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Christine Luken

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Joseph Anderson

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Alan Clopine

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Published On

May 2, 2018

Money & Divorce: The financial lifeguard Christine Luken talks about her new program, Financial Dignity After Divorce, plus 14 money mistakes to avoid during a divorce, how much the average couple will spend on healthcare costs in retirement, and with all this market volatility, is your 401(k) safe? And the fellas answer questions buying a house with cash vs investing in a mutual fund and paying into Social Security after you quit working so you can max out your benefit.

Show Notes

(01:34) Here’s How Much the Average Couple Will Spend on Healthcare Costs in Retirement
(05:27) Financial Dignity After Divorce with Christine Luken
(14:32) Big Al’s List: 14 Money Mistakes to Avoid During a Divorce
(23:47) Email Bag: I inherited $180,000 and want to buy a house. Should I pay cash or invest in a mutual fund? If I retire at 62, can I still pay into Social Security until I’m 65 or 66 to maximize my withdrawals?
(34:28) How Safe is Your 401(k)?

Transcription

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Money is like the third person in your relationship. And even though you and your ex have split, you and money are still together forever. And so it’s very important that you repair that relationship with your money. Because whether you get married again or not, like I said, you’ve still got a relationship with money and you’re still going to need to interact with money. So it’s very important that you productively deal with these negative emotions. – Christine Luken, the Financial Lifeguard

That’s the Financial Lifeguard, Christine Luken. It’s Your Money, Your Divorce today on Your Money, Your Wealth® as Christine talks about the money mistakes we make during and after divorce and how to recover financial dignity when the dust settles. Plus, how much will the average couple spend on healthcare costs in retirement, and with all this market volatility, is your 401(k) safe? And the fellas answer questions buying a house with cash vs investing in a mutual fund and paying into Social Security after you quit working so you can max out your benefit. Don’t try that in this country because it won’t work and you may indeed end up divorced! Now, a guy who may never marry and another who’s lucky enough to have zero experience with divorce, here are Joe Anderson, CFP®, and Big Al Clopine, CPA.

01:34 – Here’s How Much the Average Couple Will Spend on Healthcare Costs in Retirement

AC: You know, I was kind of interested to see this: here’s how much the average couple will spend on health care and retirement. And alongside that, a recent study with the Employee Benefit Research Institute. I’ll start with EBRI: they found that 80% of retirees are very or somewhat confident in their ability to cover basic expenses. But then it goes on: in 2018. I guess they didn’t ask them, “what do you think about 20 years from now?” (laughs) And that was compared to 85% in 2017. So we slipped a little bit. But then they found some holes, because of how people think about their finances and what reality is. So what they found was that…

JA: 40 some odd percent figured out how much they need?

AC: Well about 50% had not even considered health care cost. In other words, that was not plugged into their thinking process. And at the same time, Fidelity sort of does this every year. They look at what a 65-year-old couple, what they’re going to spend in retirement over their remaining years. And this year’s $280,000, which sounds like a shocking number, and it’s a big number to be sure. Because a lot of people think Medicare covers everything, but it doesn’t. So what this $280,000 is inclusive of is premiums for Part B and Part D, in terms of Medicare, out-of-pocket costs for deductibles, costs that Medicare don’t include, some of the drugs that Medicare doesn’t include, and then certain services and devices that Medicare doesn’t include, like hearing aids. That’s inclusive of here. And what they did is they said well, the average lifespan of a male is to 87…

JA: So yeah, they’re saying $280,000, and so I think sometimes people think, “wow, $280,000. Do I need an additional $280,000 on top of my savings?” I think it probably boils down to additional $400 a month.

AC: Yeah, it’s $6,000 a year. So you’re pretty close. About $500 a month. For women, the average life expectancy is 89. So if you take $280,000 divided by 46 years, between male and female, that works out to $6,000 per year. That’s actually a more accurate way to think about this, but it’s not as sensational.

JA: Right. It doesn’t scare the hell out of you.

AC: Right. That’s why it’s big headlines. The $280,000.

JA: Because it’s like, “Well only have $280,000 total. And now all of that is going to go to health care and I’m going to eat ramen noodles.” So if you think about it, I would plan $400 to $600 a month for health care.

AC: Yeah. That includes your premiums, which can be a big part of this. But just realize that another thing too, Joe, is this does not include long-term care – if you need long-term care – and it doesn’t include most dental work. So that’s actually over and above this $280,000, or call it $6,000 per year.

So are you ready for retirement with those increased healthcare costs? As we live longer and longer, possibly needing that long-term care, it’s important to be prepared. We’ll show you ways to deal with market volatility, costly healthcare and Social Security uncertainty, how to control your taxes in retirement and much more. Download our free Retirement Readiness Guide from the white papers section of the Learning Center at YourMoneyYourWealth.com. It won’t cost anything, and you’ll learn strategies to make your retirement savings last a lifetime. Download the Retirement Readiness Guide from the White Papers section of the Learning Center at YourMoneyYourWealth.com.

05:27 – Financial Dignity After Divorce with Christine Luken

AC: Welcome back. You’re listening to Your Money, Your Wealth® with Al Clopine and Joe Anderson. And today we’ve got a great guest on, Christine Luken. We’ve had her on our show before, she’s taught us about the behavioral aspects of money. And today we’re going to get into a topic that’s not the most glamorous or fun topic, but it’s something that we do need to deal with from time to time. And that is what you do after divorce, and Christine thanks for joining us.

CL: Thanks for having me on. It’s a pleasure.

AC: I like the way in your website you say you’re THE financial lifeguard. So you’re the one. And so you get out of trouble, right?

CL: I do. And I help people rescue their financial dignity.

AC: Good. OK. And you weren’t always a financial lifeguard or financial planner type. How did you gravitate towards that?

CL: Well essentially, I made all of these mistakes myself, despite having an accounting degree, and I crashed and burned. Fortunately, I was young. It was four years after I graduated from college. But I needed a financial lifeguard myself. And what that really taught me was that money is very emotional, and we need to be considering that, in addition to practical financial strategies.

AC: Right. And now you’ve created the 30-day online course called Financial Dignity After Divorce. Tell me about the program.

CL: So I really felt compelled to create this program because in my experience it’s one of the times in people’s lives where there is a very high likelihood of making bad financial choices out of the heat of emotion. And typically those two emotions are fear and anger. And when you’re operating out of either one of those two emotions…

AC: And I think Christine, a lot of people they realize they’re making poor decisions. But how do they turn that around?

CL: The first thing I tell people is it’s very important that you get some kind of emotional support. So whether that’s a counselor or whether that’s some kind of a divorce support group, there’s a lot of emotional stuff going on. And it’s not just about the money. So some of it is about the money for sure, but there’s a lot to process and it’s very important that you have a productive outlet for that. And what this program does is it definitely gives people practical ways to manage their changing financial situation. But what it also does is it helps to uncover the root of some of these emotional money issues, and it gives people a way to productively process them, so that they’re not carrying them forward into the future, whether they ever get married again or not.

AC: And so what are some of the mistakes that you see people making after they go through a divorce?

CL: Well, sometimes during the divorce and after the divorce. One of the things that I see happening is what I call revenge spending. So let’s say you got cheated on, and as part of the settlement, you got a big chunk of money. I’ve seen people take that money that they really should be investing in their long-term future, and they blow it on something to essentially tick off their former spouse. They go and they take a big vacation, or they buy a car that they really don’t need but it’s big and flashy, and it really wasn’t the best use of that money. And if they had taken some time to diffuse the emotion and say, “what’s really the best use of this money going forward?” they probably wouldn’t have made that decision.

AC: That’s kind of trying to figure out how to curb your spending, which is easier said than done. So what are some tips there?

CL: Well it definitely is. And one of the things that I strongly encourage people to do is to be journaling their feelings, and getting them out on paper, because when you hold all that stuff in, it’s going to come out. And if you don’t get it out in a productive way, it’s going to come out in a very unproductive way. And the other thing that I see people doing is kind of the opposite, where they’re so eager to break ties and get away from their ex, that they give up the farm. That they don’t fight for what’s theirs. And they don’t stand up for themselves. And that leaves them in a negative financial position, not just immediately, but going forward into the future as well.

AC: Yeah. So it’s almost like getting the strength to make sure you get through the process OK. And in some ways – and I’ve never been through a divorce, fortunately – but I can imagine that the emotional part is so great, in a lot of cases people just want to say, “whatever,” and then move on. And what you’re suggesting is that that can be really financially damaging in the future.

CL: Oh it certainly can. I haven’t been through a divorce, but I went through what I call an almost-divorce, and I made that second mistake. So my ex-fiancé and I had been together for seven years, and although we weren’t married, our finances were intertwined, we had debt together. It was all in my name, but we had accumulated it together. So it was a very messy process to disengage from that relationship, and unfortunately, I had no legal recourse to get him to pay for any of that debt that he helped me run up because it was all in my name. So I understand those feelings of resentment, and how much that can really take a toll on you. I’m trying to give people a way to deal with that as productively as possible.

AC: This program, is it just for women?

CL: No, although I do feel like the majority of the time or a large portion of the time, women are economically disadvantaged coming out of a divorce. But it’s really for anyone who feels like they don’t have financial dignity after they’ve gone through their divorce. They feel like they’ve got a lot of emotional baggage, and they feel like they’re at a financial disadvantage because of what they’ve just gone through. And it’s interesting because I tell people that money is like the third person in your relationship. And even though you and your ex have split, you and money are still together forever. And so it’s very important that you repair that relationship with your money. Because whether you get married again or not, like I said, you’ve still got a relationship with money and you’re still going to need to interact with money. So it’s very important that you productively deal with these negative emotions.

AC: And I suspect Christine, it’s probably not just for married people, probably people that have been together a long time, right?

CL: Absolutely. So it really doesn’t. If you’re financially entangled, if you have kids together, yeah you’re going to face some of those very same impacts, whether or not an attorney is involved or not. And it doesn’t necessarily have to even be a messy divorce with a lot of complicated emotions. I mean this could be something that you and your spouse are in agreement that it’s best that you split. But there is still going to be some financial fallout as a result of that split.

AC: We’re talking to Christine Luken. She is the financial lifeguard, and she’s just come up with a new online program called Financial Dignity After Divorce. Christine, how can people find out about it?

CL: They can go to FinancialDignityAfterDivorce.com.

AC: Fantastic. All right Christine, well thanks for visiting with us. And for now, we gotta take a break. You’re listening to Your Money, Your Wealth®.

For a transcript of this podcast and to catch up on episodes you may have missed, visit YourMoneyYourWealth.com. While you’re there, you can access white papers, articles, webinars and hundreds of video clips on tax planning, investing, retirement planning, Social Security, estate planning, small business strategies and more in our Learning Center. Plus, clips and full episodes of the Your Money, Your Wealth TV show. Get up to speed on just about every money topic that affects you at YourMoneyYourWealth.com. If you need more help, email info@purefinancial.com, or call (888) 994-6257.

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 14 Money Mistakes to Avoid During a Divorce.

14:32 – 14 Money Mistakes to Avoid During a Divorce

AC: I wanted to follow up on our interview with Christine Luken about money mistakes that you should definitely avoid during a divorce, and it’s a topic that hopefully you don’t have to deal with. Or maybe it was a long time ago, but if you are going through this now or know somebody that is, these are things that you’ll want to avoid or have your friends avoid. And I’ll just go through these relatively quickly.

The first one is hesitating to seek lawyers advice, and what it says is, “when divorce seems inevitable, the first thing to do is seek advice from a lawyer not affiliated with your spouse.” Of course, that comes from an attorney. So take that with a grain of salt. However, here’s my take on that, which is, I think you should consult with an attorney. Whether you decide to use one or not, that’s up to you. But I think you should at least consult with an attorney that can give you thoughts about the divorce and things that you ought to be considering. Many of you will want to have an attorney throughout the whole process, because this can get ugly. I know you know that it can.

Number two is not hiring the right lawyer. Remember we’re talking about money mistakes. So if you’re not hiring the right lawyer you’re making a mistake. Make sure that they know divorce law, that they’re known and respected by other local divorce lawyers – anyway, nuff said.

Number three, failing to be your own advocate – and this kind of comes from, like when you go to a hospital or when you get sick, you can usually read up on what you have and find out about it. The same thing is true for your divorce. The more that you know, the better that you can get through this process with your attorney or whether you do it on your own, make sure you learn as much as you can.

Number four is avoiding the reality of your finances – and that’s actually one of the biggest mistakes probably. What you need to do is you need to sit down and do what’s called a Statement of Net Worth, where you add up all your assets and deduct your liabilities to figure out what you actually own. An asset, by the way, that’s like a bank account. It’s like a stock account. It’s a retirement account, it’s a home. Liabilities would be your mortgage, credit card bills and the like. See what that looks like, and then realize that you’re probably going to be splitting that 50/50 with your ex or your future ex, or in many cases, maybe you’re not even married, but you’ve got related assets together. Take a look at that, and then what’s interesting about that is, sometimes some couples decide not to get divorced. When they look at this and they realize, “boy, now I’ve got half, and the expenses will be about the same,” because you have the household and a lot of the same expenses.

Number five is, if you do decide to continue with the process after going through number four, then please do not ignore the inevitable change in your standard of living – because you’ve got less income, generally, and your expenses will not be one half, because, let’s say the both you were living in a home, had a single mortgage or single rent payment. Now you’re both going to have those payments. So make sure you adjust accordingly.

Number six is, don’t wait to separate your finances. And this is kind of an important one. Some of these things you can probably do right off the bat. Some of these things you may have to wait until you actually get divorced. But here’s some things that you want to be aware of and that you do: Number one is closing joint credit accounts. Number two, remove your spouse’s name from bank accounts, credit cards and employer records, change your status and relevant information like marital status and addresses on tax records, post-office records, professional licenses, property titles, utility bills, health insurance, and so forth. Open a new bank account and a credit card in your own name. Do that as soon as you possibly can. Disinherit your spouse from your will, trust, medical device, living will, power of attorney. This one gets missed often. So if you have your ex in your will, and you then later pass away, not realizing you forgot to redo the will, guess what? Your ex will get those assets. Interestingly enough, in California where we’re recording this show, it’s an auto-revocation state, which simply means this: if you decide to get divorced, and you have a beneficiary statement on a retirement type of an account, it actually is revoked automatically. But don’t take that chance. That’s what the law is, but why chance it? Just go ahead and set up new beneficiary statements. Also, use your personal finance app to track child support, alimony, medical expenses, other expenses related to the divorce. And the last one would be to establish sound credit in your name, if you haven’t already done so. So there are a few things that you need to do as quickly as you can. But I’m back on my 14 mistakes that people make while they’re going through a divorce.

And number seven is by making major financial decisions in the midst of divorcing. So this is like the same idea as if you lose a loved one, don’t go out and make drastic life changes until everything kind of settles out, and don’t go out and buy a certain car, or don’t go out and do this huge trip if you can’t afford it. Things of that sort. Don’t make decisions that are emotional that you’re going to regret later.

Number eight is attempting to hide money or assets. If you’re trying to hide money, and sometimes people do, because they have to pay spousal support, or child support, realize that you’re risking serious penalties and even possible jail time, according to an attorney that was that was quoted here. And the enrolled agent talked about the IRS considers this a fraudulent conveyance, and it’s it’s easy to catch and it’s not tolerated. So be careful there.

Number nine don’t quit your job or reduce your hours – if you already have a job, don’t try to reduce the amount of time and income that you earn in order to lower your spousal payments. In addition to stiff penalties – and if you’re found out, the courts can impute income if they believe you intentionally suppressed and charge you for that.

Number 10 mistake is remaining unemployed – if you’re currently not working, try to get a job. Remember, your expenses are likely going to be more, relative to your income, to keep up some level of standard of living.

Next one is keeping the same beneficiaries. I talked about this already. So if you have an IRA, a 401(k), a 403(b), transfer on death of a non-retirement account, you want to make sure that you change the beneficiary, and realize that California is that auto-revocation state. Not all states are. But make sure that you have the correct beneficiaries, just get that done as soon as you can.

Number 12 is wasting money fighting about child support. The reason there – don’t spend a lot of legal time on this, child support is set by a formula which the courts rarely deviate from. So obviously, have your attorney help you with this, but don’t spend a ton of money finding something that’s probably not winnable.

13 is going to court unnecessarily. If at all possible, you’re trying to stay out of court. There’s mediation, there are other kinds of things that you can do.

And the last one is not enlisting the help of a financial planner. And of course, this is a quote from a financial planner. So again it’s a bit self-serving, although this is from Scott Hansen, who’s a CFP that I actually know and trust! He’s actually a good guy up in Sacramento. But at any rate, when you get divorced and you’re trying to figure out finances, particularly if you were the spouse that didn’t know as much about finances as the as the person that you divorced from, make sure you hire a financial planner, make sure that you are on the right kind of budget, the level of budget that you can sustain, and that you have a plan for moving forward, for maybe buying a house again some other time, or retiring, or any other number of goals. That you have a financial planner can be fantastic for that.

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Now let’s open up the email bag. If you’ve got a money question, send it to Joe and Big Al at info@purefinancial.com.

23:47 – Email Bag: I inherited $180,000 and want to buy a house. Should I pay cash or invest in a mutual fund? If I retire at 62, can I still pay in to Social Security until I’m 65 or 66 to maximize my withdrawals?

JA: I’ve got a couple more e-mails. “I am 76 years old and retired. I have excellent credit and receive $22,500 in total income per year. I received $180,000 inheritance and want to purchase a new home. What is the best way to approach buying this new home? Should I pay $180,000 in cash? Should I invest in a mutual fund and pay the monthly mortgage using the mutual fund? Would that be possible in the foreseeable future?”

AC: All right, well we don’t have a lot of information, but I’ll go off of what we have. So $22,500 of annual income…

JA: And I guess this 76-year-old is comfortable with that $22,500.

AC: Yeah. Yes. They’ve figured out how to live on that. That’s less than $2,000 per month. So $180,000 inheritance, wants to buy a new home. First of all, I’m not a mortgage broker or advisor, but I think a quick rule of thumb is the amount that you can borrow is something like your income times three. Don’t quote me, maybe it’s times four but you’re going to have problems, I think, borrowing as much as you want to borrow. Maybe you can borrow some, maybe you can borrow $60,000 or $80,000. I’m not really sure. So you’re going to have to use a lot of the cash, depending upon how much the cost of the home is.

JA: Buy it with cash.

AC: If you can. Because you’re already covering your lifestyle.

JA: Right. And now you’re going to save money because you’re renting somewhere. So you just take the $180,000, buy it for cash. That money that you put in rent is now going to be used to pay for your property tax, maintenance, insurance. But then you have equity within the home.

AC: Yeah. And of course, what we don’t know is do they have other assets that they can draw on if she needs it. But yeah, I think it’s going be hard to qualify for a loan, and I’m not sure if that’s going to be the best answer for you either. I agree with you, Joe.

JA: So then here’s a little sidebar question that they asked, “should I invest in a mutual fund to pay them monthly mortgage using the mutual fund?” The answer is absolutely not. This is where I think people get a little bit confused on rates of return because they might hear, “Hey, I bought this mutual fund, this mutual fund has averaged 6% over the last 20 years. So that’s 6% of my $180,000, well that might help me pay my monthly mortgage.”

AC: Yeah, because the mortgage is only 4%.

JA: Well no, what’s 6% on $180,000?

AC: I dunno. $11,000, call it.

JA: OK so let’s say that their mortgage is $11,000. So they’re going to say, $180,000 goes in and they’re going to get $11,000, they’re going to pay the mortgage with that $11,000 and keep the principal of $180,000 for the rest of their life.

AC: Sounds good.

JA: Sounds great. And I think that’s why this individual is asking that question because I think a lot of times people think that way. If you got a guaranteed rate of 6%, which you cannot find, then that’s one thing. But no. That is way too risky because if you’re going in whatever type of mutual fund and try to get a little higher expected rate of return to pay a mortgage payment, you’re going to have tons of volatility within that overall mutual fund. And some years you’re going to do well, some years you’re going to do poorly. But now you have this mortgage over your head, and this thing will dry out fairly quickly. So I would just pay it with cash. Get over it. Now you got your home and go from there.

AC: Yeah, I think another side point – we get this question as well. I got $180,000. I want to buy a home maybe in a couple of years, so how should I invest it? And the answer is put it in cash, or put it in a very safe short-term bond fund because you can’t really risk that principal. And any money that you want to get at within three to five years, really shouldn’t be invested in the market, because you can’t really depend upon the market in the short term.

JA: Right. Without question. We’ve got time for one more here. “If I retire at 62 years old, can I still pay into the Social Security system until I start withdrawing at 65 or 66 years old? I think I would need to do this to maximize my monthly benefit.”

AC: Got it. Well if you truly retire, then the answer is no. Because the way you pay into it is through your job. So you have to either keep working or at least have a part-time job or something to be able to pay, and you can’t just write the Social Security Administration a check, which I think is kind of the question.

JA: Right. In other countries you can do that. But not here in the good ol’ USA. I’m retiring at 62. Can I continue to pay $5,000, $10,000 a year, $7,000 a year into Social Security?

AC: Right, and get a good benefit. Actually my brother, who’s an attorney in Sacramento – actually he’s a judge. So be careful when you’re Sacramento, Joe. Just warning you. (laughs) Anyway. He’s been at it I don’t know how many years, maybe six or seven, something like that, and he’ll work another six years or so, I think is what he told me. But he wants to buy another seven years, because you can with the state of California pension. And that might make sense, but you have to run the numbers and see if it does. But you can’t do that with Social Security.

JA: Yeah you can’t buy in years in Social Security like you can in some other pensions. But here’s another point with these questions that we get. If you’re 62 years old and you need to maximize your Social Security, keep working! (laughs) Don’t retire at 62! I get it. It’s like, “Oh I’m tired, getting older.” Well, you can’t afford it!

AC: It’s true. And we just talked about life expectancy for someone that makes it to 65. So for men, it’s 87, for women it’s 89. That’s a long period of time for retirement, which is why Social Security retirement age is going up. It will be 67 here pretty soon, and you’re going to need to have more productive years to be able to fund this retirement, because we’re living longer, which is a great thing until you start adding up dollars and cents, and you better have a plan for it.

JA: Yeah. It always boils down to a plan. I don’t care if it’s on a napkin. I don’t care if it’s a thousand page document.

AC: Ever seen a thousand page document?

JA: Oh yeah. Yeah. Thing’s huge. Heavy as hell. (laughs)

AC: (laughs) Comes in a wheelbarrow?

JA: (laughs) It does. But yeah it’s just taking some time. Real simple. Start with your net worth statement. What is a net worth statement? It’s just basically all your assets – and assets could be your home, it could be retirement accounts, could be cash accounts, minus your liabilities, which is your mortgage payment or credit card debt or car loans. That equals your net worth. That’s where you start. It’s real simple. Just start there. And then, you want a cash flow statement. All that is a look at your income coming in minus the expenses going out – is it positive or negative? Then get a decent handle on that. Those are two documents that are crucial. It takes a matter of – I don’t know, half an hour? To put together for the rest of your life?

AC: And I think Joe, sometimes people get really caught up in, “well wait, I’m spending $28 or $30 on cable,” or whatever it may be.

JA: Right. And they just get caught up in the weeds.

AC: For the purposes of this example, it’s like no, “what’s your net pay?” “OK well, my net pay is $5,000 a month.” OK, so that’s $60,000 for the year. “Do you have money extra at year end?” “Yeah, I probably put about $200 a month in my savings, so that’s $2,400.” So $60,000 minus $2,400, that must be what you’re spending. It doesn’t have to be that complicated. Now if you want to take the time to get it more accurate, I’m all for that. That’s a really good thing. But if you just do that first step of looking at your net pay and then and then deciding whether you have extra, or in some cases, you’re spending more than your net pay because your credit card bills keep going up year after year.

JA: Sure. And I get it. We all want to find that. There’s two things, though. There is financial independence and then there’s some people that are retiring. And I like financial independence a lot better because people are retiring without doing the appropriate planning, and it’s going to blow up. It’s got to. They’re going to – I don’t know. We know people that spend a couple nickels a year and they’re the happiest people on earth. So money is not everything. But if you don’t plan on it, and you’re really happy the first couple of years of your retirement, and then you find yourself broke? That’s a long row to hoe. That’s why divorce happens frequently now with people in their 60s right. What do you think the number one reason is? It’s not because they’re cheating on each other!

AC: They don’t have the energy for that. (laughs)

JA: I know! 70 years old: “Going out to the clubs, babe!” (laughs)

AC: “See ya Monday!” (laughs)

JA: “I’ll be home around 3:30.” Well, maybe they’re going to the Sizzler?

AC: Yeah. Couple of things, it’s not planning, the finances blow up, and the second thing is all of a sudden they’re together all the time and they haven’t figured out how to do that.

JA: Yes. It’s like, “get the hell outta here. Leave me alone. I’m used to seeing you at night or on the weekends.”

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34:28 – How Safe is Your 401(k)?

AC: This is an article I saw from U.S. News and World Report on How Safe is Your 401(k)? And I think that’s a pretty relevant question right now, because we’ve had an eight-year bull market, probably likely one of the best markets in our lifetimes, and of course what preceded that was the Great Recession. And that often happens when there’s a huge correction, there’s also a huge bull run. And so people are a little bit worried about their 401(k)s, particularly this year it’s been a lot more volatile. So here’s a couple of thoughts to check the safety of your 401(k). The first one – and some of these will be basic, but I think it’s worth revisiting and thinking about – is to make sure you’ve carefully selected your investments. And a lot of people don’t really fully realize that, depending upon what investment choices they make in their 401(k), it can completely change the outcome of what the future might look like. For example, stocks generally outperform bonds over the long term, but bonds are safer. They’re less volatile. And certain kinds of stocks generally return more over the long term, like small companies stocks, value stocks, emerging markets stocks. But they’re also a lot more volatile. And I think it’s easy to get complacent over the last few years that the stock market will always go up, and I think a lot of people have loaded up on these aggressive investment categories. And I think it’s worth taking a look right now to see, is this really the right mix for you, and how close you are to retirement.

JA: Well that’s called recency bias. Because when you have a good bull run, people continue to believe that it’s going to do what it’s done in the past. But they do the exact same thing when the market goes down. And so then they believe that the market is going to continue to go down, so then they react completely differently. If you look at 2000 through 2010, several studies have been done, and if you look at the highest performing mutual fund in that time period – because if you look at, let’s just say the U.S. markets as a whole. The U.S. markets as a whole was down about 10% over a ten year period.

AC: So not only did you not make anything, you lost money.

JA: So if you started with a million bucks, you had $900,000 ten years later, if you bought and held. That means you didn’t get out of the markets. Because if you remember, there was 2000 through 2002. And then we had the Great Recession. So those two year time periods were brutal. Down roughly, I don’t know, what, 40-50%? But they looked at the top performing mutual fund within that time period. And I don’t know the name of the fund. Just call it a hypothetical fund. Just for compliance purposes. (laughs) It was up about 22% over that time period. So then they looked at the average investor within that fund. Guess what their average rate of return is in that same time period, and they were invested in that fund?

AC: I’d say 5% because they bought and sold at the wrong times.

JA: Negative 11. (laughs) So it just shows that individual investors, even institutional investors, we’re human beings. And as soon as you started taking a look at your account balance, it’s like, “oh my gosh, I’m down 10%. I got to do something I got to get out of this.” It’s human nature, because if you see a train coming down the tracks right at you, you want to get the hell out of the way. That’s what we believe or feel when we look at our market balance. If it’s going down, it’s like ” danger! Get out!”

AC: And I have a little history here – I looked this up, Joe. So you look at the Dow. And in October of 2007, so this is a little over 10 years ago, it reached a high of about 14,198. And then by March of 2009, it was 6,470. So that’s the 40, 45% down that you were just talking about. And of course, we know a lot of people panicked and sold at that point. They got into cash. “The market doesn’t work. The system’s broken. You can’t make any money any more.” Now April 2018, the high of this last month, 24,859.

JA: Close to 25,000.

AC: Yeah. You go from 14,000 to 6,000 to 25,000 just by doing nothing – just by staying. And I’m not saying to invest in the Dow, I’m just giving you a frame of reference here. And a lot of times, when they say, “well wait a minute, we’re at all time highs, I got to get out, because there’s going to be a correction.” Yeah there’s going to be a correction, but you have the right investment strategy, you probably shouldn’t be in all stocks. That’s why you want to have diversification. Turns out foreign stocks, they tend to go up and down at slightly different times than U.S. stocks. And then there’s bonds, which in some cases do somewhat the opposite of stocks, not always. And so that’s where you have more safety is the diversification, and not by getting in and out of the market.

JA: You know, you did a wonderful job this week, Alan. As a CPA, talking about Al and I had a client meeting, hypothetically, and Brian Perry was with us, and he’s our director of research, he’s a chartered financial analyst. Alan’s a CPA, and I’m a certified financial planner. And we were doing some complicated investment strategy on this person’s stock. (laughs) And I was thinking about it this morning on the drive in. You’re like, “OK, this is going to be fairly complicated, but we can isolate the price of the stock with some options. There’s all sorts of different flavors.” (laughs)

AC: (laughs) You like that? My technical term?

JA: (laughs) It’s like, “is this Baskin Robbins?!”

AC: But I got that from Alexis in our trading department, he said, “you’ve got all kinds of choices.”

JA: (laughs) “We got all sorts of flavors here. But it’s gonna be good.”

AC: “It’s going to be really good. You might limit a little bit of your upside, but you get rid of the downside.”

JA: (laughs) “So what do you think?” “Uh… OK, what does that really mean?”

AC: Yeah. And you were trying to pull me out. You were saying, “Brian? Would you get in there and tell them what really is happening?”

JA: (laughs) Because this person has a couple of million bucks in an individual security. The security is fairly volatile, and they’re looking to retire in the next year or two. And if they sell it, they got a million two of gain. So we looked at it and said, “we got to figure out a way to sell this off over time. But we also can’t necessarily have this individual security.” And so we did some caller options on it and secured the price of the stock.

AC: We talked calls and puts, didn’t we?

JA: Calls and puts, baby. All right. That’s it for us. Hopefully, you enjoyed the show, we’ll see you again next week.

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So, to recap today’s show: Watch out, because Big Al’s brother is a Big Judge, a thousand pages is delivered in a wheelbarrow, 70 year olds pick up chicks at the Sizzler, and investments are like ice cream – they come in all sorts of flavors. It’s important to pick the flavors that work best for you, and you might need a professional scooper for that. I might be getting too deep into this metaphor.

Special thanks to our guest, the Financial Lifeguard Christine Luken. Visit FinancialDignityAfterDivorce.com to regain your financial dignity after divorce.

Subscribe to the podcast at YourMoneyYourWealth.com, your favorite podcatcher, or Apple Podcasts. Listen next time for more Your Money, Your Wealth®, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.