For A More Prosperous Future, Focus On Things You Can Control

Episode: 202
Originally Aired: September 20, 2017
Topic: Want a More Prosperous Financial Future? Focus on the Things You Can Control. Advice from Jonathan Clements

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

Introduction of Author Jonathan Clements, Founder of Humble Dollar
Most People Know What to Do With Their Money But Don’t Do It
Buying Experiences Rather Than Things Has Greater Value
It’s Smarter and Much Safer to Bet on Living a Long Life
Delaying Social Security Will Greatly Benefit Surviving Spouse
Immediate Annuity Can Provide Lifetime Income
Rewire Your Brain to Control Emotions, Shut Out Politics
The Stock Market Is Expensive, but It Has Been for Years
Pensions and Social Security Benefits Are Similar to Bonds
As Wealth Grows, Insurance and Others Costs Can Be Trimmed
Look at Your Financial Life as an Integrated Whole
Death of the Stretch IRA Would Be the True Death Tax

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.

1. Introduction of Author Jonathan Clements, Founder of Humble Dollar

Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg along with CPA and Attorney Jim Lange, and tonight, we are very excited to welcome Jonathan Clements back to the show. Jonathan is the founder of HumbleDollar.com and author of seven personal-finance books, including his latest, How to Think About Money. He sits on the advisory board and investment committee of Creative Planning, one of the country’s largest independent financial advisors, and is involved with a financial startup as well. Born in England and educated at Cambridge University, Jonathan spent almost two decades at The Wall Street Journal in New York, where he was the newspaper’s personal-finance columnist. He also worked for six years at Citigroup as director of financial education for the U.S. Wealth Management Business. This week, we’re going to be talking about a lot of investment-related topics, including how to keep your emotions in check when investing, how much or how little you should let politics and the ups and downs of the market affect your long-term plans, and why buying experiences instead of material possessions is so important. So let’s get right to our conversation by welcoming Jim Lange and Jonathan Clements.

Jim Lange: Welcome to the show, Jonathan.

Jonathan Clements: Hey, Jim, it’s great to be back on.

Jim Lange: Well, it’s great to have you. So, by way of disclosure, Jonathan has consulted with me with attribution in 34 columns for The Wall Street Journal. If he isn’t the top financial writer in the world, he is certainly one of the top two, and one of the things that I observed is the, let’s say, development of Jonathan as a writer. So most of our columns were things kind of like meat and potatoes, Roth IRAs and estate planning and how to best educate grandchildren, maxing out your retirement plan and which asset you should spend first and should you purchase an immediate annuity, things like that. Then, after he went on his own, he became wiser and, let’s say, more philosophical. In 2009, he wrote a book called The Little Book of Main Street Money, which is still a fabulous book, by the way. And now, the book that I think we’re going to spend the most time talking about, How to Think About Money, I just think is superb, and I reread it in preparation for this show. By the way, if you just read the foreword by William Bernstein and nothing else, you’ll have received great value. So if this isn’t the top recommended book, I can’t think of what would be. So, if you have to go, write down and order from Amazon, or your local bookstore, How to Think About Money, by Jonathan Clements.

So, Jonathan, if it’s OK with you, to me, there’s so many wonderful things in the book, I’d like to go through some of the things in the book. Would that be all right to talk about some of the things that are in the book?

2. Most People Know What to Do With Their Money But Don’t Do It

Jonathan Clements: Absolutely, Jim. There’s just one thing I’d like to say, after that kind introduction, is that I think, you know, anybody who spends a reasonable amount of time kicking around the general field of personal finance, whether as a writer or as a financial advisor, discovers that figuring out what to do with your money is not that complicated. Often, the really complicated problem is getting people to do it. I’m sure you see this every day in your practice. You know what a client should do, but persuading him or her to do the right thing, that’s often a struggle because people simply don’t want to do certain things. They don’t want to give away money now. They don’t want to pay taxes today so that they can have a larger sum down the road. They don’t want to invest in the stock market because they’re nervous. All the time, we have these emotional blocks that prevent us from doing the right thing.

Jim Lange: Well, I think that is true, and I think your book certainly addresses a lot of them. On the other hand, you have had, I think, some profound impact on your readers, and you also have a wonderful Facebook blog. So, for example, I have often quoted you. In fact, I even wrote a column quoting you saying the best way to spend your money, and it wasn’t buying a car or buying an addition to your house or a new bathroom or anything like that. It was actually using your money to buy experiences, and you were talking about taking your family on a family vacation, and I think that that is the perfect lead-in to, to me, what you call Step Number One and how to think about money, which is to buy more happiness, and in there, you say there is a connection between money and happiness, but it’s a messy connection, and if you want to get the most out of your dollars, we need to think how much harder about how we spend and what goals we pursue. Could you expand on that thought about buying happiness?

3. Buying Experiences Rather Than Things Has Greater Value

Jonathan Clements: Sure. Well, let’s take a step back, Jim. One of the things that we have in the U.S. is great research data on this. For the past 44 years, there’s been something conducted called the general social survey, and it asks people to tell the interviewer how happy they are, and they’ve been asking this question for the past 44 years, and the people who say that they’re very happy, pretty happy or not so happy has remained unchanged year after year after year, and yet, over this 44-year period, U.S. inflation per capita income has risen 120 percent. So, in other words, we’re more than twice as well off as we were 44 years ago, even after adjusting for inflation, and yet, our reported level of happiness has not budged. Money has not bought happiness. And the question is: Why not? At issue is a psychological phenomenon known as the “hedonic treadmill,” and the notion is this: We want the bigger house or the faster car or the next pay raise, and we achieved it, and initially, we’re really happy about the bigger house and the pay raise, but then, a few months later, it’s just the place that we live, it’s just another paycheck, and we’re back to feeling dissatisfied and hankering on for something else. So if you’re going to get off the treadmill and squeeze more happiness out of the dollars that you spend, you need to be much more thoughtful about what you do, and the research tells us, as you mentioned, that you can squeeze more happiness out of your dollars if you spend the money buying experiences rather than possessions. The research also tells us that just pausing and thinking about the good things in our lives, thinking about the pay raise we got two months ago, thinking about the bigger house that we bought, that can help us to avoid some of this hedonic adaptation and we can squeeze more happiness out of the possessions that we purchased.

Another key ingredient to happiness is having a robust network of friends and family. One of the reasons that experiences tend to deliver more happiness than possessions is because we tend to have experiences with other people, and that makes them extra enjoyable. Spending time with friends and family gives a huge boost to happiness, and an added bonus, research tells us that not only does having a robust network of friends and family boost our happiness, it actually also increases longevity. In fact, having a robust network of friends and family has an impact on longevity equal in impact to not smoking.

Jim Lange: Well, that’s pretty significant. So if you don’t smoke and you buy experiences with friends and family, the combination of that should be pretty powerful, and hopefully, maybe we might not be twice as happy as we were before, but if our incomes are doubled and we are, let’s say, consuming our money better by buying experiences rather than things, that really does increase happiness. By the way, that’s the kind of soft science, if you will, although you’re actually backing it up with data, which you have consistently done for the 18 years … I remember when you were the personal finance top guy at The Wall Street Journal. I love that idea that you can actually, in effect, almost have a more of a designed life by thinking about how you’re going to spend your money and spend it right.

One of the things that I always ask my clients, and sometimes it puts them off a little bit, is I ask them when they’re going to die, and the reason for that is … and I usually get answers that are shorter than I would guess if I looked at them, I ask them about their genetic history, and I think about the ever advancing science that is actually increasing our life expectancy, and one of the things that you pointed out in How to Think About Money is don’t just think about, let’s say, living to 75 or 80, because, let’s say, you bet on that and it turns out you spend all your money and now you’re 81 and you’re broke, then you made a big mistake. Can you tell us about what you mean by “bet on a long life” and why that is the safer way to go?

4. It’s Smarter and Much Safer to Bet on Living a Long Life

Jonathan Clements: Well, first of all, Jim, let’s look at what the numbers say, because a lot of people are really confused about life expectancy. I still meet and correspond with plenty of people who think that their life expectancy is somewhere between 75 and 80, and that may indeed have been their life expectancy when they were born, but remember, those averages are pulled down by all the people who die early in life. If you make it to age 65, statistics tell us that if you’re a man, you’re likely to live somewhere around age 85, and if you’re a woman, you’re likely to live to age 87, and then if you layer on top of that, you know, if you’re somebody who has taken reasonably good care of your health, you know, you’re reasonably conscientious about exercising, you’re not obese and so on, the statistics indicate you’ll probably live four years longer on average. So, suddenly, we’re looking at men and women both living to around 90 to 92 on average. Clearly, you don’t want to live to 92 and run out of money when you’re 80! And in a sense, it’s a lopsided bet, and the reason I say that is this: If you bet on a short life and you live long, you’re in a heap of trouble. If you bet on a long life, you manage your savings as though you’re going to live into your 90s, and you die in your 70s, well, what can I tell you? At that point, all of your financial problems are over. It is a lopsided bet, and the big financial risk, not the big personal risk but the big financial risk, is not dying early in retirement; it’s living longer than you ever imagined, and that brings us to all these strategies that you and I have talked about, in terms of making sure you draw down your savings in the right place, thinking about delaying Social Security until age 70, and potentially even buying a certain low-cost, simple immediate fixed annuity.

Jim Lange: Well, let’s spend a couple minutes on those because the idea that the … and I’ll be a little bit more specific, that the primary wage earner in the house, whether it’s the husband or the wife, I am a big fan of having the primary wage earner of the family wait until 70 in order to get the highest Social Security, not just for him or her, but, assuming they are married and have been married for more than 10 years, although actually less if we’re not talking about a divorce, the survivor will also get the higher amount. So, even just between 66 and 70, you’re getting an 8 percent raise for every year you wait. So, just think about that. Between 66 and 70, you’re going to get a 32 percent raise, and then if you live into your 90s, you’re talking about potentially hundreds of thousands of dollars.

5. Delaying Social Security Will Greatly Benefit Surviving Spouse

Jonathan Clements: And that sort of brings us to this counterintuitive notion. I mean, let’s be politically incorrect and assume that the higher wage earner was the husband in the relationship. Even if the husband is in his 60s and he is not well, and there is every chance that he’ll barely live beyond age 70, it still makes financial sense for the husband to delay Social Security until age 70 because his wife will receive his Social Security benefit as a survivor benefit. So the life expectancy of the benefit is actually longer than his life expectancy.

Jim Lange: And that is really critical, and then going back to a combination of what you had said earlier about life expectancy, and then let’s call it gambling. So let’s say that the mathematical breakeven age, and depending on what assumptions you use, is somewhere around age 84. If you both die before age 84 and you ended up getting a little bit less out of Social Security, it kind of doesn’t matter because you’re dead, and dead people don’t have financial problems. What people should fear, as you had mentioned earlier, is running out of money late in life, and, to me, there is no better and cheaper longevity insurance program than holding off until age 70 for the purposes of Social Security.

Jonathan Clements: You’re absolutely right, Jim.

Jim Lange: And by the way, one of the reasons why I want to emphasize this is because most people get this wrong. So I wrote a book about Social Security and there’s a whole bunch of others out there, Larry Kotlikoff wrote a very good book, your old columns are excellent, Jane Bryant Quinn talks about this, I’ve had several Social Security experts on, but still, so many people persist in taking Social Security early.

6. Immediate Annuity Can Provide Lifetime Income

The other thing that I see very few people doing in practice, and I want to distinguish between an immediate annuity and a commercial annuity, because you had mentioned that one of the things, let’s call it a meat-and-potato type item, but it’s also somewhat philosophically important in that we want to make sure that we never run out of money. So could you tell our listeners the difference between a commercial annuity that typically has very high fees for the advisor and an immediate annuity that does not, and why you prefer immediate annuities and what it might do for them?

Jonathan Clements: So, when people hear about annuities, red, flashing warning signs start going off, sirens are ringing, and they should because if a financial advisor or likely an insurance salesman or a broker is offering to sell you annuity, probably what they’re selling you is a variable annuity, and a variable annuity is essentially a really, really high-cost mutual fund. You can find variable annuities that are charging 3 percent a year. When I think about what the stock market is likely to earn over the next 10 years, I think about that it might earn 6 percent a year. If you buy a variable annuity that’s charging you 3 percent, you’re going to give up half of your potential gain to the insurance company and the broker or insurance salesman who sold you on that annuity. Instead, what I’m talking about here is something that has a much lower implicit cost and is much simpler, and, in fact, brokers and insurance salesmen generally don’t sell them because they don’t get much commission for putting a client in what’s called an immediate fixed annuity, and with an immediate fixed annuity that pays lifetime income, you simply pony up a sum of money, and then, in return, every month for the rest of your life, you get a check from the insurance company. It’s not the best way to generate income from your assets. The best way to generate income from your assets is to delay Social Security. That’s the best annuity out there, as you made clear, Jim. But if you want more lifetime income, buying a plain vanilla immediate fixed annuity that pays lifetime income can be a good supplement, especially for those who only just have enough savings for retirement and are really looking to squeeze the maximum income possible out of those savings. For them, an immediate fixed annuity may be a good product.

Jim Lange: And Jonathan wrote, I think if not the best, certainly one of the top financial books ever, and it’s actually relatively short. It’s an easy read, and it gives people so much, I wouldn’t even say knowledge, I would say wisdom, and the book is called How to Think About Money, by Jonathan Clements. The foreword by William Bernstein is excellent. Jonathan’s introduction, I could’ve done a whole show on the foreword and the introduction. It’s just such a wonderful book. I would recommend anybody get it, and by the way, it’s also universal. It’s not just U.S., but anybody who is interested in money, or even how to think about money, it would be a great buy.

And before we took a break, we were talking about betting on a long life, and we were talking about some of the benefits of an immediate annuity and some of the problems with a more traditional commercial annuity, and I will say this much because I am licensed to sell these types of annuities, and I might make 8 percent, 10 percent, 12 percent on an annuity. So, just think about that. Let’s say you had $100,000 and I sold you an annuity and I made $8,000 or $10,000. Well, that’s pretty easy money for the advisor. But with my business model, where our firm runs numbers, and we have another firm that does the investments, and we figure out Roth-conversion strategies, and we look at estate-planning strategies, and we do all kinds of tiered investments where you have multiple layers, and we do, like Jonathan likes, take into consideration maximum strategies for Social Security and working pensions, and I have to do that for 20 years to make the same amount of money as I would if I sold somebody an annuity, and I don’t get the money upfront. I get a little bit Quarter 1, a little bit Quarter 2, a little bit Quarter 3. So you can see the incentive for a financial advisor to sell these types of annuities where, as Jonathan mentioned, the immediate annuity is really not a very profitable thing for the advisor, but might be a very good thing for the client, particularly if combined with Social Security, it provides a certain minimum base.

So one of the other things that you mention in How to Think About Money, your third step is rewire your brain. So, how can people rewire their brains, and why should be rewire our brains?

7. Rewire Your Brain to Control Emotions, Shut Out Politics

Jonathan Clements: There’s been a lot of research done, Jim, on the way that the brain works, and essentially, when you think about the brain, you can think about it functioning in two parts. There is the incredibly fast-moving instinctual part, and then there’s the much more ponderous contemplative part. So the fast-moving instinctual part is the part of the brain that makes you jump out of the way when you see a car coming in your direction, or makes you pull your hand away from the oven when you sense that it’s hot, and often, you do these things even before you’re conscious of what’s going on. So, you detect a car coming in your direction and you leap out of the way, and it’s only when you’re sitting in a pile on the sidewalk that you realize, “Wow, that was close!” So most of the time, our instincts are super helpful. They’re just not super helpful when it comes to modern financial markets, and our hardwired instincts can lead us astray. They can lead us to panic when the stock market goes down. The market goes down and we’re like, “Oh my goodness, I’m going to lose everything,” and we sell, or we think, “Wow, look at that wonderful new car. I want to buy that right now,” and we forget all about the fact that we need to be saving for retirement 30 years down the road. In these situations, what we need to do is to pause, is to reflect, is to act deliberately rather than impulsively. We need to allow the contemplative side of our brain to weigh in on these financial decisions. And so, for instance, if you’re on vacation and you think, “Oh, this is such a wonderful relaxing place. I want to buy a vacation home. I want to buy a timeshare,” what you need to do is rather than acting on that instinct, acting on that emotion, you need to pause. You need to say, “OK, I’m going to put this whole idea on freeze for 72 hours while I give it some serious thought,” instead of acting on instinct. If we act on instinct, our financial decisions, more often than not, we’re going to end up making bad decisions.

Jim Lange: I’d like to expand that thought, and at the risk of sounding a little political, talk about how Democrats do as investors when there’s a Republican administration, and how Republicans do as investors where there’s a Democratic administration, and I think that this is a little bit similar to what you’re talking about. So, historically, Democrats will say, “Oh, George Bush, what a moron. The country’s going to hell. I’d better put my money in cash and be very conservative,” and likewise, the Republicans saying, “Oh my God, Obama, what a moron. He’s just going to give everything away. I’d better put my money in cash and gold.” And in both cases, they were wrong and the market does just fine over time, and they both get hurt. So the Democrats tend to do badly in a Republican administration, the Republicans tend to do badly in a Democratic situation, and right now, I’m hearing, “Oh, Trump’s crazier than all of them,” except his supporters, who think he’s wonderful, and I fear that people are going to make bad investments based on what is going on politically. Is that also an example, or at least related to, rewiring your brain?

Jonathan Clements: Absolutely, and we are actually already seeing the damage done. I mean, if you cast your mind back to a year ago, I remember getting quite a few e-mails and quite a few comments from people saying, “I’m going to go to cash because the market’s expensive. If Hillary’s elected, that’s what everybody expects and it’s going to be no big deal, and if Donald Trump is elected, the stock market is going to crash. So I’m going to cash.” And I know people who went to cash, and, of course, Donald Trump got elected and what happened? The stock market went up! All these experts who were predicting the market was going to crash because Donald Trump was elected were dead wrong, and what that tells you is not that Donald Trump is necessarily good or bad for the stock market, what it tells you is who’s sitting in the White House doesn’t have a whole lot to do with how the stock market performs. It’s completely independent. What drives the stock market is how the economy’s doing and how corporate earnings are doing, and if the economy and corporate earnings are continuing to chug along, which they were before Trump was elected and they continued to do after Trump was elected, then, in all likelihood, the stock market is going to be just fine, and you should not let your political instincts and your distaste for one political candidate after another drive your investment strategy.

Jim Lange: Well, what about the market timers who, and perhaps with some justification, say, “Hey, let’s just look at classic price/earnings ratios,” and it’s not like we’re historically very high, but we’re a little bit higher than average. Is there any wisdom in saying, “Well, I want to, let’s say, cut back on my stock portfolio because I fear that the price/earnings ratios are too high, and then, when they’re lower, then I’ll come back again,” or is that the same as classic ill-advised market timing?

8. The Stock Market Is Expensive, but It Has Been for Years

Jonathan Clements: Well, market timing traditionally has been an all-or-nothing thing, right? You go entirely into the stock market and then you press a button and you pull everything out. Now, if somebody wants to take a more graduated approach, say, you know, “OK, the stock market’s expensive. I’m going to reduce my stock exposure from 70 percent of my portfolio to 60 percent,” I mean, I’m not going to banish them from investment paradise for that. It’s not a terrible, terrible sin. I think, for most people, they should decide how much they want in stocks percentage in their portfolio and just stick with it, but if you’re going to play around at the edges a little bit, it’s not terrible. What I really worry about are people who are making those all-or-nothing decisions. In terms of valuations, I mean, you’re absolutely right, Jim, the market is expensive. But I will tell you this: The stock market has been expensive ever since I’ve started writing about the stock market. I’ve been a financial journalist since 1985, and every year since then, people have been complaining that stocks are expensive, and yet, here we are. The past 31 years overall have been a pretty great time to be an investor.

Jim Lange: Well, and I know there’s a lot of cash on the corporate balance sheets, and, you know, I just think of the classic, what we call, the stock premium, which is the amount of money on a return that you can expect over and above the return on a fixed investment, or the difference between stock ownership versus lending money to either a government or a corporate entity, and that stock premium is significant, which is why I believe most people, depending on their risk tolerance and depending on their investment horizon, should have a decent amount of money in the market.

Jonathan Clements: I agree with you, and I think one of the things that any of us as individuals should think about is that the prices in the financial markets are established by investors collectively. With every buy and sell we make, we’re essentially voting on what we think the price of stocks and bonds are going to be. We all know that stocks are riskier than bonds. In the short term, stocks can have terrible performance. In the short term, while bonds can go down, they’re not going to go down that much. Stocks are clearly riskier than bonds, and so in order to compensate people for that risk, they should have higher expected returns, and when investors vote with every buy and sell that they make, when they vote in the way they influence the pricing of stocks, stocks are priced reflecting the fact that we know they’re riskier. So, they should be priced to deliver higher returns. It’s not guaranteed, and you sometimes have to stick around for a long time to get that higher return, but if stocks weren’t priced to deliver a higher return, then the world has gone crazy and we’re all mad because we’re paying too much for something that’s riskier than another instrument —bonds — that would give us a better return.

Jim Lange: Well, one of the things that you write about, and I think it makes so much sense, and I incorporate it in my own practice, is to not just do a mechanical 60/40, 30/70 or whatever people feel comfortable with in terms of the asset allocation between stocks and bonds, but actually taking into account your other income. Now, I know that you talk about working capital, that is if you are still working, but let’s even forget that. Let’s say people are retired or about to retire and they have Social Security and a pension. Is it fair to say, “OK, the Social Security and the pension make up, let’s call it, at least a portion of the fixed-income portion of a portfolio, and therefore, somebody with a good pension or a high Social Security or preferably both can afford to have a higher percentage of their portfolio in stocks because they’re safe and short-term money is coming in in the form of income? Is that a fair way to look at this?

9. Pensions and Social Security Benefits Are Similar to Bonds

Jonathan Clements: It’s absolutely the way you should look at it, Jim. In fact, I just wrote a blog on this on my website, www.humbledollar.com. The blog is called “A Price on Your Head,” and what I did was to set out to show people how to calculate not only the value of their so-called human capital, the stream of paychecks that they will collect between now and when they retire, but also to put a value on any traditional company pensions that they have and on their Social Security benefit, and if you look at those and you go to an annuity-pricing service — because that’s what essentially they are, they are an annuity that’s paying you income — you can go to an annuity-pricing service and calculate how much your Social Security is really worth and how much your traditional company pension is worth, and they are worth hundreds and hundreds of thousands of dollars, and that is essentially hundreds and hundreds of thousands of dollars of your money that is in something equivalent to bonds. So even if you have what looks like a relatively aggressive portfolio with, say, 70 percent of your money in stocks, once you figure in your traditional company pension and once you figure in your Social Security, you think about those as bonds, it might turn out that, overall, looking at your entire finances, less than half of your money is in stocks.

Jim Lange: Well, just as a simple example, let’s say that the combination of Social Security with you and your spouse, or maybe even a pension, is $50,000, and I’m not sure what you’re using for a return on bonds or fixed income, but let’s just keep it simple and call it about 2 percent. If you had $2.5 million in bonds earning 2 percent, that would throw off $50,000. So, there is an argument that if you have less than $2.5 million and you had Social Security and a pension, that perhaps if you had all your money in stocks, that you would actually still have a reasonable allocation between stocks and bonds. Now, that’s probably a little bit too aggressive for most investors, but the idea is is that you can take into consideration, and should, your fixed income and then also your working capital.

And Jonathan is the author of How to Think About Money, which is just such a superb book. It really does help clarify not, say, meat-and-potato issues like Roth IRA conversions or Social Security, but really a philosophy of how you can enjoy literally a better life, and how you can be smart about money so you can actually be happier.

So, Jonathan, we were talking about kind of integrating the idea of pension, Social Security, working capital, into the big picture, and in your step Number Four, “Think Really, Really Big,” you say that we divvy our financial life into a series of buckets, but we often sometimes don’t realize that each bucket is part of an integrated whole. Can you kind of explain your idea of buckets and how the buckets relate to each other?

Jonathan Clements: So, when we think about our financial lives, we do think of that as buckets or as manila folders with one thing separate from the other. So our insurance is separate from our estate plan, which is separate from our portfolio, which is separate from our car and our auto loan, which is separate from our house and our mortgage. But all of these things influence one another should affect the decisions that we make. And let me just give you two examples, Jim. First, we talked about thinking about Social Security and your official company pension as being like huge bonds that you own and that should influence the mix of stocks and bonds that you hold within your portfolio, and that is absolutely correct. But in addition to owning these bond lookalikes, the Social Security and these traditional company pensions, we also own what I call negative bonds, and by that, I mean the debts that we have. So, let’s say that you have $200,000 in bonds where you’re paying interest to somebody else, but you also owe $200,000 on a mortgage, which means you’re paying interest to somebody else. You net it out, you’re owed $200,000 because you own bonds, but you owe $200,000 to somebody else because you have a mortgage of that size. Effectively, your net position in bonds is zero, and maybe your financial life is far riskier than you imagined.

10. As Wealth Grows, Insurance and Others Costs Can Be Trimmed

The second example: Let’s say that you’ve been successful with your finances and you managed to hit that target that’s seldom talked about. You got a seven-figure portfolio. That should start to influence what you do with your insurance policies. It may be that, now that you’ve got that seven-figure portfolio, you need less disability insurance. Maybe you don’t need disability insurance at all. Maybe you don’t need life insurance anymore because your family would be fine if you died tomorrow. But maybe because you’ve now accumulated significant wealth, you’re more likely to be a target of lawsuits, so maybe you should, even if you drop your disability insurance and even if you drop your life insurance, maybe you need to think about getting umbrella liability insurance so that you have some protection in case you’re sued.

Jim Lange: Well, I actually couldn’t agree more, and I’ll tell you what often happens in my practice, is that when people come in, we have a pretty extensive questionnaire, so I find out a lot about people, and I find that where people are is the result, not of what you’re thinking where you’re trying to integrate an entire picture, but it’s more where they are is the result of a bunch of individual decisions, each one that seemed to make sense at the time. You know, maybe they talked to their 401(k) administrator at work and they decided on an asset allocation for their 401(k). Maybe they saw their CPA and he said to do a Roth IRA, so they did a Roth IRA. Maybe they had kids and they figured they needed a will, and they went to the local attorney and the local attorney did a will that might not have been reviewed for 20 years. Maybe they thought, “Oh, gee, maybe I should get some life insurance,” so they got a life insurance agent to sell them some life insurance. And where they are, and even very smart people, it’s not the result of what I would call one well-thought out masterplan, but it’s the result of many individual decisions, each of which seemed to make sense at the time, and what we do, and it kind of reflects the way I think of things in life, and frankly, the way I think in general, and I’m a chess player and a bridge player and I like to strategize, is I like to come up with what we call a masterplan that will include not just the investments, leave that aside for a second, but things like a masterplan for Roth IRAs and Roth IRA conversions and Social Security and how much money people can spend and estate planning and what’s the best way to pay for a college education for their children or grandchildren, and I don’t know if that’s what you’re kind of getting at when you’re trying to integrate some of these ideas, but that’s what we like to do in our practice. And then, we try to integrate that along with the investments. So, for example, if you have the pension, you have the Social Security, you can have a higher percentage of money in stocks. The higher buckets, if you will, might be for the Roth IRAs and money that you are not planning on spending for a long time. But I think, and maybe this is what you’re getting at, is that people really need to think about more of an integrated plan.

11. Look at Your Financial Life as an Integrated Whole

Jonathan Clements: Oh, absolutely. When you look at your financial life, you need to look at it as a financial life and how all these different pieces fit together, and one of the things that you may find is that by thinking of it as an integrated whole, not only can you earn better investment returns, but also you can save yourself significant amounts of money. To take a simple example, it wouldn’t matter if you totaled your car tomorrow. You could afford the loss, then maybe you can start to have auto-insurance policies with much higher deductibles, and that’s going to bring down the premium a lot. The same with your homeowner’s policy. You can jack up the deductibles and lower your premiums. As I like to say to people, this is the reason that the rich get richer, because you can take your wealth, and because you’re more financially secure, you can find ways to trim costs. You can consolidate accounts and avoid getting fees that are below some investment minimum. You can consolidate your accounts and qualify for mutual funds that have lower annual expenses. You can take your wealth and start to think about, well, I know I’m going to be in a higher tax bracket down the road when I start to throw down my IRA, maybe I should use some of the money that I have to do a Roth conversion and reduce the size of that IRA now and then get tax-free growth thereafter. There are all kinds of ways as your wealth grows that you can start to save yourself money and improve your after-tax investment results.

Jim Lange: Well, I do want to talk about that in one minute, but I’m going to do a quick note to our listeners on, let’s say, my most recent signature issue, which is the death of the stretch IRA. I’m very, very worried that the current tax changes will actually be a tax increase for IRA and retirement-plan owners that are going to ultimately leave their IRAs to their children, and the proposed law that was voted on by a 26 to 0 vote by the Senate Finance Committee, subject to exceptions, will have the United States tax, for federal income-tax purposes, your entire inherited IRA, again, subject to exceptions, within five years of your death, and I have done two things about this. One, I’ve written a book on how you can reduce the impact of this, and two, we’ve actually done a petition and we are sending it out to all the senators and the people on the Senate Finance Committee, and if you are interested in signing that petition, if you could go to www.stopthesneakytax.com, and the reason I call it a sneaky tax is because it’s the kind of thing that seems relatively innocuous, it’s not going to be a tax on us, it’s going to be a tax after we’re gone, but the new name of the game, in my opinion, is not estate taxes, but it’s income taxes even after you die. So you might want to consider that, and then while you’re there, you can download my book, which is literally my latest and greatest, and you can do that for free.

12. Death of the Stretch IRA Would Be the True Death Tax

Jonathan Clements: Hey Jim, before you roll on, could I just chime in there, because I really avoid politics. I consider myself to be a personal-finance columnist and I avoid stuff that I feel is overly political because it’s not my area of expertise and it’s not why people read my stuff. But I will make a political point here. We have been, for the want of a better term, brainwashed to believe that the federal estate tax is the big problem. We’ve been brainwashed into calling it the death tax. You know what? This death tax only affects 1 out of 530 deaths. With the estate-tax exemption for the federal level at $5.5 million, or $11 million for a couple, federal estate taxes are a problem that you should feel fortunate to have. It affects so few people and certainly not ordinary Americans. Instead, the real death tax is the income taxes that still have to be owed on IRAs after you’re dead. That is the death tax that affects the typical American, and if we get the end of the stretch IRA, what it’s going to do is it’s going to make that death tax even more punishing because everyday Americans, their family’s going to have to empty their IRAs much more quickly and going to get socked with that big tax bill very soon after their death.

Jim Lange: Well, I could not agree with you more, and it tends to be especially important for the type of clients that I tend to attract, which tend to be IRA or retirement plan heavy, that is, they have as much money or more in their IRA and retirement plan as they do outside, and again, at the risk of being self-serving, but also for political purposes, if you are interested in stating your objection to it, we already have, I think, over 120 signatures, so I think it’s just about to take off and we’re going to actually release a press release tomorrow about it, and we’re asking some of our friends who have blogs to write about it, www.stopthesneakytax.com.

So, unfortunately, we only have about two minutes left, so I don’t think we have time to cover point Number Five, so Jonathan, I’m going to just throw it out to you, what have we not covered that you’d like to cover in the next two minutes?

Jonathan Clements: One of the things that I say to people all the time is that the goal is not to be the richest family in town. The goal is not to beat the market. The goal is not to prove what a clever investor you are. Instead, when managing money, the goal is to have enough to lead the life that we want, and what that means is that when you manage your money, you should pursue strategies that have a high likelihood of success. And so what does that mean? It’s really very simple. You want to keep your investment costs low. You want to manage your annual tax bill. You want to diversify as broadly as possible. You want to avoid taking on excessive amounts of debt. And you want to think about the risks in your life and make sure that you have insurance against them. What you want to do is pursue strategies that have a high likelihood of success so that you can make this journey safely from here through to retirement. It’s very simple.

Jim Lange: And again, I want to thank Jonathan for his wonderful insights, and I’m going to encourage everybody to go to their local bookstore or Amazon or Barnes & Noble, and order the book How to Think About Money, by Jonathan Clements.

Dan Weinberg: And listeners, if you’d like to meet with Jim Lange in person, give the Lange Financial Group a call at (412) 521-2732 to see if you qualify for the Lange Second Opinion service. That number again is (412) 521-2732. You can also always connect with Jim’s office through www.paytaxeslater.com, the Lange Financial Group’s website. While you’re there, you can also get a free digital copy of Jim’s latest book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, including how to protect your nest egg from the pending death of the stretch IRA legislation. That’s it for this week’s edition of The Lange Money Hour. I’m Dan Weinberg. For Jim Lange, thanks so much for listening, and we’ll see you next time for another edition of the show The Lange Money Hour, Where Smart Money Talks.

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