably all know about it, but I always just like to make a quick explanation where you can take equity…basically, you’re taking equity out of your home.  It’s not a loan because it doesn’t have to be repaid.  But you can take it out as a credit line.  You can take it out as a lump sum, and then you have that money, and you do not have to repay that money until the house is sold.  So, you are taking a loan against your equity, and when the house is sold, which means if you move, if you go into a nursing home, if something happens, you sell the house, only then do you have to repay the loan.  Until that time, the loan is yours, tax-free, to use.  It’s an expensive loan.  There are a lot of fees upfront, and I have always thought that the time to use a reverse mortgage is only later in life when, if you’ve run down other money and you really are in a state of health where you can stay in your home and you want to stay in your home, that this is the last kind of loan you should take.  So, you should wait until your late seventies or your eighties before you start thinking about a reverse mortgage, and then, you may decide you don’t want it anyway!  You say, “I’ve had it with cleaning the gutters.  I’m going to buy an apartment!”

Jim Lange:  I was wondering if you had any opinions about doing a one-life or a two-life pension, and whether you thought a one-life and insurance would be appropriate, or what some clients do (it just bothers me to no end) is they take a one-life, and then they don’t do any insurance. 

Jane Bryant Quinn:  I have a very strong opinion about this, and that is…

Jim Lange:  You have a strong opinion about a lot of things, but go ahead!

Jane Bryant Quinn:  Who, me?? 

Jim Lange:  Who, ME???

Jane Bryant Quinn:  If you have a pension, and you have it to cover only your own life, how selfish can that be?  If your spouse has a pension of her own and it’s equally good, well, you know, that’s fine.  If you have plenty of money so you don’t need your pension, that’s fine.  But if the spouse needs that pension money to live on and you cover only your own life and then you don’t care about it because you’re dead, I’ll tell you: not only will your spouse not be happy with your memory, neither will your kids.     

David Bear:  Thanks Jane Bryant Quinn for that excellent information.  Jim, tell us about our next guest.


17. Grant Oliphant - Satisfaction through Philanthropy

Jim Lange:  Grant Oliphant is the president and CEO of The Pittsburgh Foundation. 

Grant Oliphant:  You know, there’s a reason that so many of the people who have made enormous wealth over the course of the last few decades through the information revolution and through the internet and all of the innovations that we’ve seen, people from Bill Gates on have decided at the end of their lives to devote their lives to philanthropy, and trying to change the world around them, and it’s because it’s immensely, immensely satisfying.  Obviously, making money was satisfying for them too, but having done that, to be able to turn to charity is a wonderful thing for them, and we see it every single day.  Even with people who don’t make that life choice, to be able to give means a lot.  You know, this challenge that’s out there right now from Bill Gates and Warren Buffett to the billionaires of the world to give away half of their wealth is a wonderful sort of challenge, but, you know, my message to our community is you don’t have to be a billionaire to get the happiness that comes from giving.  I’m not sure that all of us are in a position to give away half of our wealth, but we’re all in a position to give away something, and the satisfaction that comes from that is enormous.


18. John Bogle – What Caused The Financial Havoc of 2008-2009?

David Bear:  What’s our next clip, Jim?

Jim Lange:  To finish up the program, John Bogle has a great solution to many of our problems. 

Jim Lange:  Do you think that some of the problems that you had mentioned earlier, in terms of speculation versus investment, were really the cause of the financial havoc that we had in 2008 and 2009, or at least partly responsible for some of the problems that we’ve had?

John Bogle:  Well, I wouldn’t put speculation at the heart of that.  Of course, there’s speculation because when someone sells you one of these collateralized debt obligations, you’re speculating that it has independent analysis says these things are money good.  The basic part of that was a terrible fraud perpetuated by mortgage companies countrywide, Washington Mutual.  The system works like this: you got salesmen out there, and their job is to sell money, okay?  So they find somebody that makes $20,000 a year, they get them to take on a $200,000 mortgage, and actually give them a $300,000 mortgage so he spends $100,000 before he buys a $200,000 house.  This has been known to happen.  And why don’t they care?  Because they sell the mortgage to a bank.  Why doesn’t the bank care?  Because they sell it to a collateralized debt underwriting.  We sever in that system the essential link between borrower and lender.  If there’s no connection between the borrower and the lender, the lender’s going to be like, “Hey, he doesn’t care about the borrower.”  He’s going to get rid of the instrument and give it to somebody else.  And the rating agencies have a huge onus on them after what they did in this area.  You know, it was well known that you could kind of buy ratings.  I believe these companies were paid to give a AAA rating to a collateralized debt obligation.  The underwriter would work with the rating agencies and say, “What do we need to do to make this a AAA?”

Jim Lange:  Included in your list of institutions that you indict, you do include Congress.  Do you think Congress has a role in trying to change some of these habits of behavior?

John Bogle:  Well, poor Congress, you know?  They’re a bunch of nice people, and the complexities of the financial system are, in fact, rather overwhelming.  So, they listen to industry lobbyists and get directed in that direction, unless you get a real crisis as we had in 2008 and 2009.  So, they passed the Dodd-Frank Act and it’s still gotten nowhere three years later, I guess.  Sensible things like what we call the Bogle rule, which is designed to keep banks largely out of dealing as underwriters for their own accounts, they’re working on 193 pages of regulation to make that happen.  Obviously, what would’ve happened, in a wise world, and without the pressures from these institutions themselves, is we would’ve gone back to what is known as the Glass-Steagall Act, an act that was passed by Congress after the debacle of the Great Depression passed by Congress, which said you can be a commercial banker and lend money, or you can be an investment banker and take all the risks of underwriting.  Never the twain shall meet.  So, we abandoned that in 1999, and instead of putting it back, just saying, “Okay, we made a mistake,” they have this convoluted law intended to accomplish the same thing.  I think Paul Volcker did a great job in getting that Volcker amendment in there, but nothing’s been done about it yet.  And then, the lobbying pressures are terrible.  The banks and their lobbyists fight every regulation with an army of lawyers and look at every comma, and here, the regulators are completely outmanned and outgunned.  So, what we’re going to get out of Dodd-Frank, I think finally, is very, very little.

Jim Lange:  And you would just prefer going back to…

John Bogle:  No, I’d prefer naming Bogle a czar.


19. Jim Lange - Personal Story on Roth IRA Conversion

David Bear:  And before we stop, I know there’s a personal story you wanted to share with listeners again. 

Jim Lange:  So, I had this challenge.  How am I going to convince people that the analysis that I did on Roth IRA conversions was accurate and it was a good thing?  So, I went to the American Institute of Certified Public Accountants, and they’re actually a pretty credible group, and they have a journal called “The Tax Advisor,” which is peer-reviewed, which means anything that goes in “The Tax Advisor” has to get through a board of reviewers, and just picture these nitpicking CPAs that love to find mistakes and tell you how wrong you are.  But anyway, I submitted the article with all the analysis, and it actually went through with flying colors and was published, and it was actually the first major magazine article on Roth IRA conversions, and it proved the value of Roth IRA conversions for many people, and at the time that I did it, it was really done for clients and prospective clients.  In 1997, I didn’t qualify for a Roth IRA conversion because my income was more than $100,000.  Today, you don’t have that limitation.  There is an unlimited income amount, so anybody, regardless of income, can make a Roth IRA conversion as long as they have an IRA.  So I was not thinking about this for me.  Then, on February 16, 1998, I was above a pizza shop and there was a devastating fire that basically wiped out the office, and again, the moral of the story is never put your office above a pizza shop.  But I did, and I was basically wiped out, and I was well insured, but I didn’t get the insurance check until the following year.  So in 1998, I probably had my lowest year that I’ve had probably since more or less I started practicing.  But anyway, I had a really rough year, and my income was less than $100,000, which meant I qualified for a Roth IRA conversion.  And that was good.  So, I’m married.  We had between us $250,000 in our combined IRAs, and I said, “Cindy, I think we ought to make a Roth IRA conversion of the entire amount.”  So, we had to pay income taxes on $250,000, and the original plan was then we would get a bunch of tax-free income when we were older, and that was good.  It is possible, even likely, that we will never need that money, that $250,000, plus all the growth on that money, in our Roth, and it is possible that if neither of us ever needs it, it will end up going to our daughter, who was three years old at the time that we made the conversion.  Through second-to-die life insurance, other monies that we will leave our daughter, and money that our daughter will earn herself, it is very possible, even likely, that she will not need all that money, in which case it might end up going to her children.  So, we might get 80-90-100 years of tax-free growth and our family will be millions and millions of dollars better off.  And even if my wife and I need it and it doesn’t go to the next generation, we will still be hundreds of thousands of dollars better off, and it will have been a very good thing.  So, that’s my own personal Roth IRA conversion.

David Bear:  Thanks for listening.  We hope you’ve enjoyed this special 100th edition of The Lange Money Hour.  As always, you can hear an encore broadcast of this show at 9:05 a.m. this Sunday morning here on KQV, and you can always access the archive of past radio shows, including audio and written transcripts, on the Lange Financial Group website, www.paytaxeslater.com.  While there, check out the latest video clip in the series of Jim’s interview with John C. Bogle, founder of the Vanguard Group.  You can also call the Lange Financial Group offices directly at (412) 521-2732.

END

 

James Lange, CPA/Attorney

Jim is a nationally-recognized tax, retirement and estate planning attorney with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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