Jon Gay

TRANSCRIPT

Jag: Welcome to the Art of Wealth Unbroken podcast. We’re here each and every week to provide you with investment and economic insights. We’re here to discuss trends and developments in the field of finance and retirement. Creating certainty in uncertain times. These discussions can help you make better informed decisions so you can make better financial choices with the wealth you’ve built and are continuing to grow.

Our goal is to help you live the lifestyle you’ve imagined for retirement. Stacy Andres is a registered financial consultant and I’m joined today by Michael Wallei, a certified financial planner. I am John Jag Gay and for our topic today, we’re talking about what is a financial plan and what should that effectively build plan include? Hello, Mike. 

Michael: Hello, Jag. This topic for this week’s show comes from a message that was submitted through our website by one of our loyal followers. So thank you for sending that message in. Each show we remind the listeners that the first step to having a financial independence is to define your short, your mid. And your long term goals.

Then to structure a written goals based plan that gives the highest probability of success. Now, you know, many times. JAG. On the show. I have talked about Steven Covey. He is one of my favorite authors and his famous quote is “begin with the end in mind.” Know your goals, determine your timeline, map out the most effective plan of action, and then monitor the actual results and make modifications if necessary.

Jag: You know, Mike, I’m thinking about many of the people I know that are currently working and contributing to their retirement plan or individual accounts, the approach, the methodical approach you just shared it’s much different than the course of action a lot of folks that I know are taking today, because many of them ,and myself included at one point in time, it’s just the enroll in their plan that the employer offers. They pick a few investment options. They contribute for 40 years and hope that when they get to retirement, there’s gonna be enough to live for 25, 30 years or however long they’re around 

Michael: Jag you painted a real picture of the approach that most workers are doing today. A couple of the words that you said just really resonated with me. 40 years and hope. You know, we know that the probability of success has increased when investors start saving early.

Jag: Sure. 

Michael: I mean, that’s an easy mathematical equation. Matter of fact, a lot of people could meet the same amount of savings in a much shorter duration, simply by saving more in their early years and taking advantage of the principle of time, value of money, make money on your money. Is the concept behind compounding.

Compounding is when your money is earning from your investments, is being reinvested for the opportunity to earn even more money. I would pose this question to anyone that is approaching retirement, that doesn’t have the investment resources saved that they needed for retirement. And if we pose this question to ’em, what is the one thing you would do different?

I believe that a majority of the time, the answer would be, I wish I had started saving earlier for retirement. 

Jag: Absolutely true. In my case. 

Michael: Now, having a written plan.With predetermined goals and set checkpoints gives the investor a higher probability of reaching their objectives, which translates into a happy retirement.

Jag: That does make a lot of sense. So let’s kind of look under the hood here. Mike, talk about the, when, how, and what of a financial plan. 

Michael: The when is easy as early as possible. Unfortunately, most of the plans that we are building today are for individuals that are 50 plus. And usually that means that the first 25 years of the client’s investment timeframe was without a known objective.

Unfortunately this is a situation like an individual says, I want to go on vacation, but they don’t determine where they want to go on vacation. They don’t get a hotel room reservation. They don’t identify how many days they’re going to be there. I mean, how many of us today would go on a vacation, basically blindfolded, just go out, get in the car, take the blindfold off, pull out of your driveway. Start driving down the road and just pick north, south, east, or west. You know, you don’t have luggage packed, you don’t have anything prepared. I mean, this is how we go into retirement. And then we spend this 40 years where we’re really not finding any impact.

There’s no burden because we’re earning money. That earnings is going against our expenses. And so we really don’t feel the pain because it’s a future need that we’re looking at. And so, unfortunately, a lot of times, Jag, when I’m sitting with clients today, they have met that timeframe of retirement.

Hopefully, you know, five years, seven years, before they actually pull the plug at work. But, if not a lot of times, it gets into the point that they have already retired. And now they’re like, this is what I have. How do I make this work? But they really never had any goals or objectives laid out. 

So they earned money. They saved money. But was it enough? Was it in alignment to what their goals and objectives were? 

Jag: And you’ve talked in previous episodes, Mike, about the fact that Americans on average spent a heck of a lot more time planning their vacations than they do planning their retirement. And to further your analogy here, it’s almost like you got in the car and you drove over in circles for a while, and then you said, oh shoot. I’m right back where I started.

Michael: It is, because if you don’t have a strategy and you’re not aligning the risk in your portfolio. Just think about the workers today, for how many years they were working, how many bear markets occurred over a 40 year period? Did they experience five bear markets? Did they experience seven bear markets?

How many times of recovery did their earnings or their savings have to go through to get them back to the point to where they are today? So it is a concern when we’re talking to people. To answer your question.” When should a person start with a financial plan?” I believe they should start from the day they first start saving. The day that they’re going to work and they’re gonna enter into their 401k. First of all, you need to know what the objective is. You need to know how much money you need to be putting aside. I oftentimes give this analogy. 

If we were flying from Nashville to San Francisco. We had a beautiful flight across the country. And as we’re coming in to land there in San Fran, if the front tires hit the runway and the back tires didn’t on the plane, that’s called a crash. 

Jag: Yeah. 

Michael: You got to your destination, you got to where you were planning to go, but you crashed into it. The ultimate goal is that you land safely on that runway into retirement, because you have got your strategy and your plans in place that aligns you with hitting that tarmac at the right time.

Unfortunately, a lot of people because of 2001, 2008, 2015, what we’re experiencing now are crashing into their retirement simply because they’ve never diversified their portfolio, even in their 401k. 

Jag: That plane analogy is, is striking that’s cause you’re painting the picture in my head and I’m sure our listeners’ heads as well.

So I know you and Stacey do the InfoRight process where you evaluate, determine the dependency level and each of the 10 core areas of planning and what they have and the dependency level they have on each other. With the Life Arc plan and the info right process. Give me real quick, the 10 areas that you look at when you’re setting up a plan for somebody. 

Michael: Absolutely. Using the Life Arc plan software, we focus on investment, social security, retirement income, wealth transfer, tax, healthcare, personal care, education, charitable and estate planning. The reason JAG that we look at all of those areas comprehensively is because we have to determine what’s most important to the client. Where can they allocate their limited resources and are there interdependencies between those. 

Jag: Right. And that helps you prioritize for sure. So that covers the when and the how. So, what else needs to be in a successful financial plan, Mike? 

Michael: For most, we have to balance between the scarcity of resources.

We evaluate the interdependency of how each of these areas affect each other. This helps in that prioritization, as you said. Now, let me give you a little quick scenario of something that happened multiple years ago. And it’s why we take a look at tax. You know, the importance of looking at Rothing, our investment planning, looking at education, and this story kind of encapsulates each of these.

I was in my office. I had one of the advisors that works through our firm give me a call. Had a client in the office. And at that time we were seeing a lot of the circumstances that we’re dealing with in the marketplace today. And this individual wanted to retire and they wanted to Roth their full 401k plan.

So in that process, I shared with them. Now there’s some strategies we could do. We could look at mitigating some of the tax liability by doing this over a period of time. And the client was just very adamant. No, I want to Roth my total 401k and I was very concerned about that. Had a half a million dollars that’s taxable income this year.

It is not always the best strategy to do that.

Jag: Because you’re paying the taxes right now at the time of conversion. And then you’re also talking about how that interplays with the other tax liability that individual has. 

Michael: Absolutely. And you run through that progressive tax rate to the highest tax amounts. So he’s paying the highest tax levels on his dollars on a portion of those funds. So when we went through that process, I said, well, I’m concerned about this one. And I told my colleague, I said, I think this person will call us back come tax time when they meet with their CPA. So fast forward we’re in April, end of April, the phone rings.

Client calls back and they are livid. Because the client never shared, the advisor never asked, about any of the other means tested benefits or situations in the client’s life. And this is where education got tied into it. His son happened to be in a degree program that was very hard to get into.

You had to take courses in a certain order and the moment he increased his income for that year, based upon a Roth conversion, then his son lost all of his means tested scholarships. He lost all of his benefits and was no longer able to continue his education. 

Jag: It’s really a horrible story, but a really good example because you know, your financial aid evaluation for any kind of secondary education comes down to income and your folks’ income. And if the client had thought about, or given you the full financial picture of everything they’ve got going on, you might have been able to say, Hey, I know you wanna avoid the taxes down the road on this money. You wanna put into a Roth, but there are implications for it right now that are really going to hurt you both short and long term. So that’s why it’s so important to look at all 10 of those areas. Get that full 360 degree view. 

Michael: That’s absolutely correct. And if a plan had been put in place that looked at those areas, we would’ve avoided the individual having to pull directly from his Roth to pay for his son’s education. We would’ve mitigated taxes. We could’ve got him into a diversified portfolio over the next four to five years. And he would’ve been in a much better situation. But because we took a one dimensional approach, the client was negatively impacted because of that. 

Jag: So it’s important to have all the information coming in. And I know part of a financial plan is qualitative. And then part of it is quantitative, right? 

Michael: Yes. Quantitative is mathematics, but qualitative is what brings joy and happiness to a client. This needs to be incorporated into a well-constructed financial plan. Qualitative is what is important to the client? What are their plans in retirement for where they wish to live?

How do they wanna spend their time? Are they active or are they a person that likes to do more gardening? Do they want to set up a new business? Do they want to do volunteer work? Is it gonna be a quiet lifestyle in retirement or is it gonna be an active life? What are their travel dreams, their inherited goals, all of that needs to be built inside of a well-constructed plan so that we can properly allocate resources so we can make those become reality during the retirement years.

Jag: Right. Last point, Mike, as we start to wrap up here, you’ve taken all the information in you’ve built the plan. How do you keep the plan on track?

Michael: Periodic reviews to monitor and make necessary changes to get back on the plum line. If we get off course, for instance, if an investor needs to average a rate of return of 8% to make their plan work, and they’re currently experiencing 6% returns.

When would you want to know that when would you want to make that adjustment? Well, my answer would be immediately. 

Jag: Right. 

Michael: Our Life Arc plan system allows us to be able to see that, to be able to monitor it in real time, making sure that their plan is not just a written plan, put into a binder, sitting on a shelf gathering dust, but it is active.

It is being followed and it is getting them to the destination that they need to live the best retirement they can have for the next 25 or 30 years when they leave the workforce. 

Jag: It’s important to know that this plan is a living breathing thing. And I know you’re making the Life Arc plan system available to our listeners.

For more information, you can go to our website, artofwealthunbroken.com. It’s gonna be linked in our show notes, again, the website artofwealthunbroken.com. If you’re more of a phone person than a web person can certainly give Mike a call with the phone number of? 

Michael: (855) 378-1806. (855) 378-1806.

Jag: Important stuff today as always. Mike, thanks for the time. We’ll talk to you again next week. 

Michael: Thanks, Jag.