#stumpjustin 8/31/18 – Tax Reduction Strategies, Buying New or Used Cars, What to do with Extra $

#stumpjustin 8/31/18 – Tax Reduction Strategies, Buying New or Used Cars, What to do with Extra $


Hey guys! This is Justin Goodbread here with Financially
Simple. It is Friday! Friday at 4:30 on a long weekend. I hope you have some, uh, plans ahead for
this weekend. Um, man, I know I’m gonna run a chainsaw a
lot this weekend. I’m gonna be goofing off and, uh, doing some
work. I’m hoping to get the boat out on the lake
one more time this weekend, but, um, man, I’m ready for it. So it is Friday. My brain is fried, but we have a ton of questions
this week. Our lines have been lit up. We have all sorts of questions from various
folks. We have some questions we’re gonna answer
from last week’s “Stump Justin” episode. Sorry, my nose is itching. We had some questions come in from Twitter. We had some questions come in through Investopedia. As you know, I write for Investopedia. I write for Forbes. I write for Kiplinger, so I get questions
from those directly to me, and a lot of those folks join us on this video during the week,
and so, we’re excited to answer a lot of questions this week, and I have a ton here. So for those of you who are joining us and
for those of you who are going to watch this video later on, feel free to shoot me a message. Shoot me a comment here on this particular
video if you’re watching it later on. If you wanna leave me an email at [email protected]
or [email protected], if you wanna shoot me an email at one of those locations,
our team will get it. They’ll put it into the que here of all these
questions that I get to answer for this particular week’s episode, so today I’m gonna go through
and start answering a lot of these questions here today, and so there’s some fun ones in
here. I’m gonna start off with this one. I thought it was intriguing to me, and the
question is this. It says, “So Justin, because of my low income,
would I not be subjected to capital gains tax if I sell my house?” Let me ask that a different way ’cause I didn’t
like the way that question was worded. It basically said, “If I sell my house, am
I gonna pay taxes on the house?” And then they went on to say, “Justin, I have
a house in California worth $2 million. I have been in the home for more than 30 years. The original cost was $70,000. Man, talking about a nice investment! Um, he said, “I spent about $50,000 in repairs
and upgrade. My total income between Social Security and
a little bit of income from my pension’s about $30,000, and I have no other income or investments. Because of my low income, would I not fall
into the 0% capital gains tax?” So that’s what he’s asking. Is there a way to determine this? Here’s a quick answer for that. As individuals, we can properties, which is
what a lot of us do. We buy houses, and we can allow those houses
to appreciate in value, but the IRS says that we can sell, for a married couple, a married
couple. We can sell a house, and the first $500,000
of those gains, in most cases, are not taxable. Anything over the $500,000 is gonna be taxable
to us as capital gains tax. So in this particular case, I told the individual. I said, “You need to talk to your tax advisor,”
and they said, “Yeah, we’ve already reached out to this individual. We’ve reached out to our tax advisor, and
he said the exact same thing you’re saying. He’s saying, Justin, that if I sell my house
for $2 million, and my basis, which is the amount of purchase plus his repairs and maintenance
in the house, is roughly $120,000 – my basis is $120,000, but it’s currently worth $2 million
– and I sell it for $2 million, I’m gonna pay taxes on that gain for most cases. Now, there’s always an exception to the rule
in finance, but the majority of times, you’re going to pay taxes on that. So for us, for those of us who aren’t dealing
with a $2 million house that’s appreciated in value that much, if we have a house, and
it does appreciate, and we wanna sell it, as long as we’ve lived in that house at least
2 of the last 5 years, 2 of the last 5 years is the rules, then the gains, in many cases,
the gains are not taxable as long as we as married couples don’t exceed $500,000 in gains,
and single individuals don’t exceed $250,000 in gains. So, by no means is anything on this show considered
personal financial advice. This is just for educational purposes only. I’m gonna tell you that this is where you
talk to your tax advisor in this particular case. So talk to your tax advisor. See what they have to say about your particular
circumstances. The information that this individual gave
me is not enough for me to actually give advice, but I’m gonna tell you the same thing I told
this individual. Talk to your tax advisor. So I thought that was intriguing, interesting
question this week. Hey! For those of you coming into the show right
now, if you have a question, just drop it in the comments section, and I’ll jump on
it today. The idea is to try to stump me. Now, I got a lot of questions here this week
that are kinda tough. Um, I’m not sure any of them are gonna stump
me, but they’re kinda tough. Here’s one that’s an interesting one here. It says… The title of it says, “What are some strategies
to minimize the impact of taxes for high earners in a high tax state?” And they said, “My wife and I make about $900,000
combined. We live in California. We pay a lot of taxes. Most of our income comes from our salaries
and bonuses. We’d like to minimize the impact of taxes. What might be some good choices for us to
consider? Should we…” He said, “Taxes and bonds don’t work, and
tax lost harvesting are minimum, and they have very little impact to our net income. Is real estate a good idea? What other ideas should we consider?” So that is a very big question. The ultimate question is, is look. We make a lot of money. How do I not pay taxes on it? How do we reduce our taxes? Whew. You know what? I just finished up a conversation with one
of my clients and his tax advisor, who I work very closely with, and we were having this
discussion on almost the exact same numbers. I mean, I just hung up the phone probably
15 minutes ago. We were diving deep into some various scenarios,
and we had ideas that were created like conservation easement. We dealt with defined benefit plans. We dealt with charitable remainder trust or
charitable need trust or charitable annuity trust or all these types of charitable trusts. We talked about gifting. We talked about charitable annuities. Um, we talked about a lot of different things. Here’s the thing. Whenever you’re dealing with high income,
there’s never just one thing that you can do to minimize your taxes. Very seldom is that the case. So you start with the basics. You start with the basics. Are you maxing out your retirement accounts? That’s number one. Most people aren’t. They’re looking for a quick bullet. So number one, are you maxing out your retirement
accounts? Are you using an HSA or an HRA, and HFA, any
of these type of health accounts? Are you using these accounts? HSA, HRA are some of the best out there for
business… for people who are high income earners. Um, after you get out of the basics, then
you go into well, can I use real estate? Real estate works decent. Um, a new code allows us to take a lot of
up front, accelerated, I’m sorry, cost segregation studies on residential real estate with the
way the new tax code works, so it could help in one year, but it may not help the next
year. And if you go to sell the real estate, now
you’re left doing a 1031 exchange, or you have to pay a recapture tax, so I’m gonna
answer the question as this. The question was, is there, is there one thing
I could do to help minimize my taxes? The answer is no. There’s not. There’s a multiple of things you can do. This is where you’re gonna have to get with,
like our clients just did, get with a planner, a CPA, and a tax attorney. Get all three of those parties on the phone. That’s what I just got done with. When everyone of those professionals on the
phone have different ways of thinking… I put out ideas. Some of them were good. Some of them were bad. The attorney put out ideas. Some of them were good. Some of them were bad, and the CPA put out
ideas. Some of them were good, and some were bad. Well what happened was was that a brain trust
came together, and we had multiple different scenarios. Now, my job is to come back with those other
parties, with the attorney and the CPA, and to figure out which one, or which path, is
gonna yield the results that this particular client needs. That’s the same approach that this individual
needs to take. If you’re making a ton of money. This guy said they’re making $900,000 combined. If you’re making that much money, you’re not
gonna get the answer to your question in one line. You’re gonna have to spend some time. Get with some professionals, and let them
use their minds, their power, use programming to figure out which concepts plural could
help you minimize your taxes. So there’s not just one idea. There’s multiple different things. So those of you who are just joining us, what
I’m doing is I’m going through, and I’m answering questions from individuals that we’ve received
this week. If you’re watching this later on, and you
have a question, you can reach out to us a [email protected] You can leave us a question, like this next
individual did, on FaceBook. They actually sent a message. Um, you may go on Twitter. Shoot us a tweet out there, and say “Hey,
stump Justin #stumpjustin. Here’s a question for you.” This question comes in, and it’s from one
of our listeners, and the question was, “Self-directed IRA in trust.” So they have a self-directed IRA, and they’re
using a company as the custodian. They rolled 401(k) money into an IRA account
which is common. A lot of times, whenever you leave your place
of business, you have a 401(k), a 403(b), or some sort of retirement account, and you’re
retiring, or you’re moving from one job to the next, you’ll roll over. You’ll move the monies form that corporate
retirement plan into an IRA or a self-directed IRA. That’s a very common practice. So there’s many reasons why you would do that. One reason why I personally did that with
my own money, whenever I changed some things in my company, was it allowed me to open up
my investment world to more investments than I can offer you in a 401(k). Now, there’s reasons why you would not do
that. 401(k)s you can borrow money from. IRA’s you can’t, for the most part. Again, there’s always exceptions. But the question goes on. It says, “I rolled the money from a 401(k)
into an IRA account, and I purchased real estate.” So, and they said, “What is the best way to
get out of an IRA with the lowest amount of tax ramifications?” All right, so we’ve gotta dissect this particular
onion, pull back the layers, okay? So the money was moved from a 401(k) to an
IRA. We got that. That makes sense to us. Then, they bought real estate with the monies. Now, you can. You can use IRAs, Roth IRAs to purchase real
estate. Um, many people did that some years back. I’m gonna tell you, I am not a big fan of
that. I’m just not. There’s a number of reasons for that. Let me give you a couple of the highest levels. Number one, the reason why most of us purchase
real estate is because of the tax benefits. Whenever you buy it in an IRA, you’re basically
not getting those tax benefits, and in fact, whenever you pull the money out, you’re paying
taxes at the highest bracket. So whenever I purchased my rental property
some years back, and I’m selling one, my last one next week, whenever I purchased rental
property, I did it outside of my IRA, and so I received tax deductions through the years. My income dropped drastically through the
years. A lot of different things transpired. (I just turned my phone off). A lot of different things transpired through
the years that allowed me to reduce my taxes. Now, when I go to sell my property next week,
my CPA, my tax advisor, and myself have already ran the numbers, and I know that the majority
of my earnings are going to be taxed at a 15% bracket, at the lowest capital gains bracket. Now, I’m gonna have some recapture. It’s called recapture tax from the depreciated
asset, but in an IRA, you lose that. You lose the ability for tax benefits. You lose your IRA for real estate. The number two reason for IRAs is you’re required
to take distribution out of your IRAs at a certain age – 70 and a half. It is near about impossible to get money out
of a piece of real estate to meet the required minimum distributions. It’s fairly impossible. I’m not saying it’s not possible. It’s very difficult. So that’s another reason why I don’t like
using IRAs to buy real estate. I know you can. You can. I just don’t like it. The third thing about IRAs and real estate
is it prevents me from being able to leverage dollars. Real estate works really good for what’s called
a cash on cash return. If I can put 20% down and get appreciation
on that 20% in the markets, then it helps me out drastically to build my net worth. If I’m using my own money to go out and buy
a piece of real estate, then I lose the ability to leverage my assets, so I’m not just a big
fan of using IRA money to purchase real estate, so let me address that number one. Then the question goes, “I wanna know the
best way to get out of an IRA with the lowest amount of tax ramifications.” Ooohhh. Okay, so my simple answer to that is time. Time. Um, if you can spend down the IRA slowly over
time, then you can get out of the IRA with the least amount of tax ramifications. Anytime we take money out of an Individual
Retirement Account, (I’m not gonna say anytime), most of the time we take money out of the
Individual Retirement Account, we’re gonna pay taxes. We’re going to pay taxes at an ordinary income
rate. If we dump a lot of it out at one time like
we talked about last week in our “Ask Justin” questions, then we’re gonna increase our taxes,
and it ends up hurting us. So, what’s the best way? I don’t know. I don’t know the particular circumstances
here in this particular situation. My answer to you is, get with a financial
planner. Get with a tax advisor. Let them see what has transpired. Make sure that you haven’t hurt your IRA. If you didn’t follow the rules just right,
then you may have already blown up the IRA. You may …. taxable …. altogether. What’s the best way to get out of an IRA with
the lowest tax ramifications? Man, it’s gonna be building a comprehensive
plan and using time to your advantage. You could use some charitable contributions
to offset it, um, but outside of that, it’s just gonna be time, but there’s some other
tricks of the trade that you can use, but you need to get with a planner or your tax
advisor to ask that question. With this particular thing, I can’t tell you
the best way on how to get out of an IRA, um, with the least amount of tax ramifications. I don’t know enough about your particular
mix, but I can tell you that I’m not a fan, not a fan of using IRA money for real estate
purchasing. So I hope I answered that question. I’m gonna tell you to go back and talk to
your advisors, and they can get you the specifics. If you don’t have an advisor, reach out to
a good Certified Financial Planner and a good Certified Public Accountant, and they can
help you with that. Um, all right. So we have a lot of people jumping in right
now to the, onto the live video, so here’s what I’m gonna tell you. If you have a question for me, now’s the time. Drop a question in the comments section here
below. If we don’t get to ’em on the show today,
I’ve got a list of questions here that I’m we’re working on here today, man, that came
in this last week. A lot of people are sending emails to [email protected] Even on our podcast, I had a question come
in from a listener on our podcast. We have a podcast, Financially Simple. It’s on iTunes, Stitcher, Spotify. Somebody was listening to some things, and
they reached out and said, “Justin, I’ve got a question for you.” So if you’re listening to us on the podcast,
on YouTube, on FaceBook, on Twitter, Instagram, wherever, if you have a question, put in the
heading, “Stump Justin,” and I’ll put it to the list, and we’ll deal with it next week
in our episode. So another question we had come in this week
is it said that, “What should I do with the extra income I’ll be earning from a promotion?” It said, “Justin, I’m 26 years old. I’m married, and I have 3 kids.” I’ve been there. “I was recently promoted.” Congratulations! “I now have an extra $300-$400 in income per
month. What should I do with it? I have about 3 months of savings in an emergency
fund.” In quotations, he said, “I knew you were going
to ask that.” Then he said, “Should I invest the extra income? Should I put it in a savings account, or should
I pay off a little bit of debt? I’m new to investing, and I’m not sure what
to do with a little extra income.” So that’s all good questions. So let’s peel this onion back slowly, okay. Congratulations, number one, on your emergency
fund. Props, mad props, 3 months worth of expenses. You don’t say if your spouse works in this
particular case. Um, I reached out and found out their spouse
does work, so they do actually bring in income, so I’m gonna say that three months worth of
cash is probably good for this family. Now, you say that… Next question says, “Should I put money into
a savings account?” My question is, do you have the ability at
work to contribute to a 401(k) or some sort of retirement plan? If the answer is yes, then I’m gonna tell
you if you’re eligible for enrolment into that plan, go ahead and enrol in that plan
, and put the extra money, this extra money, out of site. I use an acronym called M.O.O.S.E., you know,
like the big thing with horns on its head. The MOOSE stands for Monthly, (the M), Out
(the O), Of (the other O), Sight (the S), Expense. So Monthly Out of Sight Expense – MOOSE. If you can put the money back out-of-sight,
every month in a habitual way and invest it, not a savings account (we don’t need any more
cash based on the data that you provided), but if you could put it back now and just
leave it alone, get a good, high-quality stock investment, something like a mutual fund or
an Exchange Traded Fund, through a 401(k), just leave it alone. That extra money’s not going to create taxes
in most cases because we’re gonna be able to offset it with our 401(k) pre-tax contribution,
and it’s gonna create a compounding growth factor for you. So, I don’t wanna see this extra money going
toward any cash accounts. We’re too cash rich in some cases. I wanna see the money starting to work for
you. Now, you said you had debt. Well, in our conversation, this individual
said that it’s on the house. I’m like, you know, you don’t have any car
debt. You don’t have any credit card debt. You don’t have any student loan debt, so this
is a pretty good little position for this 26-year-old young family. Now’s the time for them to start taking this
$300-$400 a month and start putting it back into a savings account. Now, if you’re not eligible for a 401(k),
you could obviously look at an IRA or a Roth IRA. Either one of those, depending on the income
brackets, will make a lot of sense. I love the Roth IRA. In fact, me and Ms. Emily just maxed out our
Roth IRA for this year. I’m super stoked about that. I like the Roth IRA. I personally use that. So if you don’t have a 401(k) at work, you
can use a Roth IRA and get tax-free compounding growth on that money. So if you’ve got a little extra income in
this particular case, put that extra income toward an investment. We don’t need to save more cash. Now’s the time to start investing and allow
the power of compound interest to just move your net worth into the future. Good question, though. So here’s another question I got this week. Just a quick Tweet. “Hey Justin, #stumpjustin” came in on Twitter. “What should I do with an inheritance?” Okay, simple question, but I understand Twitter. So I recently, my aunt, someone who I love,
I mean, this lady was in my life at every Christmas as long as I can remember. Just a crazy aunt. She left me and my brother and sister a little
bit of inheritance. I’m having to deal with the same question. My family – my brother, my sister – are dealing
with the same question. I can tell you what my thinking on inheritance
is and how to utilize that. So, what should I do with an inheritance?#1
– Look at any debt that you have as stupid debt. Stupid debt. I use “stupid debt.” I don’t mean that in a derogatory manner. Student loans, credit cards, car loan. Any of those things, why don’t we use some
(not all of it), but some of the inheritance to pay off some of that crazy debt. That’s #1. You say, “Justin, I don’t have debt” or “the
inheritance is larger than all my debt.” Then, #2 – You gotta spend some money. Time out, Justin. You just told me to spend money, yeah. Our families gave us this money for us to
enjoy. So in our case, I went out and bought me some
things for hunting. I’m enjoying the fire out of them. Ms. Emily went out and bought a… She’d been wanting a new couch and some chairs,
living room furniture, so she bought us some living room furniture off of some of the inheritance. It’s something we’ve been saving some cash
toward. I think my aunt would be pleased to know that
we were able to use some of that money for our own benefit. We were playing with the money, but we also
invested some money. We used some of that money to max out our
Roth IRAs. We finished maxing out our HSAs. We finished maxing out, or we will finish
maxing out our 401(k). We’re investing some of those dollars. So I can tell you that #1, you pay off your
crazy debt, your stupid debt first – credit cards, student loans, car debt. Pay those off first. Then spend a little bit of the money on something
that you’ve been wanting. That way, your loved one, they gave you that
for you to enjoy. And now, whenever I see those things that
we bought, I’m sitting here looking at my aunt and just enamoured that she loved us
so much that she would give us something. That’s where inheritance comes in. And then the third thing we did is we actually
invested it. So now, as we watch those investments grow,
my aunt has positioned my family and my brother and my sister in a position to where we’re
gonna be a little bit better off because of her generosity and her love for us. So if you’re getting an inheritance, go with
that. #1 – Pay off some debt. Pay off the crazy debt first. Spend a little bit of money and enjoy it. Do some things that are gonna add value to
your life that you can create some warm fuzzies with for yourself, and then invest a little
bit of that money. So that’s what you should do if you get an
inheritance. Thought that was a cool question. Now, I’ve got a lot of questions here, but
perhaps the number one question that I need to answer is, I’m trying to get the microphone
up here so you can hear me on this one. Um, I have gotten lots of text messages from
friends, lots of messagings from FaceBook, things from Twitter, just all over the place. So, I’m sitting here in the office this week,
and for those of you who subscribe to the Financially Simple channel, I did a quick,
impromptu video on buying a car. Holy cow! It is driving me batty on what I’ve gotta
deal with. So let me lay out the story for you. I’m gonna tell you kinda where I’m at today. I’m gonna promise you it’s gonna change. So, I have stumped myself. I am stumped. Justin has stumped himself. Here’s where I’m at. I need to buy a car. What do I do? Do I buy a used car, or do I buy a new car? Well, my initial thought is to buy a used
car. Buy a used car. I’ve been preaching it forever. Buy a used car. Except, I’m working on the numbers. So I’ve looked out there in the car space
that I’ve looked at, the vehicle range that I wanna buy, and between a used car with about
30,000 miles on it and a new car, there’s only about a $5,000 difference. It’s not a lot. Now, I did this same exercise about 4 years
ago, and there was a major, there was about a $15,000 difference between a used car and
a new car. Right now, there’s only about a $5,000 difference. So I’ve looked at every make. I’ve looked at Toyotas and Chevys and Fords
and Hondas and Nissans. I’ve even looked at some luxury vehicles like
Infinitis and Acuras and Lexus. I’ve looked at a lot of different vehicles
just in my night time, playing with my phone, and there’s only about a $5,000 difference. So I’m calculating, and I ran this calculation
on my Nissan Murano. I bought it, and over the last 4 years, I
have put 120,000 miles on it in 4 years. That tells you the amount of driving I do. In those 4 years, I have spent from the purchase
(and I got a good deal on the car), from the purchase, the repairs, the maintenance to
today, I’ve spent about $22,000. So I’m spending roughly $4-500 a month on
this vehicle, okay? And I’ve only got 4 years out of it, and the
car is like eeekkk. It’s done. I wish I could go further, but it’s done. Now, I spent about 20 grand, but I can get
about $5,000 when I sell it, so I net about $15,000 over a 4 year period of time. So keep that in mind. That’s my math on this side of it. So now, I realize that if I buy a car with
30,000 miles on it, for me, that’s about a year to 18 months worth of driving. If I calculate that I just spent $4-500 a
month, in a year and 18 months, I’m about 6 to 7 to $8000 that I would spend in that
first 30,000 miles. Therefore, for me to buy a new car and a used
car, if I equate them, and I get the mileage just right, they’re equal. They’re about the same price. So then I said, “Well, my goodness.” A used car used to be the way to go. Now, I’m looking at a new car, and I’m going,
“Man alive! I don’t want to buy a new car.” First of all, they’re crazy expensive. I can’t believe the price tags these vehicles
have on them, but I pick up a warranty, and several of these companies like Toyota, like
Ford, like Infiniti, like Honda, they have lifetime warranties on ’em, on the engine
and the transmission and the chasis, the drive-train, etc. And a couple of these things have even greater
warranties based on the dealership. So I’m looking at a 4-$5000 difference, saying,
“Man, I don’t wanna buy new, but I’m spending about the same amount of money when I equalize
out the mileage, and I can get a warranty with lifetime on it as long as I own it.” And I own cars, typically, for like 20 years. In fact, we have a Ford Excursion I bought. It’s a 2002 Ford Excursion. I bought it in 2005. We’re pushing about 300,000 miles on that
beast, and we’re gonna get it to 500,000. That’s what – we’re knocking on wood here
– that’s what I hope happens. So I’ve stumped myself. What am I gonna do? I don’t know. I’m gonna go out of town and not think about
it is what I’m gonna do. And I’m gonna see what the car market does
in the next 30-40 days, and depending on what the car market does, I may buy new, and as
much as I used to fuss about that, the current pricing is so crazy where the new cars and
used cars are very similar in pricing. Now, I’m forecasting out. I realize there’s just over (I think the number
is) 70 something million cars have been sold in the last 5 years. Every year’s been a new, all-time high on
the sales price. So what’s happened is the new cars have been
flooding the market, and the used car quality is way up. So because the quality’s way up, that’s where
the price comes in. Again, 5 years ago, it wasn’t that way. 5 years ago, you could be a 2 or 3-year-old
car and be giddy-up good. If you have any insight on it, let me know,
but I’ve stumped myself on that for the time being. I don’t know what I’m gonna do right now. Hey! I’m gonna answer a couple more questions here. If you have a question this week, drop me
a line on the comments or shoot me an email at [email protected] So here’s one of the last 2 questions I’m
gonna deal with. Number 1, here we go. Question was, “Justin, what is a safe return
to assume when running retirement projections?” And so I responded and said, “What type of
retirement projections,” and he said, “I’m just using a basic calculator.” So I wrote back, “7%.” That’s the number that I would use for this
particular aged individual. Now, you may be different. Your age may put you where you don’t need
to use 7, you need to use 5. You may not need to use 5; you may need to
use 3. It just depends, but in this case, I told
the individual 7%. And they said, “Well, where’d you get that
from?” And here’s where I got that from. Calper. C.A.L.P.E.R. That is the California Pension Employee Retirement
system. So that is CALPER. CALPER, which is the largest pension plan
in the United States – actually the world – the largest pension plan says that they’re
forward projecting assumption that they are using is 7%. So it’s a reasonable return. You know, some people around the media world
talk about this 10, 11, 12% long-term returns, and friend, that may happen. That may happen. Whenever I’m doing projections for myself,
though, I like to use… I like to plan for the worst; hope for the
best. My clients hear me say that all the time. Plan for the worst. Hope for the best. Let’s identify every major obstacle out there. Let’s plan for it, and then let’s hope it
never happens, okay? My safe assumption return for this individual
was 7%. Again, yours may be different. You may be at 3%, 4%, whatever, but it’s interesting
to me that the largest pension company, that manages tons and tons of money, is only calculated
on 7%. Now, there’s a lot of other studies out there
that are actually smaller than that! There’s some that I saw that are at 6% and
5% going forward. My own planning software in the office just
this week updated to a 5.46% assumption in the U.S. Stock Market. Now, I don’t know if that’s the number. I don’t know. It could be higher, could be lower, but I
thought it was interesting that CALPER said 7%. So, what’s the safe return to assume when
running retirement projections? I have the tendency to say, not higher than
7% right now, not given the current market conditions. I’m gonna get one more question, and we’re
gonna be wrapped up for this week’s edition. The question was, “Why does my advisor charge
1.5%; yet others charge 0? What gives?” Okay, that was a good question that I received
through Twitter. Well, it’s interesting that you say your advisor
charges 1.5. I don’t know how much money you have, but
I would bet it’s not a large amount cause the way the financial world works in the money
management space is the more money you have, the lower the fee becomes. In our office, it’s on our website, but I
think until you get to a million dollars, it’s like 1.2, 1.1 or something like that
is the advisory fee. But you made the statement of “Why is it that
others charge 0?” Do they really charge 0? Are they in business for free, or are they
in business for a profit is my question. Chances are they’re not charging 0. Chances are they have another charge somewhere
else that you haven’t seen. We took on a new client about 2 months ago,
and the gentleman had a fair amount of money, um, millions of dollars. Let’s just put it that way. And he was comparing the cost to manage money
with his current firm, which he was unhappy with, and our firm. His current firm was charging him 1%. We were going to charge him 1%, so it’s apples
to apples cost. But I had a small technology fee of like 50
bucks on there, and that was his fees, but he said, “Justin, over here I’m only paying
1% on about a million dollars, but on this other plan, I’m not paying any money.” What he had was actually a type of annuity,
and there was actually a fee, but it was hidden from the individual, so I had to go, and I
showed him, “Here’s the actual cost of the product.” The other thing that happened was he bought
a product from this other advisor, and the product went bankrupt, and he actually ended
up losing $200,000. Gone! Gone just that fast. He and I were talking about it, and I try
not to pour salt on a wound, but I said, “So and so, I understand that you think my fees
are higher, but I haven’t lost you $200,000 that’s not even got a chance to rebound. The company went bankrupt.” And he said, “Yeah, I know, and I said, “And
I haven’t placed you into a high-cost annuity that the other advisor made almost $90,000
on that you’re stuck with now for 10 years. I haven’t done that.” And he goes, “Yeah, you’re right.” I said, “But instead, I’m going to use you
in very liquid, build a very, very diversified portfolio that’s to your risk tolerance, and
we’re gonna save you some money on the other areas,” so we ended up showing him that we
saved him a lot of money in some tax planning and some retirement planning projections,
or retirement planning that we’re doing for him. So why does my advisor charge 1.5%? You know, I bet, just knowing the math; I
bet they’re a Registered Investment Advisor. I bet they’re using full disclosure, and I
bet the money that they’re managing for you is quite small. Why do others charge 0%? That’s…. Yeah, there are others that charge 0%, but
they’re making their money somewhere else. I’ll give you one last point to think on that. Um, Fidelity, about 3 weeks, maybe 4 weeks
ago, actually came out with their “free” mutual fund. Now, think about this. How can you have a “free” mutual fund? How are they making the money? Well, that’s through swaps. That’s through peer lending. That’s through a number of other things that
are happening behind the scenes. So if everything is “free,” how long is the
company gonna be in place, or are they making money elsewhere that could potentially harm
you long-term? So there’s…. Nothing in life is free. We know that. Nothing in life is free. So, whenever you see an advisor that’s charging
something, chances are they’re trying to get you the exact data, and they’re not trying
to hide stuff. Yeah, but others charge 0%. No, they don’t. They’re making money. The question is, how are they making it, and
are they being honest with you on how they’re making the money? So, guys, that’s a lot of questions. I am exhausted. I am ready to go home, just enjoy the weekend,
run some chainsaws, get on the boat, have a nice long weekend on this holiday weekend. Look, that’s a lot of questions. We’re gonna be answering next week. Next week, I’m actually gonna be driving. I’m gonna pull off somewhere in Kentucky as
I’m driving. I’ve gotta go out of town for just a couple
of days. Um, I’m gonna pull off the interstate, and
we’re gonna shoot an “Ask Justin Question” somewhere in Kentucky. I’ll be back on the weekend, but I think it’s
one night over time, but if you have any questions, reach out, and we’ll answer ’em. Until then, guys, check out the podcast. The podcast is rockin! The newsletter. Oh my goodness! The number of people who have signed up for
the newsletter is just beyond me. So, if you’re interested in that information,
I’ve got a good rockin’ newsletter. Sign up for it at the financiallysimple blog. Like I say every week, Life is hard. It is. Life is sad. Life is tough, and money can be frustrating,
but it doesn’t have to be. Let’s just make our lives, at least, financially
simple. Hey, ya’ll go out and have a blessed weekend.

About the Author: Michael Flood

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