Paul Winkler: Welcome. This is “The Investor Coaching Show,” and I am Paul Winkler. We talk money, investing, and financial planning, and do it from the perspective that we are not salespeople. It’s not a sales thing, where we’re getting into selling products.
We sell ourselves, I should say. Everybody does that. Every single one of you out there is a salesperson. Let’s just face it.
Evan Barnard: Yeah.
PW: Evan Barnard’s here with me.
EB: I’m cheap but not easy.
PW: Yeah. So, whatever.
Financial Planning
PW: Evan and I were talking a little bit about how, quite often when people are advertising about investing in financial planning services, usually financial planning is what you hear an awful lot about. I hear people talk about making sure that you’re planning.
And this is something that’s a really big deal to us as well: engaging in financial planning. I always tell people, “It’s the biggest vacation you’ll ever take.”
Your retirement, it’s going to be the biggest vacation you’re ever going to take, and you’re going to sit down and you’re going to do lots of planning for that. And the same thing with retirement, you really ought to do a lot of planning with that.
What do you plan? Social security is something that comes up quite often. There are lots of people that do workshops on that particular topic.
And I just say, “Yeah, absolutely. Make sure that you get the social security thing right.”
But, we have a workshop online, and instead of having dinners where you have steak dinners … But anyway. Yeah, the social security question — people just need to understand a little bit more about that.
So I’ve got a whole piece on that. We’re going to talk about some of the myths regarding social security in today’s show, and a couple of of new pieces of information I thought were interesting.
Some of the data has changed regarding the trust fund, so I thought we’d talk a little bit about that, some of the estimates on that. Some of the calculations have been changing just a little bit.
EB: Oh really?
PW: Not huge. Not huge.
EB: It’s now 73% solvent.
PW: No, no, no, no. It’s actually better. It’s actually better. It’s actually improved.
It hasn’t gone down, it’s actually improved some. There are some other mitigating factors that could make it even improve more. We will talk a little bit about that later.
EB: Cool.
PW: But there’s that. You can go to the website, paulwinkler.com, and we have a whole workshop on exactly how the social security system works and just little pointers that you can go find there.
And Medicare, making sure you get the right Medicare supplement. I did a whole thing last week on Medicare and how these insurance companies, a lot of them under the Advantage Plans were denying claims.
It’s been making the companies a lot more profitable but not necessarily so great for the people that are on the system. And we had talked an awful lot about using the regular Medicare supplements and being on regular Medicare, but the whole thing was about Medicare and the insurance companies versus the government.
The government is spending a lot more money than the insurance companies are because of the fact that you don’t have the claim denials.
That has, of course, blown up a lot in the media recently.
EB: Yeah, for sure.
PW: With some really tragic results. Anyway. I talked about that a lot last week, but that is another planning thing that I think is super, super important.
Changing Tax Laws
PW: Another planning thing we hear an awful lot about is taxes. I’ve been seeing, I don’t know, it just seems like a rash so far this year of financial people trying to tell people to convert IRAs to Roth IRAs and commercials telling people, “Hey, the tax laws are going to change after 2025.”
The reality of it is the election has really put a twist in that. Don’t you think, Evan?
EB: Yeah, it’s, absolutely made it less certain that the rates are going to absolutely sunset as opposed to being extended.
PW: I think it’s highly unlikely, personally.
EB: I would agree with that.
PW: There was actually an article in the Wall Street Journal about how people may actually be really, really sorry that they did the conversions. Literally, Market Watch from the Wall Street Journal says, “Roth conversions may suddenly seem like a bad idea.”
But people are still considering them, and why? I think a lot of it’s driven by the financial community.
We had somebody that actually came to us and had that $900,000 IRA.
EB: Yeah, pretty significant.
PW: And a big firm right here in the area told them to convert it all right away and told them the taxes would only be 15% on it, which was just absolutely wrong. I think it was you, Evan, that made the point, that said, “I think I know what happened. I think I know what they’re doing. They’re looking at the client’s average tax rate.”
EB: Perhaps, but even then that size of an account —
PW: Will change the average.
EB: Yeah, the effective rate wouldn’t be that low.
PW: Yeah, it changes the average. If you don’t know what we’re talking about folks, it’s this: When you’re married filing jointly, you have about 30,000 of income that’s taxed at zero. Then the next approximately a little over 20,000 is taxed at 10 and the next 60,000 is taxed at 12.
EB: Yeah.
PW: And then you got 22 and you got 24. Let’s say that you had some income up in the 22% bracket, which brought your average up to 15%. Now, when you’re pulling $900,000 andadding it on top of all your other income, your average goes way, way higher than that.
The Government and Delayed Gratification
PW: Then all of a sudden, now you’ve gone and paid a significant sum to the government and the government’s loving you for it. They’re just going, “So yeah, this is awesome.”
Because you could say, “Well, why doesn’t the government stop this kind of activity?” Well, they benefit, quite frankly.
It used to be you couldn’t do any conversions over $100,000 of income, right?
EB: Yeah. I think the government is even coming to view it differently. Just like we talk about in the industry sometimes, particularly on ads, income you can never outlive and this longevity bias to strategies.
I think the government, even though they like the short-term infusion of cash — I think they like the fact that they can use, talking about social security later on, some of the improvements that have been made — they may want this long stream of income tax down the road without some new particular source. It’s really going to be interesting to see how this plays out.
PW: I am more cynical. I’m thinking that they don’t like to delay gratification. I don’t know.
It’s just like the person that wants it now because the elected people don’t know whether they’re going to be in the office 20 years from now. Maybe they care more than I would give them credit for.
EB: Let’s go to the ridiculous, illustrating the sublime, or however the phrase goes, of everyone converts all of their qualified accounts to Roth.
PW: Right.
EB: Okay, great. Then either they change the law —
PW: Right, go to a consumption tax.
EB: And they tax Roth IRA distributions or consumption or national sales tax.
PW: That’s right, yeah.
EB: But all of those people have pitchforks and so they don’t really want to just create some new source.
PW: Well, would they think to even use them? Because you go to a consumption tax and it’s hidden. It’s like the gas tax, nobody bucks up against it because it’s a hidden tax.
EB: Yep, that’s true.
PW: That’s always been my point regarding that. I don’t know.
Problems With Roth Conversions
PW: But anyway, so the Roth conversion, why? Let me just finish this and then go to the point that I was going to make regarding this. Because I thought this article on Roth conversions suddenly becoming a bad idea was interesting simply because they made the points that we’ve been making.
Number one, the tax laws very well might be going back to and staying where they are right now. Because you’ve got the presidency, you’ve got the Senate, you got the House, and we know that Trump’s penchant is to have lower income tax rates, and that is something that he has campaigned on. He’s usually fairly good at coming through with what he says he wants to do.
That’s one of the things that he’s been known for. They made the point in the article, it says, “If you’re likely to take out more than you’re required from your qualified retirement accounts each year, you probably won’t be generally mad about your RMDs.”
That’s a lot of people, quite frankly. That’s a lot of people that take out more than what their required minimum distributions are in retirement simply because a lot of people just haven’t saved enough.
EB: Right.
PW: So there are a lot of people that were going to be in that. So number one, they’re saying right there, the majority of people aren’t going to be upset about the RMDs that are required because they’re taking out more.
EB: They’re exceeding them. Yeah.
PW: Yeah.
The reason they’re saying that is because you don’t have required distributions with Roth IRAs, and that’s the point they’re making right here.
You don’t have that, so it’s a moot point is basically what they’re saying in the article here.
Then they said this. They said, “It’s optimal to do conversions if you’re in a 20% tax bracket or lower.” I don’t know about you, Evan, but I’m typically trying to stay below 22.
With most Roth conversions, if I’m doing them, simply because you get up in a 24 and you’re going, “Are they going to change tax laws in the future? Are they going to do something to get revenue in the future?” It just depends on the person, but a lot of times we don’t like to go too high on the conversions.
EB: Yeah. Just conceptually on the Roth conversions, you were talking about how we see a lot of it advertised. I spend some time on social media — that’s where I get some of that news. Every 15th post is a Roth conversion ad for some strategy. It’s like the pharmaceutical ads.
PW: It’s the new sales piece.
EB: It is. “But if you hear X, Y, Z drug, if you have symptoms of being tired and you’re sore, be sure to talk to your doctor to ask them about this.” Right?
PW: Everybody on the planet is tired and sore. Right?
EB: Right. Yeah, right. No, it’s suggestion, the power of suggestions.
PW: “Here, get this Roth conversion,” and so, people say, “Hey, I want one of these.” We look 30 years down the road and say, “Okay, your effective tax rate today is …”
Let’s just even say the effective rate is 15 today and they’re going to retire in six years. Well, all of a sudden their effective rate is zero, oftentimes.
EB: Certainly. Sure.
PW: Until they maybe fire up social security or pension or something.
EB: Sure.
Planning and Strategy
EB: Even at the 22% bracket, why would you pay that tax at your highest rate, when if we wait six years … It still may be a decent strategy, but to me, that’s the difference between a strategy and a plan.
A Roth conversion is a technique or a strategy.
When to use it, does it make sense, how do I implement it and have it actually benefit me? To me, that’s what separates planning from just, “Hey, I could do one of these, but it may or may not make sense.”
PW: Well, and Evan, it reminds me an awful lot of back in the mid-80s, back in that point in time — a lot of you probably don’t remember this, nor were you even affected by it — but as planners, I was certainly watching a lot of the advertising, a lot of the people that were advertising to us, because I was a regular financial advisor back then working for an investment firm, and we would go to these conventions, and they would say, “Hey, you need to check out this strategy.” Back then it was like three-for-one write-offs and limited partnerships and oil and gas.
EB: Oil and gas. Yeah.
PW: Exactly. You remember that. They were all gimmicks to get you in the door because the thinking was If we talk taxes, if we talk sophisticated planning strategies, people are oohed and awed and you sell them the sizzle. It’s the sizzle versus the steak that they would always talk about, and the idea was anything to show that you look like you’re smarter than the average person out there.
EB: Yes.
PW: And many times the strategies just backfired. I remember one client of mine, I did a commercial on this, and I told him about it, and he said, “You talk about that all day long, Paul.”
But the commercial was when he came into my office, and he said, “You’re my last hope.” That’s what he said.
EB: Yeah. Yeah.
PW: Remember that? Can you remember I had that?
And that was an absolutely true story. The guy had actually had, what was, it was a 412(i) plan or 419(e).
EB: Yeah.
PW: It was one of those types of plans.
EB: Yeah, insurance piece.
PW: Exactly. It was this thing that sounded great. From a tax standpoint it sounded brilliant and it absolutely just blew up and he lost, like, $500,000 on the thing.
EB: Wow.
PW: It was horrendous, really, really bad. He literally walked in and said, “You’re my last hope,” and that is because I’ve never thought that the tax tales should wag the dog.
When Roth Conversions Are More Effective
PW: Now, the other problem with Roth conversions, let me hit the rest of this right here, is with Roth conversions, the other thing that you got to be very, very conscious of is that Roth conversions tend to be much more effective when stock markets happen to be down versus when they’re up.
EB: Yes. Totally agree there.
PW: So you look at that and you go, “Hey, if I’m going to convert when the account’s down, I convert and pay taxes at a lower account level and tax bracket, now I got a double whammy working for me.” As much as we preach real diversification, and people think they’re diversified. I’m just telling you the studies show they are not, people are not — except for our clients.
We’re so focused on it. We’re anal-retentive regarding making sure people are really diversified between all different asset categories.
We might have 5 to 7%, just to give you an idea, of an investment portfolio in the S&P 500. Just to put that in perspective for you. Right now, as we speak, the price compared to earnings of the S&P 500 is as high within 20 cents of what it was on December 31, 1999.
EB: Yeah.
PW: And 8 of 10 companies in the S&P 500 are tech companies. When you talk to people about tech stocks, people remember the tech plunge.
EB: Yeah.
PW: Now, I’m not saying that the stock market’s getting ready to crash, I’m not saying that, but I am just making the point right now: It ain’t cheap.
EB: No.
PW: It’s not an area of the market that is really, really inexpensive, and it’s not something that can’t come back to bite you in a serious way.
EB: Are we over 25? What is it at now?
PW: It’s right in the neighborhood of 25.
EB: Is it? Okay.
PW: Yep. It’s right around that area.
EB: Yeah.
PW: As far as price-to-book value, it’s in the neighborhood of $4.50 cents.
EB: Four or five.
PW: Yeah, it’s in the neighborhood of $4.50, which is normally — just to put that in perspective — about $2.60, $2.40, somewhere in that neighborhood. So it’s one of those things that I look at and go, “Whoa.”
True Diversification
PW: Now, final point, and then we’re heading to break. This was the whole point that I was going to make from the beginning.
EB: Yeah. What started this conversation?
PW: We’re talking about people focusing on financial planning, which consists in many people’s minds of social security planning, Medicare planning, and taxes.
EB: Correct.
PW: Those three things are big things.
EB: Yes.
PW: By far, the one study that I saw showed that the biggest determinant of someone’s success is how the portfolio is put together and whether people are capturing market returns. The studies show that they are not.
If you look back at the 35-something-year data at Dow Bar, they are way the heck below. Matter of fact, the average asset allocation investor has a rate of return that’s around the inflation rate, not that they’re not making money.
EB: Right.
PW: Now, in the recent period of time, this is where it gets challenging, in the recent history in the past couple of years … and most people when you ask them who the best quarterback of all time is, they’re going to say Tom Brady, or you ask them the best of this, or the greatest whatever, they’re going to tell you something that happened just recently because it’s availability heuristic or recency bias.
EB: Recency bias. Yeah.
PW: So what we tend to be focusing on is what just happened. So we say, “What’s going on? How are things going in the stock market?”
The biggest problem that you run into is most people thought, I’m doing great. I’m doing great, I don’t know what the problem is.
Well, that’s exactly what people were saying in the late ’90s that were focused all in larger growth companies and tech companies, in particular, and that is dominating portfolios. This is something I tell people.
I was on Channel 5 this past week, on Wednesday, and I described the style box, how you tell whether your portfolio is diversified or not. And it gets down to looking at what funds you own and what segment of the market they’re in. I’m going to tell you, most of the time when people do this, if they do it themselves, now, they usually have us do it for them.
EB: Yeah.
PW: It is dominated by none other than large growth U.S. companies.
EB: Yep.
PW: Is that what you see all the time, right?
EB: Absolutely.
PW: Therefore, this is what happened in the late ’90s, and it was hard to get people to do anything different because that area of the market had done, past tense, so well. So this is critical to understand.
I don’t want you being that person that comes out here, like people came to us in 2000 and 2003, and they go, “I can’t retire now because I had everything in that area of the market.” I was screaming at the top of my lungs in 2001, because when I started the show, that’s really what I talked an awful lot about.
Don’t ignore this. Make sure that you really have true diversification because it is critical — critical because you don’t want to be that person.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
