ABOUT THE GUESTS

dr. daniel crosby
ABOUT Daniel

Educated at Brigham Young and Emory Universities, Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby is the author of The Behavioral Investor and The Laws of Wealth: Psychology and the Secret to Investing Success. He co-authored a New York Times Best-Selling book titled, Personal [...]

ABOUT HOSTS

Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
May 1, 2017

Are you a fearful moron when it comes to investing? Can you invest in LGBT rights and gender equality? Is today’s market forgetful? Behavioral finance expert Dr. Daniel Crosby, author of “The Laws of Wealth,” discusses these hot topics. Joe and Big Al consider the biggest tax cut ever, 7 common investor mistakes, Ric Edelman’s Social Security solution, and your 401(k), Roth IRA and Social Security questions.

 

Show Notes

  • Dr. Daniel Crosby, author of “The Laws of Wealth” joins the show
  • The Trump administration’s “Biggest Tax Cut Ever” (:51)
  • Dr. Daniel Crosby: Positive Emotional Investing (11:45)
  • Dr. Daniel Crosby: You Can Be Right And Still Be A Moron (20:57)
  • Big Al’s List: 7 Common Investor Mistakes (Investopedia) (32:04)
  • Ric Edleman’s Social Security Solution (42:09)
  • Audience Questions (50:51)
    • “I am 55 years old. I have $502,000 in my 401(k). I have nothing in any other retirement program except Social Security. Is it valuable or even worth it to stop contributing to my 401(k) and diving into a Roth? Should I take the tax hit on the 401(k) and roll some of it over to a Roth? I’m currently putting the annual max into my 401(k).”
    • If I begin taking Social Security at age 63 and continue to work and earn over the max allowed, does my reduced payment become permanent even after I reach full retirement age?

 

Transcription

 

Intro“You can be right and still be a moron. I think people learn the wrong lesson sometimes. And for me, the most powerful word in investing is ‘probably…’ If you hold all asset classes, ‘probably’ some of them are going to do well.” – Dr. Daniel Crosby

That’s behavioral finance expert Dr. Daniel Crosby, author “The Laws of Wealth,” he’s our guest today on Your Money Your Wealth. Is there forgetfulness in today’s market? Can you invest in LGBT rights and gender equality? Are you a fearful moron when it comes to investing? Dr. Crosby answers these questions and more. Also coming up, Joe and Big Al consider “The Biggest Tax Cut Ever,” 7 Common Investor Mistakes, Ric Edelman’s Social Security solution, and your 401(k), Roth IRA and Social Security questions. Now, two guys who are “probably” not morons at all, Joe Anderson CFP and Big Al Clopine, CPA.

:51 – The Trump administration’s “Biggest Tax Cut Ever”

 

JA: First things first Al, you just read that our President is going to come out with some new tax reform coming up here in the next couple of weeks.

AC: Yeah, he says he’s going to announce his tax package, which will be bigger than any tax cut ever, in quotes. And we’ll have to see. This sort of coincides with the 100-day mark. Remember how much he said that I’m going do a lot in 100 days? And so then, I actually saw an article that said he thinks the 100-day mark idea is a dumb concept. But that was part of his campaign promises, but anyway, I’m not here to be political…

JA: A lot of the tax cut reform had to do with revamping the health care system and that didn’t happen.

AC: At least so far.

JA: Yeah. There’s still there’s still time.

AC: Yeah. And so, by the way, just in case you haven’t really been paying attention, that was one of Trump’s big campaign promises was to reduce tax rates, not only for individuals but corporations. When you look at the experts, they kind of say, well, wait a minute, if we do all these tax cuts, we’re going to go more in debt, bigger deficits, larger national debt. And so we’ll have to see.

JA: But on the other side, it’s going to create more revenue, and if there’s more revenue, even with lower rates you’re going to be taxed more revenue.

AC: That’s right, and that’s what Treasury Steve Mnuchin mentioned. He says that some of the lowering of the tax rates is going to be offset by less deductions because Trump wants to do a cap on itemized deductions, and simpler taxes. I don’t know how simpler taxes helps pay for the taxes. But I guess the bigger function though, is what what’s called dynamic scoring. So, Joe, this is when you kind of build in that there’s going to be more growth, because there are lower taxes, and therefore that will help pay for it. Just what you said. So maybe that happens, maybe it doesn’t. It’s a hard thing to predict with certainty. And I know that was part of Reagan’s plans in the 80s, and it didn’t quite work out like he had hoped. But but that’s the idea.

JA: Well sure. I mean, let’s say that an individual that’s in the 39.6% tax rate, plus state of California where you and I live, so that’s another, call it 10. It could be higher. So you’re looking at a 50% rate. So if that goes down, that means there’s excess cash flow for that individual, and then hopefully that individual will purchase more goods and services, and then if they buy more goods and services, then that increases the bottom line for those businesses because there are more sales.

AC: That’s absolutely right. Or businesses will have more cash flow so they can invest more in the future, buy more equipment, hire more people. And that’s the theory behind this, and obviously, that’s true – just, how much it’s true? We’re not economists, and I’m not even going to predict that, but there’s no question lower taxes is going to help the economy.

JA: Well, remember a few years ago, right after the Great Recession, we had a little bit of relief in our payroll tax. So that was the anticipation of more spending. But people saved it.

AC: They did. Because they hadn’t saved in a while.

JA: Right, and they got there and they got their butts kicked in the recession.

AC: So they’re going, you know what, we’re going to do this a little differently this time, and so I kind of understand that thinking. But anyway, we’ll have to see. So the danger, of course, to state the obvious, is if the economy doesn’t grow enough, or extra tax revenue grows enough, to cover that tax cuts, then we’re just going to add to our national debt, which is already approaching 20 trillion dollars.

JA: You got to be careful too. I don’t care what side of the aisle you’re sitting in. There’s always been political rhetoric when it comes to tax. How long have you been a CPA?

AC: Well, I think early, early 80s is when I became a CPA.

JA: Wow, jeez. I can’t believe you’re still upright! (laughs)

AC: At least you were born. (laughs)

JA: So for all those years, there’s been talk about significantly changing the tax code.

AC: Oh sure. And we did have a pretty big change during… I think I became officially a CPA in 1984, and it was 1986 that the Tax Reform Act of Ronald Reagan, that came into play, and that changed a lot of things. In fact, that’s arguably the last major tax reform we’ve had.

JA: So there’s got to be give and take with anything. And so if I’m saying I’m going to lower tax rates, it’d be great if they didn’t change anything else. We still had our deductions, such as our charitable deduction, mortgage deduction, in the state of California. we can write off state taxes, and we’re in a very high state tax state. So those help with the overall taxation of our money. But then there are other things that could happen. I read this article, there’s a couple of different articles that I read in regards to retirement plans since a lot of our topics on the show is about retirement. And so here’s the headline, it was like, “The GOP contemplating shifting to all Roth 401(k) system” and I don’t think this author really understood what they were talking about. So this individual is saying we’re going to get rid of the tax deduction in regards to putting money into your 401(k) plan. So if you had a Roth 401(k), for those of you that have listened to the show, you know we’re big fans of Roths. And it’s an after-tax contribution. So you’ve already paid tax on those dollars, then you put it into a retirement savings plan and all of that money grows 100% tax-free. So you forego the deduction today, and then all of the growth and earnings of whatever investment that you choose, you don’t pay taxes on it when you take the distributions. The traditional plans today is that you get that tax deduction going in. It grows tax deferred, but then when you pull the money out, then that’s when you owe ordinary income tax on those dollars, plus state tax. So the article is like, well, all Roth accounts. And I’m like, well that sounds interesting. Because if you actually do the math, long term, all of that money compounding tax-free is really good for us, the individual, not so great for the government, 20 years from now, 30 years from now. It’s really good for them today.

AC: Sure, because they would get more tax revenue today. But talk about a classic kicking the can down the road. That would be that.

JA: Yeah exactly. So there’s uproar. It’s like wait a minute, that would that would devastate people’s saving into retirement plans. And I kept reading this article like what is this guy talking about? I think that would encourage more… I know I would not change my savings if it’s all Roth. And so just to give you an idea… of course, I don’t have these numbers in front of me, but it’s billions of dollars that would save. Here are the latest figures from the Joint Committee of Taxation showed that tax-exempt status of defined contribution plans would result in $584 billion in foregone tax revenue. So the government is saying because of these pretax contributions that people are making into retirement accounts, it costs the government about $584 billion. That’s between 2016 and 2020. And the exemption of traditional IRA contributions cost about $85.8 billion, call it $86 billion. So combine the two, you’re about $650 billion. So they’re saying no more tax deduction, but it’s not going to be all Roth.

AC: It couldn’t be.

JA: Here’s what will probably happen if this goes through, it’s going to be an after-tax contribution that grows tax deferred. But then you’re going to have to pay taxes on the growth of that overall account. Because the other article that I read, that I don’t have, that I thought I printed out since our crack research team and we’re really prepared for the show every week…

AC: Yes we are. (laughs)

JA: ….Is that then all contributions would have basis. And you and I talked about that a few weeks ago. So any contribution that you make have basis. So what that means is just, after tax, so you’re not double taxed on the contributions that you make, but then you’re going to be taxed ordinary income on all the growth. And we have those plans right now, so let’s say, with some employers, if you have after-tax contributions, or you could put up to the $18,000 or $24,000 if you’re over 50. And then some plans allow even more additional contributions, up to about $52,000, but those are after-tax contributions. But here’s the funny thing with that as well. With those after-tax contributions that you make, the law states today that you can take those after tax contributions, and guess what. You can convert those into a Roth IRA and not pay any tax. So where I’m going with all of this is, then what the heck is going to happen to the Roth? Why would anyone go after tax, to grow tax deferred, and pay tax on it, versus going after tax and then have it grow 100% tax free? No one would do that after. Everyone would go Roth.

AC: Well I think your first statement is right, the person that wrote that article really didn’t understand how a Roth works.

JA: Well I think most of these people that write articles don’t understand. I don’t know. He’s a journalist. Not necessarily a CPA or someone that is living and breathing this thing every day. So just stay tuned, you know, stay tuned. We will, I guess next week or in the next couple of weeks, we might get a little bit better insight on what the current administration is thinking about.

AC: Supposedly this coming week Joe. So we’ll see.

JA: Yeah. I’m not holding my breath, but we’ll get a little hint.

AC: The most massive tax cut ever.

JA: I’m all for it. I mean you and I have talked about mitigating, eliminating tax for years.

AC: We have. And we’re all for that.

JA: But let’s just kind of put things in perspective there too.

AC: Yeah, we’ve got to be realistic, because we still need the government to fund militaries, and infrastructure, and Social Security and things like that.

 

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11:45 – Dr. Daniel Crosby: Positive Emotional Investing

 

JA: Alan, it’s that time of the show.

AC: Yes we’re we have a guest who is way more intelligent than we are. (laughs)

JA: Way, way more intelligent than us.

AC: Definitely easy to say this time.

JA: Yes. We have Dr. Daniel Crosby on the line, he’s been on the show once before. I was talking about this gentleman a few weeks ago on our show, and I was like you know what, I’m going to see if I can bribe him to come back on.

AC: And how did you get him back on?

JA: I have no idea. Let’s ask him. Daniel welcome to the show, my friend.

DC: Yes. Thank you, and thank you for those gold bars. (laughs)

JA: Yes. You got it. (laughs)

AC: That’s what I thought it was. (laughs)

JA: So they shipped on time, perfectly.

DC: They got here yesterday or I wouldn’t have picked up the phone. (laughs)

AC: Just just in time, look at that. (laughs)

JA: Daniel, how’s your book doing? “The Laws of Wealth?” We talked about, I don’t know, maybe six, eight months ago when the book was just coming out. How’s everything going?

DC: OK, it was named the best investment book of 2016 by The Axiom Business Book Awards, and it’s now in the process of being translated into Chinese and Vietnamese. So nothing but good news since we last spoke.

JA: Wow. So you might make about eight bucks then?

DC: Yes I won’t even tell you what my advance was for the Vietnamese edition. How about this. I learned that today. We’re going to go out and get some Vietnamese food tonight, and it will almost cover a dinner for my family. (laughs)

AC: Very good. That’s very exciting.

JA: Well I want to talk about a few different things, but right now, the markets are doing well, and I think when it comes to behavioral finance, I’m a huge fan of the study, and I think there could be a little bit of overconfidence. Would you say that there’s some egos kind of out there thinking that this market is going to continue to rise and that they might be taking on a little bit more risk than than they should? Or what are your thoughts?

DC: Well, what’s so interesting about this market is that, by almost any sort of valuation based metric, it’s extremely high. And yet there’s not been what I would characterize as sort of the puffed out chest, and the ego and the overconfidence, that’s been sort of the hallmark of other times when the markets become this elevated. So as a student of the markets, it’s kind of interesting for me. As an investor, it’s kind of terrifying for me. But it’s it’s an interesting thing to see because I don’t think that people are especially optimistic, and yet here we are with valuations where they are. So it’s sort of an interesting thing. I almost see it more as complacency than overconfidence. Sort of forgetfulness almost.

JA: Yeah exactly that’s a great point. That’s why he’s a doctor, Al.

AC: And we’re not. (laughs)

JA: I listened to a podcast and you’re on it and forgive me, I forget which one because I think you’re on every single one. You’re a busy guy, man, I’m tellin’ ya. But I was so intrigued. Al and I were talking about individuals that have individual stocks, and we always talk about, there’s no place for emotion in investing. That you got to put your emotions to the side because that only gets you in trouble when markets go up. We get overconfident, then we buy, then when markets go down, we get fearful. But when someone is absolutely emotionally attached to a certain individual stock, it’s very difficult to have any type of intelligent conversation with that individual about diversification. Would you agree with that?

DC: Yeah absolutely, and I don’t know if this is your next question, but let me try and jump and anticipate it. You know, one of the things that I try to do, is almost bring up sort of a theoretical. Say hey, you know, what would you tell your friend to do, you know, if someone came to you and had 50% of their wealth either in a company that has been good to them as an employer, or you know something that Aunt Betsy gave you and that you can’t bear to part with, what would you tell them to do? And sort of get them to speak to the other side of that equation. Because people, in love and in money, I feel like people have lots of great advice until it comes to their own lives. So you have great dating advice for your friends but you continue to make poor decisions there perhaps, and the same thing can be said of money for sure.

JA: Right, that’s why I’m still single. Thanks for bringing that up.

DC: That was a heat seeking missile meant for you. Yes. You got me. (laughs)

AC: You got a direct target there.

JA: But carrying on with this emotional tie. Let’s say that you have an investment that was diversified, that you have more emotion towards. Let’s say that this exchange-traded fund or mutual fund where all companies that were going to cure homelessness, or, you know, cure hunger, you would be less likely to sell that, because by and large, if you have a globally diversified portfolio, and you keep their portfolio intact by rebalancing, tax managing it, you’re probably going to do a little bit better than someone that’s trying to time the markets, by getting in and out of the overall markets. But I find it fascinating that man, if there was such an investment that people were truly emotionally tied to, to keep them in the market, I think that’s something pretty interesting to talk about. Because if I have a Russell 2000 Index Fund, I don’t know who Russell is. I’m going to sell Russell if Russell’s treating me bad. And if Russell is treating me good, well then I might buy more of him. So there was a concept that maybe I totally misunderstood what you were talking about, but having more of an emotional tie towards these specific investments.

DC: Yeah that was from an article I wrote for the Green Money Journal and I absolutely agree. I was speaking there about socially responsible or values-based investing, where like you mentioned, the investments are sound investments. They’re well diversified. They’re as they should be, but they also have sort of a social or values-based component to them. So we have everything from sort of impacting developing countries, to funds that overweight companies that give equal rights to LGBT folks, to overweight companies that have equal representation of men and women on board. So all kinds of, any sort of flavor of value you have, you could find an investment alternative for it. And I do believe that there’s a strong behavioral benefit to be had by making things a little bit more personal because frankly, most people look at the stock market a little bit like a video game, and not like owning shares is actually partial ownership in a company. We just think about it as this thing that sort of pings up and down, and we can get a little bit removed from that equation. So I think taking this values-based approach where we think a little bit more deeply about, hey, these are real companies that are out there in the world doing good and doing bad. And as we start to be a little bit more thoughtful about that, I think we get more connected to that process, and make better decisions, just as you suggested.

JA: You know, I think we just need to do a better job of maybe helping educate individuals of actually what they are owning depending on what the portfolio looks like. Because for instance, let’s say I have $2 million in Apple. And I bought that Apple stock for $100,000. So I have a very strong opinion about Apple, and I’m emotionally attached to it. I don’t care what you’re going to say, how many statistics you’re going to show me, or what type of angles that you’re going to take at me. I might listen to you, nod, shake my head, but I’m going to be like, there is no way in hell I’m going to sell this stock. If people have that same type of conviction towards a globally diversified portfolio, I think a lot more people would have a lot more money.

DC: Yeah. And I agree with you, and I think that it goes back to, sort of making it emotional in a good way. I believe that all these things that we’re prone to, I think you can kind of turn them on their head. I don’t know if we talked about this last time, but I cited a study in the book where people who were shown a picture of their children before they made an investment decision saved over 200% as much money as a control group. So again, you’re bringing emotion in, but you’re sort of bringing it in in the opposite way. Instead of a greedy or fearful emotion, you’re saying OK, you’re going to make a decision here in a moment, but before you do that, I want you to think about what matters most to you and act accordingly. So, I think all of these things that we talk about have a flip side. And I think great planners like you guys are learning to use those things to the benefit of their client.

Do you play the market like a video game, or are your investments in line with your values? Do you have a plan to achieve your retirement goals? Visit YourMoneyYourWealth.com to sign up for your free financial assessment. There are so many things to think about – income; risk; asset allocation; inflation; taxes; Social Security; healthcare; Medicare; long-term care; the list goes on and on. Talk to a professional. Sign up for a free two-meeting assessment with a Certified Financial Planner™ at YourMoneyYourWealth.com

 

20:57 – Dr. Daniel Crosby: You Can Be Right And Still Be A Moron

 

JA: We’re talking to Dr. Daniel Crosby. You uncover what, over a hundred different behavioral issues that we have with money. Let’s talk a little bit more, let’s bring it back to your book because I love your book. I’m a huge fan of your book. I’m a huge fan of your work. What are some of the best studies when you were researching, that you found the most humorous, or the thing that could bring the most value to our listeners?

DC: Just off the top of my head, I’m writing a new book because I have a just a sickness. I mean there’s no other way to describe it. I just love doing hard things that pay me nothing. So I’m writing a new book, and it was talking about research that had been done with rats, where they basically, if you think back to your psych 100 class about Pavlov, they trained these rats to be scared of a stimulus, like scared of a chime or a bell and then they extinguished that fear. They ceased to pair it with the stimulus, so the rats unlearn that fear. And then what they did is they severed the corpus callosum, the thing that connects the two hemispheres of the brain, and did the chime again, and the rats were just as scared as the very first time. So basically what we’re learning about the human brain is that fear is basically unable to be done away with. Fear exists in your head, in a physical place that can basically never be eradicated. And so this is why in chapter two of “The Laws Of Wealth,” I talk about, you cannot do this alone. Everybody thinks that they’re going to do the right thing when that when the time comes. But these fears are so deep-seated that it’s just very tough without someone there to hold your hand, someone to keep you from making that wrong choice, in the form of an advisor. And so I thought that was just fascinating, about how fear is sort of intransigent. And how it just lives in our bodies in a very physical way. And then I went on to tie that to some of people’s early investing experiences. I think that millennials and other people who started investing during the Great Recession, that’s going to stick with them forever. You don’t shake that. And the evidence is all showing that young people are not saving enough, not putting enough away, and are taking less risk than the older generations. And so I think that fear is very much, even physically, in the minds of young people and hoping that we can turn things around a little bit.

JA: Would you think that’s anchoring then? If they look at, this was my experience, within the overall markets, was in 2008, where I saw my parents lose their home, or lost half their retirement savings. And so they’re just kind of anchoring back on that, and they’re not taking the right steps for their own financial future.

DC: Exactly. Yeah. So there’s a form of anchoring called “the irrational primacy effect” where we remember things that happened early in the sequence better than things that happened in the middle. So your early investing experiences, you anchor to them, absolutely, and they become very, very formative about the way that you think about things. You know, my dad is a financial advisor, he’s been at it about 35 years. And so he’s a big fan of bonds because they’ve done nothing but go up over his lifetime. He’s very anchored to this opinion of bonds, that is, of course, like all of us, very much a product of his early experiences. And so I think that that folks need to be market historians. They need to read excellent books like mine, to get a sense of history, and a sense of perspective, and not just be so anchored to those early experiences.

JA: I think even with everyday experiences we have that. Or you buy a stock at $50 a share and then that stock drops to 25 or even five. People will not sell their stock until it gets back to that 50 mark. Or if it goes up to 100, they’re like ooh, now it’s maybe it’s too high. They anchor it at the price that they purchased it, which makes very little sense.

DC: Yeah. I mean you see that with homes a lot too. If the grandma next door bought her home for $250,000 thirty or 40 years ago, and now it’s worth whatever $800,000, and you bought yours a year ago for $850,000 and now it’s worth $800,000. If you two have identical homes and get identical offers, one of you is going to sell and one of you is not because you’ve anchored to that original price, irrespective of what it’s worth today. It’s a big problem.

AC: And I think sometimes it’s probably one of the worst things that can happen to you right out the gate, is you make a lucky investment and then you have this feeling that, “oh I can just keep doing this over and over again.” I think sometimes when people make a poor investment right off the bat, then they start to learn more about diversification, might be a little bit better, might be a more predictable way to go.

DC: Absolutely. I mean there’s a line that gets thrown back at me a lot from the book that says, you can be right and still be a moron. And I think that people learn the wrong lessons sometimes. And for me, being a good investor, the most powerful word in investing is “probably.” That’s why we diversify because we don’t know for sure. But if you hold all asset classes, probably some of them are going to do well, and people who have early successes doing the wrong things don’t learn probably. They learn, “oh, I’m going to take a very specific action, a very concentrated action, and I’m going to be richly rewarded for that,” which, given enough iterations doesn’t always go your way. Whereas someone like Vegas, you know, Las Vegas keeps all those pretty lights on by just tilting “probably” in their favor a tiny bit. And investors would be wise to learn a similar lesson.

JA: Hey, with your investment firm, you’re basically taking all of your studies when it comes to behavioral finance in bringing that to an investment front. Share with me a little bit about the philosophy, and the origination of your firm, and more details on that.

DC: Yeah. So basically what I tried to do is create a money management system that’s robust, as robust as possible to human error. And so that to me has sort of four pillars. One of them is consistency. So it’s rule based, it’s all quantitative, it’s all rule-based. I don’t leave it to my own discretion because I know that I’m not special. I’m just as dumb and greedy and fearful as the next person. And so that’s one way that we sort of weed out bias. The next, I call it my four C’s So the first C is consistency, that rules base, the second C is clarity. Which is just taking a simple approach. I talk in the book about how the irony of a complex dynamic system, like the stock market, is the only way that you can hope to sort of crack it, is paradoxically by a simple strategy. Really complicated, ever-changing things, you can’t hit with a lot of precision, because they are complicated and ever changing. So you just have to, again, tilt some rules in your favor. So clarity for me is operating by just a small handful of rules with respect to high-quality stocks, inexpensive stocks, stocks that have a catalyst. And beyond that I say, look, there’s just a lot of luck involved, and I’m going to tilt probability in my favor and hope that good things happen. The third C is conviction. We try and do what we call Goldilocks diversification, which is straddling the line between being diversified enough to nearly eliminate single stock risk, without being so diversified that you just own the whole market. Owning the whole market is a lovely way to invest. The passive investing is a very, very smart and admirable way to invest, but there are lots of very cheap alternatives to do that. So we believe that if you are going to be a passive investor, you should be a passive investor, and get it for super cheap. And if you’re going to work with a manager like us, you should look for someone who’s going to have a little conviction and be different than the benchmark. And then finally the final C is courageousness. One of the chapters in the book talks about how excess is never permanent. And so one of the things that we automate is the process of doing exactly what feels the most uncomfortable. So at times when the market’s steeply valued, we tend to take some risk off the table. And at times when the market is in the dumps, we tend to put a little risk on. So we call that courageousness. So basically, all you’re doing is a rules-based approach to buying a diversified, but not too diversified basket of stocks, and trying to hold them in good times and bad. Just simple, simple stuff, but takes a lot of studies to make it that simple.

JA: But I think, when you’re talking about overly diversified, I think a lot of people are overly diversified. They might have 10-15 different mutual funds. And Al and I got in a fight before we got on the air about looking at passive funds versus active, and things like that. But it’s all about the diversification of how you’re building and constructing that overall portfolio. And you might have 10 different mutual funds and they all might be passively invested, but if they’re all the same stocks, it’s a redundant portfolio. It’s not necessarily going to capture any higher expected returns than you think you might be doing by having ten different funds.

DC: Yeah. You point out a way that I think people get it wrong a lot. They go, oh, well I have, like you said, 10 different large cap equity mutual funds. So I’m diversified. Well, you’re diversified among large cap equities, yes. But where’s your exposure to real estate, and fixed income, and small cap value, and all these other things. And so yeah, I think a lot of people – you need diversification within and among asset classes. And I think that that’s where a lot of people fall down, and I think a lot of advisors don’t do a great job, is getting people into five or six different asset classes and not just sticking with lots of large-cap equity mutual funds, because you’re right – you could own you could own 10 different mutual funds and have very little diversification in fact.

JA: We’re talking to Dr. Daniel Crosby. It’s awesome to talk to you again. Where can people get more information from you?

DC: They can follow me on Twitter where I say awkward things and post pictures of my kids, that’s @DanielCrosby, or they can go to my professional site, www.nocturnecapital.com

JA: All right. That’s Dr. Daniel Crosby. We’ve got to take a break. Show’s called Your Money Your Wealth.

 

32:04 – Big Al’s List: 7 Common Investor Mistakes (Investopedia)

 

AC: Today’s list is from Investopedia. These are seven common investor mistakes and the first one – and this happens all the time. And the first one is people don’t have a plan. In other words, they don’t know where they’re going, and as the old saying goes, if you don’t know where you’re going, any road will take you there. And how often do we see this? People just haven’t sat down. What’s your goal, is it save $100,000 for kids college or a million or two for your own retirement? Have you done that calculation? Have you figured out how you’re going to get there? How long it’s going to take?

JA: If you do that, if people did that, you know how much more money people would actually have?

AC: Yeah, because they would have a roadmap. And the way that you go about this, is you have the goal, and then you start chipping away at it. And what happens is people go through their whole working life without a goal, and then they retire and they go, man, I’m in trouble. I wish I would have done this 10-20-30 years ago.

JA: Everyone has some sort of plan in their head. But is that plan really going to get you to where do you need to be? You’re driving from San Diego to New York, and you’re just going, well, I know I have to head east and a little bit north. How efficient is that? You’ve got to plan a little bit more. And here’s, I think, why some people don’t necessarily want to go through that process, is that they’ll find out, A, yes I know I’m a little bit behind.

AC: Yeah, it’s kind of like not going to the doctor. I might find out I’m not doing that well. I’d rather not know.

JA: Another just kind of the status quo is OK. Because it might say, yeah, you’ve got to save all this money, it’s like I can’t save. Well no, just save what you can. Let’s say you’ve got to save five thousand bucks a month, something like that. And you can afford $300 a month. Well, you know that you’ve got to get to a certain level, so you start with $300. And then maybe six months later then you go to $400 or $500. Maybe then you get to $1000 and then you get to $1200 – whatever the numbers are. I’m just making things up. But if that number seems too large, you don’t have to hit that number right away, if you just do something.

AC: That’s right. And of course, the younger you are the better, but sometimes we’ll talk to people – a 63-year-old that comes in with nothing. And then what do you do? Well, let’s let’s take a look at this and figure out how much can you save, and maybe work over the next seven years, to age 70. OK and maybe you can work up to $100,000 of savings in that seven years. First of all that’s better than nothing, it’s also better than average, by the way. You’re going to take your Social Security at 70, so it’ll be the highest benefit and maybe have a strategy to work part time in retirement, or maybe downsize your home and move to a cheaper area. But the thing is, if you don’t do anything then you get to 70, and then what? Or worse yet, you retire at 67 because you think that’s when you’re supposed to retire, and you haven’t run any kind of analysis. And then all of a sudden you’re back to work. But sometimes it’s hard to get a job when you’re 67.

JA: Right. And I know, all you listening, there’s got to be some sort of anxiety of saying, man am I on track? Not on track? I freak out about it and I’m 40 years old. Well, 42.

AC: Let’s be real. Almost 43. (laughs)

JA: Oh whatever. What’s next.

AC: Number two is too is too short of a time horizon, and this is common. Like if you’re saving for retirement for 30 years, what the stock market does this year or next should not be a very big concern. Stop stressing about the headlines. And even if you’re 70, your life expectancy is 15-20 years. That’s still a long time. What the stock market does tomorrow doesn’t really matter that much.

JA: Right. And if you die tomorrow, who cares anyway?

AC: True. (laughs) Yeah, that’s a common misconception that people have is, like when they retire, Joe, Al, I need to get out of all my stocks because I can’t afford the loss. Well sure, none of us can afford losses. But you’re actually guaranteeing a loss by being too safe, because you’re not going to keep up with inflation, and you’re not going to have enough growth to fund the lifestyle that you want to have, and you’re probably going to live longer than you thought.

JA: It’s having the right strategy, the right portfolio, given what you’re trying to accomplish. People have super high octane portfolios that shouldn’t, and people have very conservative portfolios that shouldn’t. You just want to make sure that you have the right portfolio given your circumstances.

AC: This is related, Joe. Too much attention given to the financial media, because there’s almost nothing on financial news shows that can help you achieve your goals. So the advice is to turn them off. It just it leads you astray. It preys into your emotions and then you end up making the wrong decisions because you get scared.

JA: There’s a ton going on right now. Venezuela, what we got going on in North Korea. You’ve got Syria and France. There’s a lot of headlines that, it’s pretty scary out there. But guess what? It’s always scary out there.

AC: And some people say well I’ve got this guru. They give them $49 a year and he or she gives them all the stock picks.

JA: Yeah, with a nice newsletter.

AC: And it’s like, if they really had the secret sauce, they would be doing it themselves, not trying to sell you a $49 a year newsletter. So let’s be realistic here. Another problem is people are not rebalancing. In other words, rebalancing is when you return your portfolio to its target asset allocation. So let’s say you’ve done your planning and you figured out, I need to have 60% in the market and 40% in safe assets. Well the market tends to outperform safe assets over the long term, and the longer time goes on, you have a higher and higher allocation to riskier assets, which expose you much more to a market correction should it happen. And market corrections will happen. We just don’t know when.

JA: It’s going to happen soon. I don’t know. This year, next year, I don’t know. But then you have to take a look. You’ve got to stress test your portfolio and say, all right, well, how much risk am I really exposed to here? I like the big returns, but, everyone hates a diversified portfolio, because you’re never going to have the highest return, but guess what. In a down market, you’re not going to have the lowest return either. So that’s why diversification, again, and rebalancing towards your overall risk parameters, is so key.

AC: Yeah. And that’s even more important as you’re approaching retirement because you really can’t afford these gigantic losses. Here’s another one, Joe, which is overconfidence in the ability of fund managers. And how many reports and how many studies do we have to have before we realize that index funds tend to outperform, on average, actual active fund managers.

JA: Yeah, I don’t even think it’s the overconfidence of fund managers. I think it’s just individuals overconfidence in themselves, of either picking the right fund manager, or the overconfidence of themselves of being able to pick the right investments. It’s not like hey I got this really good fund manager, because most people when they buy mutual funds, they’re not looking at the fund manager. There are only a few real well-known fund managers, and I would say only the industry actually knows their names.

AC: I think so too. Peter Lynch, who is arguably one of the best traders in probably the 1990s, maybe late 80s, 70s. He says there are no market timers in the Forbes 400. In other words, the people that make the money, they’re not timing. They’re not in and out, they’re creating value, and they’re sticking to – and that’s what Warren Buffett does. Warren Buffett does not get in and out of the market. It’s long term investing. We all know that. But emotions get in our way sometimes, Joe. And of course, another one is, related to that, is not enough indexing, because again, index funds, their unmanaged funds, but they tend to be the active managers. Not every year, but over the long term, the overwhelming evidence is that you’ll do better with index funds than actively managed funds.

JA: Yeah, but it’s all still based on the overall portfolio. I don’t care if you have actively managed funds and I have an index fund. If I have an actively managed mutual fund portfolio, and you have an indexed portfolio, I still probably could beat your portfolio. It’s based on the asset allocation. Let’s say you have index funds because everyone loves index funds and ETFs.

AC: But you get the wrong ones, you’re all in fixed income.

JA: You’re just in the S&P 500, or your stable value. Well I’m going to go, so you have S&P 500, and stable value, well I’m going to have a higher cost portfolio on my end, but I’m going to tilt my portfolio, maybe a little bit more towards small value emerging markets. Emerging markets this quarter we’re up to 13% in a quarter. Extremely volatile. But over the long term, that volatility, that risk you are compensated for. So, I’m so sick of the cost discussions. Yes, you’ve got to control your costs and keep them low. But still, it’s not the end all be all, you want to look at the right allocation for what you’re trying to do, and if you like the portfolio managers, by all means, do it, but just make sure that your allocation is appropriate to what you’re trying to accomplish.

AC: And Joe, real quickly, the last one is chasing performance, and we see this all the time. So emerging markets did have a great quarter, so we’re going to see money flooding into it. And maybe you’ll have another great quarter, but when you’re chasing the winners, they tend not to stay up on top.

JA: Last quarter, in the fourth quarter, small value, up, what 20 some odd percent. Unheard of. First quarter 2017? Down 2%. So what do you think people did? Now they’re selling though because oh, these stink. Oh, I guess the run is over. A quarter! Stop it! Stop it already. (laughs)

 

You heard Joe say this just a few minutes ago: “You’ve got to stress test your portfolio and say, all right, well, how much risk am I really exposed to here?” Find out your risk number with our risk factor tool at YourMoneyYourWealth.com. Make sure your portfolio aligns with your investment goals and expectations: identify how much risk is acceptable to you and compare it with the amount of risk you’re currently taking in your portfolio. Together we can take the guesswork out of your financial future. To find your risk number, visit YourMoneyYourWealth.com.

 

42:09 – Ric Edleman’s Social Security solution

 

JA: Ric Edelman, you know that guy, right?

AC: I sure do. He’s got a new solution for Social Security, doesn’t he?

JA: Yeah what do you think about that. Let’s talk about it a little bit here.

AC: Let me pull it out. He wants to allot $7000 for each baby for the next 35 years, and then have some kind of congressionally appointed investment board that would invest those dollars, and then by the time those kids got to retirement age, they would have the money to be able to fund Social Security. And he thinks that will save a lot of money. Actually, it’s got some merit, I would say, based upon – I didn’t run the numbers like Ric did, but I think it has some merit. Now doesn’t do much for the current people. So we have to wait 66, 67 years for this to actually take effect.

JA: Well what he’s saying is you set aside $7000 for each newborn baby for 35 years, and invest the funds for the child’s retirement. An investment board, like you said, would just make these investment decisions. And so after 35 years, the average value of the investment for each child would be $93,000 based on an annual 7.68% return, according to Mr. Edelman. By the time the child retires at 70, he or she would have one million dollars, or an average payout of $1300, which matches the current Social Security benefit. So explain this to me? After 35 years, the average value of the investment for each child would be $93,000?

AC: Yeah. Well, it’s a lump sum of seven.

JA: But, based on a 7% rate of return, by the time you reach 70, it’d be a million. So what is it, $93,000 or a million?

AC: Yeah the math doesn’t work, does it? Well I guess maybe it does, right? Because at 35 it’s only 90, right, because of the compounding, but then the bigger compounding comes the last 35 years.

JA: I guess so. That $93,000 when you’re a 35 year old, you double it up again?

AC: Yeah, I think that works, actually.

JA: Yeah it’s probably right.

AC: But, like I said, what do you do with the people that aren’t babies? Someone that’s from age 1 to 100. You still have to fix that part of it too, but it doesn’t really go into that.

JA: At the same monthly benefit, he said, it would cost $7000 per worker instead of more than $600,000 per worker now collected through the Social Security taxes.

AC: Yeah. So it’s a long term solution. And the reason why this can work is because it’s invested in the market.

JA: Well it’s also assuming an almost 8% rate of return. I guess over 70 years.

AC: Yeah, could be. But part of the problem with that is, the market is only so big. And if you all of a sudden have governments investing with Social Security into the market? That’s a flood of money over time into the market. I don’t know. I’m not sure how that works. Right now Social Security is invested in fixed income so it doesn’t have market return. But if you have, all of a sudden, billions and trillions of extra dollars to invest in the market, I’m not sure if there’s enough stock in the world to cover that. But maybe I’m wrong. I haven’t done the math, but I’m just throwing it out there. What do you think of that?

JA: I don’t know. Maybe we should put you on an economic committee of some sort. (laughs)

AC: I like the idea though.

JA: Well, I mean, Bush wanted to privatize Social Security back in 2000 or whenever that was

AC: He did. And I do think that has merit, because if the Social Security Administration is investing only in government T-bills, we know that’s a lot lower rate than other areas of the market, in terms of stocks, and international stocks, and things like that. So I do think there’s some merit to it. We still would have to shore up anyone that’s more than 1 years old, because this fix is in about 70 years from now. But we’ve got to get through the next 70 years too.

JA: Yeah. A few things will probably happen. I think the full retirement age will increase. They’ve done that before, they’ll probably do it again. The full retirement age was 65. Now it’s 67, depending on what year you were born. They might push that out to age 70?

AC: 69, 70. I think that’s going to happen. I also think Medicare age is going to be pushed out here at some point. That’s actually in worse shape than Social Security.

JA: But Ric also thinks that we’re all going to live until like 400 years old.

AC: I know he does, in fact, I just saw a video that he did. He said retirement planners have it all wrong because we’re going to live decades more than you think.

JA: Well I don’t know. I hope so. I’d like to live a long healthy life.

AC: You bet. And I do believe that we’re healthier, and we know so much more about diet and exercise. Course you have to actually do it. Not everyone does it, but you can. I think when I was younger, I saw my grandmothers, both of them, they made it to 80, and at about 80 they just weren’t the same. And now my parents are 80, almost 85 and 83 and a half, and I wouldn’t say they are spring chickens, but they’re still independent. They’re still living their life.

JA: Yeah. Your dad looks the same over the last 10 years.

AC: Yeah he’s pretty good. Although I will say at that age you spend probably half your time going to doctors, which is why, and I just saw this on Friday, that interestingly enough, when you think about average life expectancy – so for a 65-year-old male, you know it’s maybe almost 20 years, maybe to 84, something like that, on the average. And females 87, 88, something like that. However, if you have more income and assets than the average person, you will likely take advantage of more medical services, and actually, the life expectancy of those that have more income and assets is a fair amount higher still. You very likely, where you’ve saved, and have money and have potential income, you may likely be definitely on the other side of that average, because of going to doctors and so forth, and that’s been true for a while, but I think it’s even more true now. There are bigger and bigger gaps now between the average and those that are in kind of the upper income and asset levels. And it’s mainly because they’re taking care of themselves, they’re exercising, they’re eating right, they’re going, using their doctors. They have the money for the best medical care.

JA: Yeah. If you have a couple of million bucks in the bank versus a couple of bucks, you’re going to get the best doctor, the best treatment.

AC: Yeah, you’re probably going to eat organic food and you don’t have to get the bargains.

JA: Sure. You’re not gonna get whatever – apple in a bag that we get in our office. Have you ever had those apples in our office?

AC: No.

JA: It’s the most disgusting thing I’ve ever seen in my life. They’re like cut apples…

AC: …in a bag that’s been in the refrigerator for a couple of months.

JA: And you can just taste the chemicals on it. Our office, I swear the people in our office don’t eat. Until there’s something that is full of carbs that someone leaves on our lunchroom table. So I’m like, “Catherine, let’s get a little bit more healthy here.” So she buys these apples in a bag.

AC: Well, she’s trying to go for bulk.

JA: This is not healthy! My fingernails are green! I kept losing hair! What the hell is going on?! It’s the apples, it’s the chemicals on these damn apples.

AC: Yeah. And we get those things in our freezer, the pocket sandwiches. What are they called? Pocket something?

JA: I dunno. They take like 40 minutes to cook.

AC: Yeah. And then you just take one bite and you go, this isn’t right. And you spit it out (laughs) This isn’t supposed to be consumed. It’s like, am I eating the wrapper?

JA: We have a thousand dollar Costco bill, daily It seems like! There are truckloads of this crap getting into our office! (laughs)

AC: We are feeding our staff, I’m not sure what. (laughs)

JA: I don’t know what is happening. It is disgusting.

AC: I do know that we have we have a healthier bin of stuff, and it’s always full. (laughs)

JA: Yes. Healthy snacks? Not even open. (laughs)

 

Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com 

 

50:51 – JA: All right here’s your first question, Alan. “I am 55-years-old. I have $502,000 in my 401(k). I have nothing in any other retirement program except Social Security. Is it valuable or even worth it to stop contributing to my 401(k) and diving into a Roth? Should I take the tax hit on the 401(k) and roll some of it over to a Roth? I’m currently putting the annual max into my 401(k).”

 

AC: Oh, I like it. So the max at age 55 would be $24,000. So that’s great. And doesn’t really say how much longer he’s going to work. But, we actually are big proponents – I’m going to answer this generally, first of all, I guess – we’re big proponents of getting money into a Roth IRA. Now of course, if you’re subject to alternative minimum tax and some really high tax brackets, that may not be that great a thing, but if you are in a tax bracket that is below the alternative minimum tax rate, and depending upon how much you’re going to be spending in retirement, yeah it may make a ton of sense to get some money into a Roth IRA. And maybe not all of it, maybe just start getting some of it. Maybe, if you got a Roth option in your 401(k), maybe a designate a quarter of it, or third or something. Get that started. And then depending upon when you retire, like let’s say you want to retire at age 62. Now you’ve got some years that perhaps you can do Roth conversions. Now what’s going to be tricky for you is, you don’t have assets outside of retirement. So you have nothing to live off of while you’re doing it. So that makes it more difficult. And I will say, for those of you that have money outside of retirement, it’s really great when you do retir because you can live off of those resources, be in a zero tax bracket and do Roth conversions in very low brackets and set yourself up well.

JA: So here’s what my thought is. And a couple of different key notes here: if you’re thinking about doing the Roth portion or Roth IRAs, or conversions or whatever, first of all, you have to take a look at your tax bracket. So get out of your 1040, you probably just filed it, and look at line 43. That’s the second page of your 1040. About halfway down. Take a look at what that number is. And then you want to go to the tax tables to see what tax bracket that you’re in. So if you’re in the high tax brackets 39.6%, and you know 33, or alternative minimum tax is usually in the 20% bracket.

AC: Yeah. So if you have something on line 44, that’s alternate minimum tax, that’s a pretty high rate.

JA: That’s a pretty high rate, yes. So yeah, then you probably don’t. The deduction is going to be a lot more valuable to you. But here’s why we’re big fans of Roth. You will then be able to have diversity. Diversification when it comes time to take distributions from your accounts. Because let’s say, he’s already got $500,000. He’s got half a million at age 55. He works in another 10 years and let’s say he gets a 6% growth rate, 7% growth rate, over 10 years. That’s going to double. That’s a million bucks. Now he’s still fully funding it with $24,000. So that’s another $240,000 of contributions plus growth on that. Double that, that’s another five, $1.5 million roughly. So then you’ve got $1.5 million, all taxable income at retirement. 1.5 is great. But here’s what we would tell you. You don’t have $1.5 million. You have nowhere near that, because every dollar that comes out of there has to pay ordinary income tax. Now think of it like this, say, maybe I switch my strategy a little bit, and get money into a tax free environment. I do take the tax hit today. But then all of those contributions that grow for me, I will never pay tax on those dollars again. So now I’m 65 or 70, whenever I decide to retire. And now I have a little bit of money in a Roth IRA, so when I take distributions from that it’s tax free. Then I got a chunk, a big chunk in my retirement accounts where every dollar is going to be taxed at ordinary income, and I got my Social Security. But then you could be a little bit more sophisticated on your retirement income strategy. What I mean by that is that, you look at your tax bracket. Or say what are your deductions, exclusions, exemptions? And then you say, here’s how much money I want to take out of my 401(k) plan. And I’m going to stop let’s say at the 15% tax bracket. I’m going to fill up the 10% bracket, I’m going to fill up the 15% tax bracket, and then I still want more cash flow. Well guess what. You have money in a Roth. You start pulling money from your Roth IRA to cover whatever additional income gap that you have. All of that is tax free. So potentially, you could be living in a 25 or 28% bracket, but you’re only paying 15%, because half of it is coming to you tax free, because you’ve done the planning ahead of time to make sure that you get money into a Roth.

AC: Yeah I think that’s right, Joe. Now of course there’s there’s examples where you’re in a 28% bracket now, and you’re going to be in a 15% bracket later, no matter what you do. Then maybe it’s not the best plan for you. And then other things that can happen is, maybe you don’t have any assets outside of retirement, but maybe you might inherit some money that you could use. And so you get tax diversification that way, or maybe you’re planning a downsizing, or moving to a different area, so there’s lots of ways to look at this, but I think the key point here is, we’re big believers in tax diversification in retirement because if all your assets are in your 401(k), every time you pull that dollar out, you have to pay tax on it. And if you have certain years where you want to pull extra out, it jumps you up into a higher bracket still.

JA: Here’s the argument against the Roth. And it’s a valid argument, but I think it’s flawed to a degree. If you look at it like this: if I take the tax deduction today, and I have it grow tax-deferred, and then I pay taxes on it, it’s kind of the same thing. You break even. It has the same effect if you’re in the same tax bracket. If I’m in the 25% tax bracket today, I’ll be in the 25% tax bracket in the future. The pundits will say it makes no difference if it’s Roth or traditional, and probably go traditional, because we don’t know what they’re going to do with the law. You’ve heard that argument?

AC: Yes. You bet.

JA: Explain the math on that. What are they saying there?

AC: Well they’re saying that if once you look at the the tax benefit of a regular 401(k) versus the non-benefit of the Roth, – now the tax benefit of the regular 401(k), you’ve got more money essentially in that account, so it grows more. So you think you’re doing better than the money in the Roth IRA. But yet, when you pull the money out, it’s fully taxable. And if it’s the same rate, the math actually works out exactly the same, whether you put it in one or the other. I probably didn’t explain it well.

JA: Well no, because I think what you’re saying, let’s say if I put $10,000 in, if I’m in the 25% tax bracket, I’m not really putting $10,000 in, because I get a $2500 tax deduction by putting the $10,000 in. That’s $7500 that I’m putting into the plan versus if I put $10,000 into the Roth, I’m putting a full $10,000 into the Roth. So I’m only putting $7500 into the 401(k) plan, traditional, I’m putting the full $10,000 into the Roth plan. That’s the argument. Then this $10,000 grows to $20,000. Then the $7500 grows to X. Well you pull it out, you pay tax. But it’s kind of the same wash if you’re in the same tax bracket. But here’s the problem with that. There’s real life. That’s mathematics. What’s the problem with that theory?

AC: Well the problem is, first of all, tax brackets can change. They can go up if you’re married and one spouse passes, now you’re a single taxpayer. So now you’re going to be in higher tax brackets. If you should have a year where you need to pull out more money for any reason, you jack yourself up into yet a higher bracket.

JA: There’s required minimum distributions, there’s no required minimum distributions in a Roth. And this also is assuming that you’re saving the tax deduction.

AC: hat’s true too. Which most people don’t.

JA: They’re not saving the tax deduction. You ready for the next question?

AC: Yeah let’s have it.

 

59:07 – JA: If I begin taking Social Security at age 63 and continue to work and earn over the max allowed, does my reduced payment become permanent even after I reach full retirement age?

AC: That’s a great question. I think there’s a lot of confusion there, and I think the rule, Joe, is that if you are taking Social Security benefits before retirement age, which this year 66 years and two months, then there is a certain dollar amount that you can earn. It’s like $16,720, something like that. Except for that last year, I guess the year that you turned 66, and then it’s $40,000-some. But at any rate, so if you make more than that, you have to give back some of your benefits, and I think the question is, is that a permanent loss?  Will I ever get that money back? And the answer is no, it’s not a permanent loss, because they basically re-figure it as if you didn’t receive that benefit. So that when you do reach full retirement age, it’s as if you didn’t receive the benefits. So it’s not a permanent haircut.

JA: So let’s just assume that the limit is $15,000 just to make this easy. It’s 16,000 and some change, and what we mean by that, if you take your Social Security benefit prior to full retirement age, and you are still working, you have self-employment or W-2 wages. They will reduce your Social Security benefit, based on the amount of money that you make, if it’s over that limit. It’s 16,000 and some change. I’m just going to use $15,000 as an example. So $15,000 is the number. You make $30,000 a year. So you’re $15,000 over the limit. So what they do is they say, well, every two dollars earned over that limit. they’re going to take a dollar back. So if I take $15,000 divide that by two. What does that answer? $7500. So let’s say that your Social Security benefit is $10,000 per year. So you take it early at 63, you’re enjoying your $10,000 a year payment. But wait a minute,7 you made $30,000, which is $15,000 over the maximum threshold. So they’ll take – every $2 you earn, they take a buck back over that – so that’s $15,000 divided by two, $7500. So they’re going to take $7500 back, out of the $10,000 that you earned. So your benefit is only $2500. That is not a permanent reduction. Because if I look at that, 75% of the year, they’re going to assume that you didn’t take that benefit at all. So over the next four years, if you continue to do that, so then they’ll say, well, you didn’t really take it at age 62. You took it at age 65. Because 25 and four that’s one year they’ll say, no you only took it one year early. Does that make sense?

AC: It does. And so, basically, we’re saying that you basically took a quarter of your benefit, and over the four years, that adds up to a year. So it’s as if he started taking it at 65, instead of 62 or 63.

JA: Right. So your permanent haircut, if you took it early at 62, it’s about 25%. It’s a permanent haircut. It’s 23 and whatever change, but I’m going to keep with 25%. So if you take it at 62, 25% permanent haircut, but no, you’re still working. So he’s over that threshold is what he’s asking us. So, because he’s over that threshold, they’re going to say well, given  that math, you didn’t really take it at 62. You took it at 65. So your haircut is going to be, not 25%, but 6%. Or 6.5% or something like that.

AC: Yeah, it actually it actually works out now where your haircut’s about 26%. Because now, it’s 66 years and two months, and all the way back to 62 it’s even a little bit more of a haircut to take it early, I guess is the way to say it.

JA: Oh, I went the other way. Look at the big brain on Big Al.

AC: You did go the other way but that’s OK. So here’s another point for you…

JA: Boy, people are thinking “what an idiot.” (laughs)

AC: No they’re not. Well maybe. They say that both of us all the time, and that’s OK, we got thick skin. No worries. You can say what you want. (laughs) But I wanted to say, so that $16,720 is the amount that you can earn actually, $16,920. I stand corrected. I just got the cheat sheet right in front of me. So you can make below that, and not have any sort of change on your Social Security benefit when you’re younger than full retirement age, 66 and two months. But that’s only earned income, and people get confused. It’s not un-earned income, which is interest and dividends and capital gains and rental income and pensions, 401(k). None of that counts. So this is only if you’re still working in a job, or if you’ve got a business where the profits are subject to self-employment tax, so that’s earned income. So you could be making a couple hundred thousand dollars from your investments or pension or whatever, and still get full Social Security without a haircut if you don’t have more than $16,920 of earned income.

JA: Right. So if you’re going to continue to work, well then you have to identify how much am I going to make this year, for me to make it worthwhile, should I claim or not? And I think a lot of times people don’t understand that, yeah, you can claim it at 62 and yes you get a permanent haircut of 25%-ish. But, if you’re still working, every $2 that you earn, they’re going to take a buck back over that $16,920 maximum limit. So if you are working and you’re full time, and you’re making more than $16,000. It doesn’t make any sense to take the benefit. And here’s another thing that they’ll do. Alright, you take your benefit. And then you work that year. And then you make $100,000. Well that’s well over $16,920. So they’re going to take everything back. So you’re like, the next year, you fully retire the next year. Now you’re 63. You’re waiting for that Social Security benefit. Are you going to get a check?

AC:  No. Not until it gets paid back.

JA:  No. Not until it gets paid back. So you want to make sure that you communicate with the Social Security Administration, to say  I’m working, I made this. So you’re not going to collect that benefit, because when you need it the following year, because now you have zero income, because you spent it, and then the next year you need it, and it’s not going to be there, because you’ve got to pay it back, because they don’t want you to double dip.

AC: And then you’re asking for your old job back. That big retirement party? Just kidding. (laughs) I actually really need to work and I actually do like this job! The stuff that I said before I left? Didn’t mean it.

JA: Yeah. When you’re hammered at the going away party, giving everyone F-bombs. (laughs) And that’s it for us today. Hopefully, you enjoyed the show. I want to wish my good buddy a very happy birthday. He turned the big six-oh.

AC: I did, didn’t I?

JA: Yes you did, my friend. You don’t look a day older than 59.

AC: I knew you’re going to say that. (laughs)

JA: Alright, that’s it. If you want to wish Big Al a Happy Birthday, you know where to find him, PureFinancial.com, email him at alan.clopine@purefinancial.com, he loves to get your emails. Happy Birthday, brother! For Big Al Clopine, I’m Joe Anderson. We’ll see you guys next week. You’re listening to Your Money Your Wealth.

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So to recap today’s show: “The Biggest Tax Cut Ever” is in the works, Ric Edelman wants to set aside $7000 for newborns, to be invested for their Social Security, and you shouldn’t pay too much attention to the financial media – except for Your Money Your Wealth!

Special thanks to Dr. Daniel Crosby, psychologist, and author of the Laws of Wealth, who taught us that “fear exists in in a physical place in our head that can never be eradicated,” so making investing decisions with a financial planner is a good idea.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

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