Ep.110 Inflation and Asset Performance

About This Episode

Inflation is skyrocketing in America and across the world. Patti sits down with her Chief Planning Officer, Eric Fuhrman, to discuss what the major headwinds are that are currently driving the economy and asset markets. Looking into the history of the Federal Reserve policy and fiscal policy, they contemplate correlations to determine the best moves to make with investment portfolios during this volatile market.

Patti Brennan:Hi, everyone. Welcome to The Patti Brennan Show. Whether you’ve $20 or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is the professor Eric Fuhrman, our Chief Planning Officer here at Key Financial.

Today, Eric and I are going to be talking about the topic that’s on everybody’s minds today, and that’s inflation. It’s affecting everyone across America and throughout the world. Today, Eric and I are going to dissect it.

We’re going to get to the bottom of it and figure out what is causing it? Could it have been avoided? What do we do now? Eric, welcome to the show.

Eric: Thank you, Patti. Excited to be here. I got to say, these podcasts are a real treat – highlight of my day.

The great part is, normally when I go on family vacations, my wife and kids would have to listen to this kind of stuff because they don’t have a choice, but now I get to share it with our listeners today and our clients, so it’s a real treat for me.

Patti: You know, Eric, I don’t know what our families would have done if you and I hadn’t gotten together, because late at night after everybody’s left the office, invariably either, you’re coming into my office or I’m coming into yours and we’re doing this theoretical brainstorming on what’s going on in the world around us and ideally trying to solve all the problems.

Eric: The hypothetical of that is, too, I don’t even try to envision it. You’re right. What this podcast does hopefully for our listeners, is give you a seat in the room to those late night conversations that we have – not as advisors, but as investors.

We ponder the bigger questions – like what are the major headwinds and tailwinds that drive the economy and asset markets and factor into our planning? Ultimately, part of this is science, but a bit of it is an art form as well.

Patti: You bet. A lot of it is art form. Just so that you all know, these are not just theoretical quick conversations that we have late at night. Afterwards, invariably, Eric and I will put our heads together and put together a white paper. For those of you who might be interested, go onto our website at keyfinancialinc.com.

You will find a white paper that we’ve prepared that dives deep into this topic and goes through the history of Federal Reserve policy, fiscal policy, and the things that are affecting Americans today.

Eric, first and foremost, thank you so much, you really worked hard on that white paper.

Eric: It’s a joint effort. It’s part of curiosity. That’s part of the human condition – to always be curious and seek answers to these questions. What’s most important in terms of how we come together with these white papers, is to not load them up with industry parlance, but to try and tell a story and tell that around data and visuals.

Ultimately, we’re trying to tell a story here that’s going to resonate with our clients and our listeners.

Patti: My favorite visual is on the first page with your pictures. Eric found pictures of a beautiful lake. Serene, gorgeous, sunset picture, glass, water.

On the other side is the same lake where a seven-year-old has probably thrown a rock in the middle of it and it shows the rings and the effect of just one action on that beautiful lake. I think that is a powerful way of telling that story.

Eric: It’s a great analogy to use the lake to illustrate the pre-COVID and post-COVID environment that we’re now living through. There is a grain of truth which is that my seven-year-old or my nine-year-old is the person that chucked the giant rock into the lake, as all nine-year-olds would do.

What fun is that, find the biggest rock you can and throw it in there. To me, that instantly resonated as a great visual analogy for the pre and post-environment that we’re living through right now and the repercussions of that, the ripples in the lake if you will.

Patti: You bet. I’ve got a bunch of 30-year-olds who love doing that also.

Eric: I guess some kids never grow up.

Patti: Oh, yeah. By the way, my husband loves doing it, too, so it’s something we never outgrow.

Eric: Knowing Ed, that doesn’t surprise me. He seems like a rock trucker too.

Patti: Absolutely. All right. Let’s go into some of the details on inflation. What makes inflation rear its ugly head?

Eric: Most models operate on two axes here. That inflation can be caused by what they call demand pull factors or cost push factors. Cost push was what was attributed to the last inflationary surge back in the 1970s.

If you and I are going to break down these things and avoid any economical jargon, anecdotal evidence is a good way to describe this. I think about you and I going through that period of COVID when we’re still doing Zoom calls with our clients and so forth to communicate ideas and concepts.

So much of these calls are focused on cash flow and what do we hear? We’ve got this small sample size, but is reflective of the broader population which is, Patti and Eric, I’m not spending money. I don’t need any money because we’re in the house. We have trips that have been canceled. We deferred spending.

Eventually the economy reopened. All that pent up demand suddenly came flooding back in to the market. What do we hear now? Everybody is planning trips, they talk about where they’ve been or what they’ve done.

That to me, that anecdotal aspect tells of the broader situation with inflation as it relates to that demand component.

Patti: The interesting thing about that is, it’s not like they didn’t have the money, they had plenty of money. It’s interesting to look more universally according to the Department of Commerce, during COVID, there was $2.1 trillion. That’s with a T of excess savings that had built up in consumers accounts, etc.

That’s over and above what they would have saved if COVID hadn’t happened. That’s a lot of money. If you think about our economy being a $25 trillion economy, that’s 10 percent just sitting there, ready to be deployed once things opened up.

Eric: It has been. That’s part of the story here, right?

Patti: It sure is. What I also think is interesting is that, that excess savings has come down. It’s now 1.3 trillion, still a ton of money that is yet to be deployed.

What does that mean for inflation? Does that mean it’s here for a long period of time?

Eric: I keep going back as we work through this podcast and to envision in your mind that imagery of ripples. That is one of those ripples but once that rock, COVID for example, goes into the lake, eventually over time those ripples begin to dissipate. That’s what you’re seeing.

The pent up savings, the pent up demand is being drawn down, but eventually, that will subside and return to a steady state. I think of that as a way to think about the excess savings that’s been used and where it’s at today.

Patti: I might be taking this analogy a little too far, but is inflation like the algae growing underneath that nobody sees quite yet but could fester and create major problems?

Eric: What are you doing tonight? We can talk about it. That’s a deep question. I don’t know.

I don’t know, but an interesting suggestion. The other dynamic here is that cost push factor. I wouldn’t think of inflation as this binary thing that has to be one or the other. The real answer here is, it’s a little bit of both which is unique and that’s a byproduct of COVID.

Patti: Let’s put that in English. What exactly is cost push? I understand demand, what’s cost push?

Eric: A great example of this would be the 1970s that was also viewed as cost push. This is where the raw materials, the costs involved of production, taking raw materials and turning them into the stuff that people consume. When those costs go up, that creates inflation. Those costs have to get passed to consumers.

When you look at let’s say, raw materials like copper, aluminum, lumber, for example, those prices went through the roof when you look at the futures markets for those products. That was an enormous demand for those things. They were in scarce supply at the time and the prices went through the roof.

That raised the cost for builders and anybody involved in production to acquire those things. Now what you’re seeing, those prices have come down dramatically for things like copper, lumber and so forth, but now you’re seeing the impact of a very tight labor market.

A big impact for any business owner or manufacturer is salaries. Salaries and wages that you pay. Right now you’re seeing a dramatic escalation in the cost of labor and benefits, but at the same time you’re seeing a dramatic fall off in the productivity of that labor.

Essentially, it’s costing you more to make stuff, but you’re getting less of it. That dynamic which again, that will work itself out, but that’s the other side of the equation here, is that rising cost of production. The demand pull was the first phase and now we’re entering the second phase which is that cost of production that’s now being passed on to the consumer.

Patti: What I’m hearing is, the impact of the supply chain bottlenecks that were created during COVID were one issue and they are still there although they’re getting better. The other impact is the idea of the great resignation or the quiet quitters, people not quite doing as much as they used to do.

Employers are looking to hire more people or to solve the problem to meet the demand that is clearly there.

Eric: Also, think about the demographic composition of the country. This is a unique tailwind for those like us in the financial advice business, but a very large segment of the most experienced, most productive, most knowledgeable workers are those that are 65.

One of the trends that you see manifest out of the COVID experience is that those people are not returning. There’s fewer people and fewer people that are capable of high output, high production that are not coming back to the workforce. They’re retiring, but they’re still consuming.

Patti: In fact, they have a lot of money to consume because they’ve got the 401(k)s now instead of the defined benefits, instead of a monthly check that they would get from their employer, they’ve got a big fat balance in a 401(k) ready to be spent.

Eric: Well, not to mention that they’re also the largest recipients of government transfer payments in the form of Social Security and other benefits.

Patti: That’s a good point. The brain drain is definitely going to impact the output and what companies are able to do, because how many people have said to us, “They’re going to have to hire two people to do the work that I was doing.”

Eric: You see these numbers. The statistic that’s quoted for countries that are aging rapidly like China, Japan and also the United States, is this dependency ratio – the number of retirees to number of workers, and that’s rising across most advanced economies.

What we should do is table that. That’s a deep subject. That’s a more secular trend, so it’s perfect to bring people back to the table for another interesting discussion. We got to work it out first on that one.

Patti: Absolutely. We talked about the very high levels of savings. Those high levels have come down in a dramatic fashion by the way. That’s a lot of spending that occurred in the last year or so.

On top of that, debt increased. We’re at record high levels of both consumer and government debt. What’s going on with that?

Eric: A couple of things there. There is this connection, if you will, that economists have made historically between money supply and output. As the saying goes from Milton Friedman, he was a famous economist that had won the Nobel Prize. He said, “Inflation is nothing more than too much money chasing too few goods and services.”

If you look at the pre and post COVID area, you want to look at what’s called monetary and credit aggregates. I know, I promise we wouldn’t use technical jargon, I apologize. What does that mean? When we look at monetary aggregates, that’s things like currency and circulation and the Central Bank reserves. This is money that commercial banks have in the banking system.

Central Bank reserves increased dramatically, currency and circulation increased, but that’s not a reflection of inflation. Currency and circulation is people that prefer to use cash and so forth. The vast majority of money creation occurs at the private level from banks.

When banks make loans, there’s demand for deposits, things like that. That’s where money is created in the system and also, government debt. I don’t know if that’s the appropriate term, but essentially when the government issues say treasury bonds to fund deficits, I know it’s called debt, but that’s a form of money that pays interest. That adds to the system.

When you look over this two year period, you had an annualized increase of about 12, almost 13 percent in government debt, which again, that’s issuing assets, or currency if you will. Then you had about a 12 percent annualized increase in bank deposits.

The money in the system escalated dramatically and the problem that you have is that the economy at any given time has a natural speed limit. The Congressional Budget Office estimates, what they call the potential output or potential GDP. This is really the maximum output that can be sustained if all the resources of the economy have a high use or being fully utilized.

The problem that you have is when there’s a whole bunch of money injected into the system, and now all of a sudden you reopen and unleash this wave of demand, there’s only so much that can be made. The outcome there is rising prices when there’s an imbalance between demand and how much can actually be produced at a given time.

Patti: In hindsight, let’s play Monday morning quarterback, Eric.

Eric: That’s always fun.

Patti: It is so much fun. Let’s go back and say, “OK, what should have happened? Why didn’t the Federal Reserve act sooner than they did?

We breached their target inflation rate of two percent in the beginning of 2021. Here it is October of 2022 and granted, they’ve increased interest rates, but is it too little too late?” Why didn’t they do this sooner?

Eric: Yes, that’s a good question. The best way I can describe it, we’re not in the room when they have these committee meetings, so we only can speculate. I think we can piece together a narrative based on her understanding. It is crystal clear what the Federal Reserve’s mandates are. Those are by congressional decree.

If you go back to the Federal Reserve Act of 1913, the goals that are enumerated for the Central Bank is essentially to maintain maximum employment, stable prices, and moderate long term interest rates.

Patti: Wow, that’s a hat trick right there.

Eric: Yeah, right? You’ve got…

Patti: A lot.

Eric: …trying to balance three objectives and I think those are good objectives that are within the framework of long term stability to maximize resources and growth. The problem is when you have a crisis, achieving all three becomes a bit aspirational. If anything, it’s an impossible trinity to satisfy all three at the same time.

The medicine, the reason why part of the explanation here is that we had 15 percent unemployment. The objective of the prioritization is really to heal the labor markets, which means dropping interest rates to near zero, providing massive stimulus to keep the spending going.

It just takes time, but what we see is that roundabout March of last year. The Federal Reserve also has this objective or mandate of price stability. They define that as two percent annual inflation growth. March of last year, suddenly, price increases exceeded or breached that two percent level, and they kept going higher.

The problem was unemployment was still deemed to be too high, six percent. That desire to let unemployment heal let those prices increases go on for about a year.

The policy response to curb inflation, which is raising rates, which is antithetical to healing the labor markets because higher rates tend to create unemployment, that just came 12 months after the fact. Now, we’re trying to play catch up.

Patti: You know, it’s so interesting. It’s a good example of how quickly we forget. I think a lot of the commentators I hear and articles that I read, they forget that inflation was 15 percent. They forget how much people were suffering. There was so much uncertainty at the time. Six percent is still really high.

To give these policymakers a little bit of a break, they’ve got to make their decisions based on the information they have at the time. They refer to it as being data dependent. What else can we expect them to do? Even then, the data that they receive is historical data. They’ve got to be forward looking. That’s what they do.

They’ve got to try to anticipate and understand, in the midst of that high unemployment and in the midst of a supply chain backup and a lot of global uncertainty and things, that we’re really uncomfortable for a lot of families in America.

Eric: Ultimately, human beings are trying to solve the problem here. Nobody is clairvoyant and can know. Again, these prescriptions, the medicine that’s being used has a lag effect. Knowing how much medicine to administer, when and how long it’s going to take, all those things take time, which is why the Fed always reinforces the idea they’re data dependent, to see what happens.

Unfortunately, it’s an art form. It just can’t be precisely estimated. These things take time, and they adjust.

Patti: Can you imagine what would have happened if the unemployment rate was at six percent, and it just breached the two percent inflation rate, and they decided to increase interest rates by a quarter of a point?

Sure enough, businesses would probably freak out and begin to lay people off. Unemployment will go up to eight percent. Anything can happen at any time.

It didn’t happen. Fortunately, people remained employed. Families were able to do the things that they wanted to do, and we do have inflation. The one thing I always look back during these periods of crisis and the immense amount of liquidity that was put into the system, I look back to the financial crisis.

That was a crisis of a different kind. The things that caused so much of the worldwide difficulty was a systemic banking issue. What they did at that point in time because these concepts of quantitative easing had never been done before, so it was slower. It was much more modest.

When businesses were given large amounts of money like AIG. AIG was given a huge loan, but guess what? They had to pay it back, and they did. Fast forward to COVID, we had PPP, same kind of idea. Businesses were given trillions of dollars, but guess what? Businesses didn’t have to pay it back, so it stayed in the system.

It seems to me they’re calibrating. The criticism, if there is one based on what the policymakers’ response was after the financial crisis, was that it resulted in much lower, slower growth. We didn’t come out of it until 2016, 2017.

Even then, it was very modest, one percent increase in GDP when, theoretically, at least historically, our economy was growing at closer to three. That’s a big difference.

This time, with this crisis, they looked back and said, “OK, well, that worked sort of, but it probably wasn’t enough, and it wasn’t as quick as we needed to do it. Let’s try something different,” and they did.

They put in massive amounts of money, which they really don’t do but that’s the perception, flooded the economy with lots and lots of money. It solved the problem. We had a recession, but it was very, very short. Markets recovered. Families recovered. The unemployment rate is now 3.7 percent.

We’ve got this little problem. It’s a side effect, the side effect that is pretty much textbook when you put that kind of money into an economy. That’s inflation.

Inflation has ramped up very, very quickly in this calendar year. There’s a lag effect to inflation. That’s basically what we’re dealing with today. It went up much faster and much higher and has stayed higher than the Federal Reserve and policymakers had anticipated. Now they have to deal with the problem, right?

Eric: Yeah. I think you highlight a lot of wonderful concepts there. If we’re going to try and draw a parallel, there was massive stimulus that occurred under the financial crisis in ’08 just as there was in COVID.

Why is the outcome inflationary here, and it wasn’t there. I think you draw a really important distinction about the nature of the crisis. Every crisis has a unique fingerprint. They are always different. The catalysts they created are different.

If you think back to the financial crisis, the contagion infecting the system was one of counterparty risk. Remember, Bear Stearns and Lehman Brothers folded. A lot of mortgage banks folded. The issue there was more of an institutional contagion. What did the government do?

They provided massive stimulus to large financial intermediaries in the form of loans and even taking equity stakes, which was controversial at the time. Here’s the difference. That stimulus was paid back. Those companies paid back the loans, or the government sold their equity stakes. It wasn’t a permanent increase.

If you think about unemployment benefits, there was emergency declarations to extend benefits but not massively inflate them. Those things were in place.

Patti: They didn’t send checks to every family in America, right?

Eric: Yeah. Fast forward to COVID, now, again, we have this contagion, but the contagion is within the household sector, infecting everyday Americans because they’ve been thrown out of work. People stopped purchasing. The medicine there, again, same idea, flood the system with money, but how was it executed?

Businesses were given PPP loans to keep people on the payroll. Essentially, that’s just more or less stimulus to households, because people keep getting paychecks. What happens with those loans? Most of them were forgiven. They weren’t paid back. They were forgiven.

In fact, they weren’t even taxed because of a last minute change in the rule which, originally, the program was meant that it would be taxable income, and that wasn’t. That just added to the stimulus.

Unemployment benefits were extended and boosted substantially – which kind of kept people out of the workforce for longer than they might otherwise have been. Then there were also direct payments based on income or how many kids you had, direct stimulus.

The difference here is the recipients and then how that program was governed. The stimulus that went to households was not really pulled back out of the system in any way, shape, or form.

You can look at these measurements. M2 is this measurement of broad money supply, which absolutely skyrocketed. Historically, we have an example of this in our white paper. We look back to the ’70s. There were three dramatic expansions in money supply, and then within a matter of time again because there’s a lag effect, dramatic increase in the consumer price index.

Some people have said the connection there is weaker today than it was back then. There are arguments for and against that, but you see the same thing. If you drop bales of money out of the sky, on the people, eventually nobody’s really wealthier, because we haven’t made more stuff. You just have more money to spend on the same limited pool of goods and services.

Ultimately, that’s what we see here. That’s the hallmark of how stimulus was executed here versus the financial crisis and why the same result didn’t happen back then.

Patti: This is not just here in the United States. Inflation is a worldwide phenomenon. Almost every major nation in the world is dealing with runaway inflation. Yet, I’d be curious and this is something you and I should probably look into what kind of programs did they have over in Europe, in China, in Japan, etc. to cause the runaway inflation that we have, or is ours more severe?

Eric: There’s certainly further study, many more nights of pondering these questions. You’re right. As Americans, we tend to think of this as a domestic issue, which makes perfect sense.
If you look at the data in other advanced countries, whether it’s Germany, France, Korea, Australia, Canada, all these countries, they all show a very, very similar trend and level of inflation that we have here domestically in the United States.

There’s certainly a lot of integration among economies in the world. What could be the cause? The US dollar is essentially the global reserve currency. Most international businesses price contracts and so forth in dollars. There’s a dramatic need for dollar.

In essence, maybe there’s credit to the idea that the inflation and the US has been exported to our trade partners via the dollar but again, further, it’s a great question to ask.

Patti: It’s an important question because the dollar is so strong, and there is a lot of talk right now that because of that, it’s pushing these other nations who are also dealing, in the example of Europe and Ukraine, into a really deep recession. Hopefully, it isn’t the D word, but it’s causing real havoc in their economies as well.

Eric: Yep. I guess the silver lining is that this has roiled the currency markets because the dollar is strongest it’s ever been.

If you want to spend money, go to Canada, Australia, United Kingdom, Britain, because the dollar has strengthened substantially against those currencies, you’ll get a little more mileage out of your dollar if you exchange it into those foreign currencies, at least right now.

Patti: The thing that we’ve talked about, and you and I have shared this with clients as well, is there’s a part of me that looks at myself, looks in the mirror and says, “Should we have seen this? Should we have anticipated then the impact on securities and markets all over the world?”

Yes and no, to a certain extent, we knew going in – and we’ve talked about it in prior podcasts – that that would be the likely side effect of too much stimulus. At the same point, because after the financial crisis, we were ready and waiting. We were positioning portfolios for inflation that never occurred.

There is a negative impact there as well in terms of performance of asset prices. It’s easy to say in hindsight.

The question is, what is the impact on prices? Let’s think about growth versus inflation and the four quadrants that you and I were talking about, and how do we position portfolios accordingly. What do we do? What do we tell people to do?

Eric: That’s a really good question because inflation is transmitted into asset prices, but it’s transmitted in a very negative way.

Think about it as if we’re going to paint with broad brush strokes. The basic building blocks of any portfolio is going to be probably a core of equities or stocks, bonds, depending on your age and risk tolerance, cash, or something like that.

Those basic building blocks work extremely well for different types of environments. The reason you want to own stocks is because we’ve been in this expansionary phase of incredible prosperity since the Industrial Revolution and stocks give you the individual a claim on that prosperity, a claim on that production.

The economy doesn’t always go up, it exhibits this cyclical pattern. Bonds are the ideal counterweight to buffer that risk and give you an asset that usually performs well when the economy sputters and so forth.

The unique fingerprint of this situation, which is reminiscent of the ’70s is that the economy is sputtering, but prices are going up, which is unique.

Patti: Oh, the old stagflation?

Eric: Yeah, that’s bad for stocks, but rising interest rates and rising inflation is also very, very bad for bonds. The usual relationship that tends to unfold is not unfolding this time. These types of conditions when you think about bonds or stocks, ultimately market participants build in an implicit assumption for expected inflation.

When suddenly inflation is above expectations, that sends the prices of stocks and bonds down. It means that there’s not enough return there to compensate for inflation.

Things that do really well in those types of environments are any kind of claims on real assets, tangible stuff like agriculture, raw materials, and those things. They tend to perform very well. They’re up 20, 30, 40 percent. One could look and say, “Well, why don’t I have commodities in my portfolio?” Valid question from an asset allocation standpoint.

Patti: Absolutely. Yep.

Eric: The problem is, for most of our clients, we are investing for a time horizon that spans decades, life expectancy. If you look at real assets, raw materials, they usually have very, very low rates of return. They go through periods of extreme underperformance and so forth.

They’re very good in situations like these if your timing is right, but they’re very poor long term investments. They’re likely to potentially detract from the portfolio’s longer term rate of return.

Patti: There’s huge drawdowns also. It is a really volatile asset class. It tends to be very short lived. It’s fine and dandy if you catch it right but very difficult, especially since 1982, we really haven’t had inflation. Those asset classes have not performed, whatsoever.

Eric: Gold went through a 27 year period of decline. That matches most people’s life expectancy, so it’s not a good asset.

Ultimately, fundamentally, when we think about the drivers of return, raw materials are poor investments. It’s the manufacturing process that takes those raw materials and transforms them into something that people want. That is the magic. That is the real value. That’s why you own things like stocks.

Patti: That is a fascinating. When you said that to me the other night, it all made sense. That was the epiphany. Now, I get it. It’s the copper and the lumber, etc. It’s what we’re doing with those things that really create the value. It’s more of a speculative asset as raw material, right?

Eric: And raw materials, right? If it’s a grain silo in Nebraska full of corn, or wheat, or a vault full of gold, those things have storage cost. There is a deterioration, an obsolescence, and a cost to holding those raw materials that takes away from the return.

Again, you got to be in the right conditions because, ultimately, you’re speculating on price. There’s no yield. There’s no claim on profits. There’s no dividends to these things. It’s purely a price speculative investment that requires timing and we all know how hard that is.

Patti: 27 years is a long time for something to finally work. All right. We’re going into the final exam. OK, Eric. Here we go.

Eric: I’m starting to sweat over here. I’m nervous.

Patti: How quickly do you think that the Federal Reserve can realistically bring down inflation and what’s the outlook for say, the next year?

Eric: Got you. I’m terribly human and lack a crystal ball here. Nobody knows for sure. We are all operating an element of a fog here to define these kinds of things. We can rely on survey data, on empirical data in terms of how assets are priced to look at this.

There’s a couple ways we can do that. For example, the Federal Reserve, as part of their duty beyond monetary policy is to collect market intelligence.

They work through their network of primary dealers and other financial intermediators, and they give them monthly surveys to see what participants think about things like employment, growth and also inflation.

When you look at these surveys of these major financial centers, what you tend to see is that inflation is likely to be between five and six percent for this year, but they expect that long term over the next couple years, it will be anchored closer to two to three percent.

Right in our backyard, the Philadelphia Federal Reserve Bank of Philadelphia conducts the oldest macroeconomic survey called the Survey of Professional Forecasters.

You see a similar trend there, every quarter they make forecasts. Their long term expectations two, three years out, anchors inflation around a much lower steady state of two to three percent. Those are surveys. What does the market say?

There was a development back in 1997, when the treasury unveiled what are called Treasury Inflation Protected Bonds. A regular treasury bond is priced with expected inflation. What participants think inflation will be, that’s billed into the yield. Treasury Inflation Protected Securities by contrast adjust the principle for actual inflation.

You can compare the difference in yields and see what the market is forecasting inflation to be. If you look at a five year treasury and a five year TIPS, acronym for Treasury Inflation Protected Security, it would say that the market is pricing an inflation five years out at around about 2.3 percent or so.

These things change on a regular basis and they do adapt, but it doesn’t suggest that inflation is predicted to be this thing that will not be resolved in 5 or 10 years and that we’re in this permanent state. Eventually, when that inflation comes down, I don’t think it has to get to two to three percent, I think just that news or observation will be favorable for prices.

Patti: Financial connections…

Eric: Financial assets.

Patti: It’s interesting because we are seeing it here day after day in just talking with our clients. They are already pulling back. They are canceling the renovations on the house. They are not going away as they had hoped that they would be able to do.

They are not spending as much money. They see their statements and they think, “Oh boy, can I really afford this?”

Eric: Do I have to go back to work?

Patti: Yeah, exactly. Fortunately, we’ve planned literally for this environment. We assume that these things are going to happen, and we manage the portfolio accordingly so that people don’t have to be a victim of something that is cyclical.

I don’t want to understate it or I don’t know what the word is, but it is a big deal. At the same point, it’s nothing that we haven’t seen before, and that’s important. The Federal Reserve knows what to do, and boy, are they very clear, they are not fooling around.

I appreciate the fact that they are being as aggressive as a Federal Reserve has ever been in the history of their dual mandate. They’ve never gone this high this quickly, but they’re not fooling around. They want to squash this bug before really becomes a problem and they will.

Eventually, I believe it’s going to be effective, and we’re already seeing the impact. The question on everybody’s minds is, are we going to end up in a recession?

Eric: Is this for bonus credit?

Patti: Yes, it is. Absolutely.

Eric: To your point, as investors, there’s no single indicator that is going to tell you. We have to form a mosaic of different indicators to read the pulse of the market. They would all suggest that if we’re not already there, we’re heading into a recessionary environment.

Things like the University of Michigan Consumer Sentiment Index, lowest reading ever since the index started.

Patti: Time out. The interesting thing about that is, that has been awful all year. I don’t know whether it’s correlated or there’s a causation effect, but the sentiment numbers have been awful all year starting in January.

Sure enough, GDP didn’t grow. In fact, we had two back to back quarters of negative GDP. Now theoretically, the powers that be have not declared an official recession, although it sure feels that way right now.

Eric: All the indicators, the inverted yield curve, inflation, rising interest rates. Usually when you go into a tightening cycle that does not portend an expansionary set of conditions 12 months out, it’s pretty typical when you have tightening conditions. You see banks tightening credit standards right now.

All those things are trying to restrict the blood flow to the body here when it comes to credit and this inflationary effect. What’s important to understand too is, think about recessions of the past, whether it was 1980, 1990, the one from 2000 to 2002, the financial crisis. The market response is totally different in every recession.

A recession is a binary thing. We’re either in expansion or we’re in contraction, which is a recession. In 1980, I think the market was down 6.8 percent. 1990, down a little bit. 2000 to 2002, was then 44 percent.

Just because we fall into recession, it doesn’t answer the most important question I would want to know, which is how long is the selloff going to last and how deep is it and how long is the recovery?

Unfortunately, every recession has a different fingerprint when it comes to how the market responds in terms of how deep it goes, how long it takes and how fast it comes back. We don’t know. Ultimately, it’s never going to answer that question even if we’re very certain about a recession occurring.

Patti: The one thing that we do know is whatever the market does, it does it before the economic reality presents itself. The market’s been going down all year anticipating that beginning of next year we’re going to end up in an official recession.

The question then is, if we have a recession, is the market predicting it’s going to be a bad one lasting a long period of time, or is it going to be short and shallow? That’s the thing. Market was awful in September and the beginning of October, just the first couple of days, it’s up hundreds and hundreds of points. Close to seven percent in two days. Crazy.

Eric: You paint an interesting, behavioral aspect of the market, because for investors, a common thing we get is if you’re sitting on cash or if you’re worried and you want to make the portfolio more conservative, usually that’s going to happen at the wrong times.

Most people are comfortable investing when things go from good to great because they perceive it as safe, but that’s when there’s probably more risk in the market. The best returns happen when things go from bad to not so bad.

These are those extreme emotional points in the market where typically the thing that your gut is telling you to do is probably the worst thing you can possibly do. We don’t know how long it goes, but typically these inflection points usually occur when we’re experiencing great emotional distress.

Patti: Absolutely. For those of you who have an investment plan, have a real financial plan, this is not the time to abandon it. Stand by your plan. It doesn’t work every time, but it will work over time. That is the most important message that we can give you. We don’t know how much longer this is going to last.

We don’t know how quickly inflation is actually going to come down. We’re confident that it will. We believe that the policymakers have the tools to reduce the cost of living in America today. That’s clear to me. The question is, how does the market perceive it and how much longer is the disruption in asset prices going to last?

We have to also remember that markets are basically a bunch of opinions. It’s people believing that a company is worth more or less than the current price. That’s what a market is. Real estate’s the same way, bonds trade exactly the same way.

We have to understand that this is going to fluctuate based on what’s happening in the world and the latest apocalypse du jour. This has been a great conversation, Eric, about inflation, markets, and what people should do. Is there anything else that you’d like to add?

Eric: No, as you highlighted, having a plan in place is so important. That’s something that mores our investment strategy and our view to think long term. When we go through periods like this, you have to have a sanguine view to get through them.

They are difficult, but an investor is an optimist at the end of the day, because that is a belief that the future will be better than it is today. That’s why you make the investment in the first place whether you recognize that or not. All of you out there that have a well diversified portfolio, stay patient.

Ultimately, you’re expressing a view of optimism. So far, that hasn’t been a bad bet in the past 200 to 300 years.

Patti: It’s been a great bet. It has been a phenomenal bet, as has this time spent with you, Eric. Thank you so much for all the work that you put into the white paper. Please feel free, go to our website at keyfinancialinc.com, get this white paper. There’s a lot of juicy stuff in there that we weren’t able to cover today.

The most important thing is, remember, this is temporary. We’re going to go through difficult times like this. It is temporary. Things are going to get better eventually. We can’t be sure when it’s going to happen, we just believe it is going to happen. Thank you so much for joining us today.

Thank you, Eric Fuhrman, for all that you do and all that you bring to the table each and every day. You’re amazing. Thanks to all of you for tuning in today. I’m Patti Brennan, Key Financial Wealth Management with wisdom and care.

Ep109: Important Milestones

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. Throughout our lives, there are specific age milestones that trigger certain opportunities or strategic financial decisions that must be made. Many are familiar with a particular age milestone, but not necessarily the action step that needs to be taken you hit that age. In this very important episode, Patti thoughtfully walks the listener through each major age milestone and lays out the potential choices that can be made, while also reviewing the consequences of each decision.

Patti Brennan: Hi, there. Welcome to “The Patti Brennan Show.” Whether you have $20 or 20 million, this show was for those of you who want to protect, grow, and use your assets to live your very best lives.

This is another one of our “Ask Patti Brennan” episodes, those questions that we often get from people. Those frequently asked and even those rarely asked questions, RAQs. Today, we’re going to be talking about important milestones.

The theme of today’s podcast came about because we often get calls from clients. It usually starts out with, “I am turning age 50 and I’m wondering…I’m feeling there’s something that I should be doing, or this is happening this year. I’m wondering what I should do.”

Intuitively, they know that they should be doing something, but they aren’t sure if they know what it is. That’s the purpose of this podcast, today. I want to go through the important milestones throughout a person’s life.

Let’s start with birth. Let me tell you guys, those babies are not calling us saying, “I got born. What do I need to consider?” That would be interesting. When a child is born, all of a sudden new options become available, Uniform Gifts to Minors Act accounts, 529s, things of that nature as you think forward in terms of what you want for that child.

After that, age 13 and age 17, both of those milestones are years when the child is no longer eligible for a childcare and a dependent care credit. Age 18 is an important age, because that’s the year when most children are considered adults. They reached the age of majority.

That triggers a whole host of events, not just the fact that they can vote which is a wonderful thing, but in addition to that, they are adults, therefore, HIPAA steps in. I’ve told you stories of my own personal family, my own son having a traumatic brain injury.

Remember that those kids are adults, they need powers of attorney, both health care as well as financial powers of attorney, in the event that something were to happen to them. Most states recognize age 18 as the age of maturity, although there are few that put it off until age 21.

At age 24, a child who was a full-time student is no longer subject to the Kiddie tax. The Kiddie tax is important. That was brought about many years ago, because a lot of people steered money and income to their children at their tax brackets.

Therefore, this new law, it’s called the Kiddie tax, was born. At age 24, that no longer applies. They will be subject to their own tax bracket, which in many cases is a lot lower than the parents.

At age 26 the kids come off the health insurance. It’s not to say that they have to stay on your health insurance, it’s that they can stay on your health insurance until age 26. After that, they’ve got to get on their own insurance.

Let’s fast forward to age 50. That is when you are eligible to make catch-up contributions in your retirement plans, your 401(k)s, your IRAs. At age 55, that is when you can make the catch-up contribution to your HSA.

Again, a great tool for those of you who have a high deductible medical plan, stash money tax-free into that HSA. Believe me when I tell you, you will be happy that you did. Take advantage of the catch-up contribution, stash as much as you can into that HSA account.

In addition, this is important, so listen up. For those of you who are working and might have a 401(k), at age 55, this is the year that in the event that you are downsized at age 55 or beyond, if you really need money, now remember, I hope you don’t, but if you need to take a distribution from that 401(k), there’s no 10 percent penalty.

We all know age 59 is the year when anybody can pull money out of a retirement plan without that 10 percent penalty. This is a little loophole in 401(k)s and corporate retirement plans that I want you to be aware of.

Make sure that you remember that if you are downsized at age 55 or beyond – if there is a remote possibility that you may need to pull money from it. Don’t roll it into an IRA, because once you do, you’ve lost that ability.

Age 60, that is when you are eligible to collect Social Security as a widow or a widower. I’m going to say to all of you, I wouldn’t necessarily take it even though you might be eligible, because you will get a reduced benefit.

Age 60, if you need the cash flow, it is there for you. At age 62, that is when you are also eligible to claim your own Social Security. Again, please run the numbers. We have met with many people after the fact, who we have met in their early seventies. They say, “Gee, I wish I hadn’t.” There is a 35 percent penalty by doing so.

While you might qualify, think long and hard before you take it because the mulligans are no longer available. Age 64, nine months, is when you can begin to apply for Medicare. It is important that you apply by age 65 for at least part A. You may continue to be working and be on your employer’s plan and that is fine, but you have to sign up for part A.

Otherwise, there is going to be a penalty for the rest of your life. That is an important landmark. Do not let it pass you by. From age 66 to age 70, those are the years where you might be reaching full retirement age, which is referred to as FRA. FRA is when you are eligible to get 100 percent of your Social Security benefit.

Once again, this does not necessarily mean that I want you to take it. It is important to run the numbers. There are many articles out there that say, “Oh, you want to wait, wait, wait until you’re 70 because that’s when you get the most from Social Security.” That may be true, but it may not be the best course of action for you.

You want to run the numbers, to make sure that waiting is the right decision for you. Let me give you an example. For example, if you decide to wait, and instead of getting that $2,000 a month from Social Security, you’re taking it out of an IRA. I am not so sure that’s the right decision for you.

To get the same $2,000, you have to take out more from the IRA. Again, it is a different decision for each person. For those people who are born in 1960 or later, age 67 is your full retirement age.

Let’s go to the age of 70. You are 70 years old, that is the milestone that you’re going to hit this year. What happens then? There is a neat opportunity that a lot of people are not aware of – when you turn 70 and a half, you are eligible to do something called a qualified charitable deduction.

All that means is that you can take money out of your retirement plan and not pay taxes on it. You might say, “Well, Patti, I usually take money out and then send it to the church or the charity.” That’s perfectly fine. If you do it that way, then you have to put it on Schedule A as an itemized deduction.

There was a law that was passed in 2017. Even though most couples have a standard deduction of $27,300, that charitable deduction on Schedule A isn’t enough to be able to itemize. It’s wonderful that you made that charitable contribution, but you’re not going to get any tax benefit from it. Instead, you might have a retirement plan.

If you are 70 and a half, take the money out of the retirement plan. Guess what? You do not have to pay taxes on it. The charity got the money and you still get your standard deduction. That’s leverage. That is powerful.

Even though required minimum distributions have been pushed off to age 72, keep 70 and a half in the back of your mind as still an opportunity to do something worthwhile. At age 72, you will take required minimum distributions.

This year in 2022, the IRS has changed the tables. We at Key Financial have had to reorient all clients’ portfolios and their retirement plans to come up to speed with these new IRS tables. That is going to impact everybody who was 72 years and beyond. It is a whole new calculation.

In addition to that as we go forward, beyond age 72, this is something that needs to be done each and every year. I am going to say to all of you, perhaps the most important milestone at the beginning of each year is to review last year. Figure out, “Gee, what worked? What didn’t work, and what are we going to do about it?”

Then, at the end of the year, let’s all be grateful. Let’s be grateful that we live in this wonderful country. That we have these wonderful milestones and opportunities to make a difference in other people’s lives.

Thank you so much for tuning into today’s podcast. Remember, that if you’d like this list of milestones, go to our website at keyfinancialinc.com. Go to the podcast tab and you will see this podcast there. Click on it. You can print out these milestones and reference them anytime you want.

Thanks again for tuning in, I hope you have a great day! I’m Patti Brennan, Key Financial Wealth Management With Wisdom & Care.

Ep108: Special Re-Broadcast of Hartford Funds’ Human-Centric Investing Podcast – How to Help Clients Age with Dignity Featuring Patti Brennan

About This Episode

Patti was recently asked to be a guest on Hartford Funds’ Human-Centric Investing Podcast. Together, with hosts John Diehl and Julie Genjac, Patti discusses the importance of helping her clients age with dignity, while also opening communication lines within the family. Throughout her career, Patti has discovered that while the conversation might be very delicate and emotional, it is paramount to discuss “what if’s” with adult children. In every client/advisor relationship, there may come a time when a client may become ill or incapacitated. Patti feels that it is her responsibility to help her clients prepare for that unexpected event. Part of helping her clients age with dignity, is working with them proactively in those decisions so family members are aware in advance of their loved one’s wishes. Listen today to find out how to start those difficult conversations with your loved ones – you’ll be glad you did!

John Diehl: Julie, in today’s podcast, we’re going to welcome Patti Brennan, and the topic is interesting to me. It’s “How to Help Clients Age With Dignity.” I don’t know about you, Julie, but how many conversations do we have when we’re with clients, with advisors? Where the conversation goes well past the money. It goes well past the financial part of the client’s life.

We talk about values, we talk about plans, and we talk about relationships. Navigating those relationships can be tricky, so that’s why I’m looking forward to what Patti has to share with our listeners.

Julie Genjac: I agree, John. I know in my own life, my grandmother passed away just about a year ago to the day and we, unfortunately, didn’t engage with some of these conversations, and I certainly wish we had. It made for her last few days…some challenges in the last few days. So excited to hear Patti’s best practices and shall we go talk to Patti?

John: Absolutely. Hi, I’m John.

Julie: And I’m Julie.

John: We’re the hosts of the “Hartford Funds Human-Centric Investing Podcast.”

Julie: Every other week, we’re talking with inspiring thought leaders to hear their best ideas for how you can transform your relationships with your clients.

John: Let’s go. Well, we’re excited to welcome to the podcast Patti Brennan. Patti is a graduate of Georgetown University, she’s a certified financial planner, and CEO of Key Financial Incorporated. Patti not only provides comprehensive wealth management; she and her team create integrated strategies that are unique for each client.

Patti’s not just a number cruncher, she has the ability to see the impact of small details in the big picture, and she’s known for communicating complex financial concepts in simple meaningful terms. Patti is consistently ranked year after year as one of America’s top financial advisors.

As a wife and mother of four children, Patti has learned to balance the most important job in the world with the needs of a growing company. Her husband, Ed, also owns a business so their children have a real understanding of what it means to be an entrepreneur.

Patti is a believer and giving back and currently resides on the boards of the Brandywine Valley YMCA, Connect Thru Cancer, Royal Alliance, and eMoney Advisory.

Patti has served the community over the years in a variety of ways including the Chester County Hospitals main board, and former chairwoman of the Retirement Planning Committee, the Chester County Hospital Foundation’s Investment Committee, the Chester County Economic Development Council, Southeastern Pennsylvania Development Council, and the Royal Alliance advisory board, as a former chairwoman.

Her favorite positions included her work at St. Agnes as a kindergarten CCD teacher, and a field hockey and lacrosse coach. Patti, welcome to the podcast.

Patti Brennan: Thank you so much, John, and thanks to all of you who are tuned in today. We’re really looking forward to presenting this information to all of you.

Julie: Well, Patti, I think this is going to be a very interesting topic, and I know that you’ve spent a lot of time cultivating your approach around how to help your clients age with dignity, but more specifically, opening up communication lines and the transparency within a family.

I know oftentimes, and I’m sure those listening today can relate to this, that clients sometimes feel like they’re a burden to their adult children. What happens if they get sick? How will their children face that reality?

I know that you’ve spent much time with multi-generations of your clients engaging in these deep and meaningful conversations, but I think we should kick it off today with the tough part of this. How do you start these conversations? Obviously, they’re very nuanced, they’re very delicate, very emotional.
How have you found the best way to approach this with your clients and their adult children? What best practices can you share with us today?

Patti: It’s a really good question. I often talk about retirement planning and financial planning in general, as it’s not just about money, it’s about the relationships, it’s about having them retire with that feeling of independence, not just financial independence, but that dignity that we all feel when we’ve got things organized and in control.

For me, I try to set them up and go through the different fire drills. If it’s a husband and wife, I ask “What if one of you died and the other person is sick, who would you call? Would you call the kids? Would you call a neighbor?”

Just get a feel, begin opening up those family dynamics with the idea of we just would want to know, so that we could make those phone calls on your behalf as well. I think if it’s the parent…To your point, parents don’t want their kids to worry, they don’t want to be a burden.

I will tell you, the kids worry anyway. They’re seeing mom and dad begin to get slower. Maybe you lose a little bit of their cognitive sharpness, things of that nature. And so, they’re going to worry.

The more than you can have an open dialogue about these issues, the better. You worry about things that you don’t know. Listen, this is me. I don’t want to create a problem that doesn’t exist, right?

If mom and dad are OK, that’s great. If they’re not, well, what are you doing to do, what’s plan B? Who would you call? What would you want them to do? What are you comfortable with?

Because they may not want the kids to help them. Those are the beginnings of the conversations.

We had a meeting yesterday. A couple, they were in their early 60s, parents who are still alive. There was something that they said in the meeting, and just intuitively I just sort of picked up on I said, “Tell me more about your parents. Do you worry about them?”

That’s when they opened up and said, “Well, we don’t know. We don’t know if we should be worried about them. We don’t know if they’re going to need our help financially or otherwise in the future.” They just had no idea. That opened up a different conversation. In terms of acknowledging the issue.

Yeah, it’s kind of a glitchy topic. Some parents, they don’t want to share. Many are from the older generation, and the mindset is “it’s none of your business”.

“I’m not trying to be grabby, mom or dad, or both. We’re just asking, in the event that you might need some help. You might be perfectly fine. You might have a lot of money. There are some practical considerations we should talk through”

“If you were to get sick, whose got power of attorney? What bills do you have? How much of it is automated? What are your passwords and usernames? Where do you do your banking? Just because we want to help. We want to make this as easy and seamless as possible, so that you don’t get behind on certain things.”

As long as we approach these with that framework of helping, wanting to make their lives easier. You’re not being nosy. In the event that there is a need, you want to know where to go. Does that make sense?

John: Patti, how often do you use stories in conjunction with trying to get someone to identify some of these issues?

I always laugh and share with my team. Sometimes when we’re talking about the issue related to longevity and aging, we’ll actually lead off the workshop by saying, “Look. This may or may not be you, but it might be a loved one, could be a parent or a sibling, that may need it.”

Of course, it’s not me, right? But I’ve got a friend who probably ought to pay attention to this.

As an advisor, do you often use stories about maybe people who hadn’t thought about some of these practical issues, and kind of the bind that they found themselves in?

Patti: Absolutely. To be perfectly transparent, some of them aren’t even my stories. I’ll hear a story from somebody else, and I’ll preface by saying, “I had a colleague who blank-blank-blank.” Because it is the stories that resonate with people.

In fact, we were talking beforehand, and you were talking the FAFSA forms and what that felt when you realized that your daughter was going to see all the data regarding income, net worth on her FAFSA form. I thought it was interesting. I thought you articulated it so perfectly.

For some people, that’s perfectly fine. For others, it may make them feel uncomfortable, cornered, etc.
To even start out with a story like that and to say, “I don’t want to make you feel that way, we just really want to help.” Stories are everything. It really helps.

John: Yeah, I had mentioned that in having to fill out FAFSAs for college scholarships, and things like that. We never made money a big point of discussion in our family, and yet, here we were, it was a surprise to me. You’re laying it bare in front of your children because they’re the ones submitting the form.

Patti, I think what I mentioned to you is it cornered me. It’s something I hadn’t planned to talk about. We never sat down to talk about it. Then, Julie shared as well that led to some new conversations when she, as a student, experienced the same thing of getting to share with her parents, about things that we might never share about.

I wonder if that FAFSA form wasn’t there at the time, would we have waited until my 70s or 80s, to have those conversations?

Patti: What’s also interesting about that, is that there are some unintended benefits to having the conversations a little bit earlier. For example, true story, we were doing some estate planning, and I was talking with my son because we wanted him to be a co-trustee in the event that something happened to one of us.

I was showing him the drawer of where I keep statements, and things of that nature. He looked at something that I had prepared like 30 years ago, and then I showed him something that I prepared, and he basically looked at me said, “How did you do all this?”

Here’s a young man with a young family, and he said, “How did you really do this?” It was a rich conversation of, “Believe me, we didn’t have the money either. We started with nothing. I was living on a home equity line of credit to pay our mortgage.” Talk about feeling some shame.

Here, I am a financial planner, and I’m using debt to pay debt. Not a good strategy, by the way. To share that with him, and to say we started off with $25 a month, and then we bumped it to $100, and that was the first thing. I never had a budget. We never did any of that stuff.

We just automated everything so that I didn’t have to think about it, I couldn’t think about it., and here we are today. So, that conversation of, “By the way, you’re named in this document,” led to a very rich conversation in terms of how to build his own net worth.

Julie: That’s a great story, Patti, and I think is so powerful. You’re right, sometimes those situations that we don’t necessarily expect to turn into the deeper richer conversations really do.

I’m curious what shape, or vision, or image do the conversations that you’re helping facilitate amongst multiple generations of families look like? Are they usually more of a one-on-one with either their parents or the adult child? Is it bringing the whole family together to have this?

What have some of those looked like, just for those financial professionals that maybe haven’t engaged in this type of conversation, so they can begin to wrap their minds around some of the different templates that you’ve taken during these conversations?

Patti: It’s usually a one-on-one conversation, either with the adult child or the parent, it’s one or the other, not typically, both. I’m always cognizant of the fact that a lot of times people will do more to avoid pain than to get something good.

You kind of got to put the fear of God into them a little bit, and I’m sorry to have to say that, but sometimes that’s the only time you can generate action. To think about the unintended consequences of this privacy, and this desire to maintain and keep it all close to the vest, both for the parent as well as the child.

For the parents, I’m talking to mom and dad, I’m saying, “I understand that this is something that is important to you, that it’s private, and I respect that completely. I’m also wondering if there’s a way that you could set it up so that if you needed something that you could make it really seamless for whoever it might be that could be stepping in to help you in that time of need.

“Unfortunately, there is going to be that time. There’s going to be this time,” – if I’m sitting with a couple – “when, where I’m sitting at this conference table with one of you. That’s when this stuff really matters. The more that we can involve your family, your children, to do the things that you may not be able to do anymore, the better, to make it easier.”

I’ve seen a lot of situations where they didn’t want to involve anybody. Then, they got hit with one of these lottery schemes. $200,000 later, they’re wiring money out to somebody because of fraud – or Amazon, that’s the latest one, the security department from Amazon calls mom and dad.

Somehow, they get access to the bank accounts, and hundreds and thousands of dollars get sucked right out of the account. These are the stories; they are true stories they can happen to anybody.

As we know, a cognitive decline doesn’t happen. People don’t fall off a cliff, and then not recognize their family. They have good days, and they have bad days. That’s when they become that much more vulnerable.
If it’s Mom and Dad, just say, “I don’t want you to lose everything because of some crook. Let’s figure out some strategies to make sure that doesn’t happen to you.”

John: Patti, I want to throw you a bit of a curve ball if I can. Change the narrative a little bit. I think what we generally imagine is a relationship where it would be better off if we got mom and daughter, mom and son, dad and son, get the family together to help one another.

One of the more painful conversations, I remember, is an advisor who said, “I have this client.

She’s widowed, but she has children, and her one son is going to bleed her dry. Just keeps asking for more money and more money and more money. As a mother, she’s finding it really difficult to say no.”

As a financial professional. Do you have a role in that conversation? What would you do if…The woman knew that it wasn’t going to be good for her, but just had a lot of trouble saying no to her son. The advisor looked at the son and realized that he was being abusive in terms of the requests that he was making. Are there any guardrails you put in place for clients?

Patti: I would just give it to them real. It literally is our job to protect our clients from that kind of elder abuse, and it is a form of abuse and call it what it is. Now, it’s uncomfortable for the parent, I would basically say to the mom, “Make me the bad guy, blame it on me. OK? Say you cannot do that anymore.

“If it’s too difficult for you to do that, let’s yank the money out of the bank account. We’ll put it in the brokerage account. Then, they can’t come to you. You can basically look them in the eyes and say, “I’m sorry son. I have $2,000. That’s all you’ll have. Frankly, that’s all you’ll have left if this keeps up. What can I do to make it easier for you to say no?”

Then, if I have the opportunity to talk with the son, I would say, “Hey, listen, I’m on to you. I have a fiduciary obligation to your mom, as well as the regulatory authorities, and they don’t like this stuff. It’s really important that you’re going to find another source of capital because we’re turning off this tap.”
John: I think what you said is right. I think being straightforward as you can, regardless of who likes it, we have an obligation to represent our clients. Thanks for that answer. I think it’s a valuable one.

Patti: It’s really where the relationship comes in. Everybody listening to this show today, you’re listening because you care about your clients, and you want to learn more. When you come from a place like that, I already know you’re a great advisor, your clients are going to appreciate that. They’re going to appreciate the fact that you’ve got their backs, no matter who might be involved.

Julie: It sounds, Patti, like the foundation of this is just being willing to have that, what I like to call, a courageous conversation sometimes with clients, and be open, and honest, and give that feedback. I’m sure that just builds such trusted relationships over multiple generations of families.

I’m curious before we wrap up, have you found that engaging in these conversations, either with the adult children that are your clients or vice versa, have one generation or the other consolidated assets with you as well, after you’ve taken the time to help go through these special conversations with the family?

Patti: Yes, I would say it’s one of the unintended benefits, and nothing I really intend. Usually, that conversation goes something like, “You’ve taken such great care of my parents. As we get into our 50s, in our 60s, in our 70s, we’d like to maintain, have a relationship with you as well.”

It’s one thing to tell prospects what you do. It’s one thing to tell clients what you do. It’s quite another for them to experience it. Then, when they get to see how you’ve taken care of another member of the family, there’s that warm and fuzzy, that level of confidence that they have just going into the relationship. Yes, that’s definitely happened.

John: Well, Patti, a couple of tips as we close today’s podcast for our listeners who have not yet checked out, our Hartford Funds material around a topic called “Your Money Story.” There’s some real good practical tools that you can use to begin to understand the family dynamics.

Secondly, I want to make sure everybody knows, Patti, that you, yourself, have your own podcast called “The Patti Brennan Show.” If you’re looking for that, you can look at keyfinancial.com/podcast, and you’ll be able to find episodes.

I know, oftentimes, advisors and financial professionals love to hear from other financial professionals, and I want to make sure everybody knows about your podcast. Patti, thanks for joining us today with your insight as always. Always good to work with you.

Patti: Thank you both, also, for your time. I’ve loved this. These topics are so important because it’s not what you’re going to hear on CNBC. That’s for sure. Right? Thanks to both of you. Thanks to all of you who are listening today. I hope you all have a great day.

Julie: Thanks for listening to the Hartford Funds Human-Centric Investing Podcast. If you’d like to tune in for more episodes, don’t forget to subscribe wherever you get your podcasts, and follow us on LinkedIn, Twitter, or YouTube.

John: If you’d like to be a guest, and share your best ideas for transforming client relationships, email us at guestbooking@hartfordfunds.com. We’d love to hear from you.

Julie: Talk to you soon.

Ep107: Triage Your Finances

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this episode, Patti addresses one of those most common questions she’s presented with. “Patti, where should I put my savings?” There are so many different types of accounts to help grow your savings tax free, but they have varying limitations and benefits. Patti identifies the appropriate accounts for each income situation and stage of life, and shares some of the negative consequences associated with certain strategies offered by other finance professionals. Listen today to hear concrete actionable steps you can take to maximize your savings right now!

Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. I’m going to set this Ask Patti Brennan series up a little bit differently for you today.

We often get questions about savings – what should I do with my savings? If you’re like everybody else, there’s a limited amount of cash flow that we all have. What’s the first and most important thing that you should be putting some of that excess money into? What would be second? What would be third, fourth, etc.?

Think of this like I thought about when I was a nurse. It’s triage. Where do you get the biggest bang for each buck? What would be second? What’s third and fourth, etc.?

Number one. If you are currently working and if your employer provides a 401(k), I will have to say that putting as much as you possibly can into that 401(k) is going to be the highest and best use of your excess cash flow.

In fact, when kids come in to or office and they’ve just graduated from college, they are typically the children of existing clients. They send them to us because they say, “Patti, my kids don’t listen to us. They don’t listen to me at all. Will you talk to them about what to do with their benefits and their 401(k)? Because we wish that we had met with you 20 years ago.”

We’ll meet with these kids. I always tell them, the line in the sand is 10 percent. When you get out of school, put 10 percent of your income into the 401(k). The only question is, within that benefit do you do the pre-tax 401(k) or the Roth? That answer’s going to be different for everyone listening to this podcast today.

If you think that your income is going to rise in the future, you might consider the Roth option instead, especially if you’re young, because the more time you have before retirement, the more powerful that tax-free benefit will be.

First and foremost, put the money into the 401(k). Let’s say that you’ve been working, you’re in your mid-50s, the kids have graduated from college. Those huge tuitions are over, and you’ve got excess cash flow. By the way, when I say excess, anybody over the age of 50 can put in $27,000 on a pre-tax basis or into a Roth 401(k), that’s the limit.

What if you say, “Well, I’ve got more capital that we could invest. We’ve got more cash flow we could invest.” I’d say the second thing is ask your employer if they allow for after-tax 401(k) contributions. Boy, I’ll tell you what, if they allow for that, you can set yourself up for an incredible retirement future. Here’s why.

There’s a strategy that if you max that out, let’s say that between your contributions and in your employer contributions that $67,000 per year, one way or the other gets invested into your 401(k). Now your $27,000 and their match is pre-tax. The rest is after-tax. You might say, “Patti, why bother, I’m not getting any current tax benefit from that.”

Let’s say that you’re 10 years away from retirement. Let’s say that that money…to keep the math simple is $20,000 extra per year. You’re putting that money into the after-tax, the earnings on it go into the pre-tax. Guess what?

When you retire over 10 years, you’ve accumulated $200,000 in that side account. When you retire, if you choose to roll your money over, instead of requesting one check, you’re going to ask for two.

You’re going to get a check for the pre-tax amount of your 401(k) and put that into a pre-tax IRA, and you’re going to take that $200,000 and put it into a Roth IRA. You’ve already paid taxes on that money, so you don’t have to pay taxes again on it. Now, you have $200,000 growing tax free for the rest of your life.

It’s probably one of the best things that you can leave to the next generation. It’s one of the best things a child can inherit.

Within your own employer there’s some pretty neat things, pretty neat strategies that you can take a look at. Many companies, publicly-owned companies provide a benefit where you can buy the stock of the company at a discount. As a rule of thumb, we often see about a 15 percent discount. Wow, that’s a 15 percent rate of return almost instantly.

That’s another alternative. Now this is after-tax money. If you do that and you sell the stock, you’re going to get capital gains treatment, but that’s a pretty nice way of saving money and it’s even better because it’s often automated.

First and foremost, look at the 401(k). Secondly, look at the equity compensation type of plans at work. In addition to that, for those of you who are still working, once you’ve looked at those two strategies, you may or may not qualify for a Roth IRA. If you’re over the age of 50, you can put up to $7,000 into a Roth IRA.

If your spouse is working, they can as well, or if they are not working, they can do a spousal IRA. What’s the advantage there? The more you can get in this tax preferred tax-free accounts, the better. What if your income level is such that you don’t qualify for the Roth? Then you might want to consider doing the backdoor Roth.

Basically, you would put that same $7,000 into an after-tax IRA, similar to an after-tax 401(k), except this time, I don’t want you to invest the money. Let it sit in the money market account. Then you convert it into a Roth IRA. There is no income level. Then you simply convert that after-tax IRA into a Roth.

The greatest thing about this is there’s no income limitation when it comes to Roth conversions. You may not be eligible to contribute, but you can certainly convert one. If it’s been sitting in a money market account, good news, bad news, yes, you haven’t made any money, but you also, haven’t got a tax liability when you convert, and now you’ve got another 7 or 14 thousand dollars growing tax free as well.

Again, we’re doing triage. Look at 401(k), Roth or regular, look at after-tax contributions to your 401(k). Look at equity compensation plans. Look at Roth IRAs on top of that or backdoor Roth. Those are for those people who are currently working. Those were all retirement savings accounts. If you have access to a high deductible plan, boy, everybody should be doing an HSA.

That truly is the only free lunch where you really have left when it comes to tax planning. The money that you put into your HSA goes in on a pre-tax basis, it grows tax-deferred. As long as it’s used for healthcare-related costs, you take the money out tax-free. It is literally triple tax free. There isn’t anything else that we get that except in those high deductible plans and HSAs.

For those of you who may be tuned in and you own a business, you’ve got some pretty attractive savings options also. Certainly, you could set up a 401(k) for your employees. You can have a matching program on that, etc. Keeping in mind that maximum of $67,500, if you’re 50 years older or older.

In addition to that, especially given where tax rates might be headed, depending on your current age, you might want to investigate a pension plan. The pension plans with big corporations seem to be going by the wayside, but for small businesses, they can be a real home run. A defined benefit or a cash balance pension plan is something where you may not be limited to $67,500.

We’ve had people putting hundreds of thousands of dollars into their own pension plan account. Getting a full tax deduction, how’s that for a win-win right. You’re saving for your own retirement, and you’re getting a huge tax deduction. Talk to your advisor and see whether or not that might make sense for you.

If you have minor children and you are a business owner, you might consider putting them on your payroll. I’m not suggesting that you pay your six-year-old $100,000, but if your kids are of age where they can legitimately contribute to your business, they can answer phones, file, scan.

I’ve talked about this before. I think it’s good in general, in terms of them understanding, what your business is all about, learning about your work ethic, etc.

If you’re paying minor children, you don’t have to pay FICA tax and neither do they. It’s a great way of teaching your children important life skills, and you could set up a Roth IRA based on their wages for them. That’s another great win-win situation for everybody involved.

If you have children that you’d like to save for college, these are savings triage, and it’s usually based on priorities, what’s most important to you. You’ve got 529 plans.

529 plans are great in terms of being used for college education or any form of advanced education, you can use up to $10,000 of a 529 for high school as well. For parents and even grandparents, it’s a great way to stash money on a tax preferred tax-free basis.

A lot of times people come into our office, and they’ve seen an advertisement, or somebody’s doing one of these dinner seminars and they’re hearing about annuities. I hear about these wonderful annuities. They’ve got all these tax benefits. Should I consider an annuity for a portion of my savings?

I would say that there can be some attractive options as it relates to those products. I would be careful. I’d put that on the lower part of this triage list because there’s a lot of other really good options. Annuities are great because they’re tax-deferred, but when you take the money out, you’re paying ordinary income taxes on what you receive on the profits.

That’s not often the ideal scene for most people. If you instead invested in, for example, an index fund with low turnover, granted when you sell it, you’re paying taxes, but for most people, that’s a 15 percent tax instead of what would be ordinary income. It’s not taxed as favorably. That’s number one.

The other option, a lot of people come in after meeting with that insurance agent and say, they also talked about me getting some whole life, or universal life, or variable universal life. As with anything I’m open to all of it, I would say that these products are on the bottom part of the triage.

I would also say when it comes to the life insurance, because there’s lots of fees associated with this product, it’s really important to make sure they need the life insurance. I wouldn’t do it for cash value accumulation.

In spite of the fact that a lot of times these products are sold based on the fact that you can borrow money out of the cash value in the future. When you borrow from the cash value, it comes out tax-free.

That is true. However, there is a cost to that. It’s coming out of the cash value and you’re paying interest on that loan. In addition, you’ve got to be careful because if you take that money out and it really bleeds that cash value dry, you run the risk of that policy lapsing.

Let me tell you something, you talk about a negative income tax result that it’s not pretty. Be careful. I’m not saying don’t do those things. Be aware of how they work, how it’s going to fit into your overall plan and look at some of the alternatives that might also be available to you.

Everybody is different. Everybody’s needs are different, and the triage needs to be adjusted accordingly. Today I wanted to give you some of the alternatives that a lot of people aren’t aware of, like those equity compensation plans or deferred compensation plans, or backdoor Roth, or the ability to stash a lot more into your 401(k) and then be able to roll it out, tax-free.

Know what’s out there and then decide what’s most important to you. Ultimately, the real metric to look at is when are you going to need that money back? Because that’s what investment is. You put it in, you save it today for some point in the future and that can also guide your decision.

Thank you so much for joining us today. I love doing this topic for you. Please if you have any questions, go to our website at keyfinancialinc.com. I am Patti Brennan, thank you for joining us today. Key Financial Wealth Management with wisdom and care.

Ep106: Tim Seifert of Lincoln Financial Shares Key Attributes of a Great Leader

About This Episode

Today’s show is the second episode of a two-part series, in which Patti welcomes Tim Seifert, the Senior Vice President and Head of Retirement Solutions Distribution for Lincoln Financial Group. Together they continue their conversation about what defines a great leader and the characteristics that are attributed to that role. Many may recognize these traits, but do you also realize the importance of being a good follower and mentee? What is that all about and why is it important? Patti and Tim answer this and reflect back on their experiences in building successful teams and identify what they all have in common.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Hey, everybody, I got Tim back. Tim Seifert, from Lincoln Financial, is joining us again, because the prior podcast with Tim was so invigorating and so interesting, and he has so much to offer.

Tim, thank you so much for joining us again.

Tim Seifert: It’s great to be back, Patti. Here we go again. You have those dates on your calendar?

Patti: Yeah.

Tim: Here comes another one, like “Let’s go.”

Patti: Here comes another one. Oh my goodness. He is unbelievable. You know somebody is something special when no matter what they do, they’re really super successful. It’s not necessarily measured in financial terms, but more in terms of the impact that they have on other people. Tim Seifert came from very humble beginnings.

Feel free to listen to our prior podcast. It’s really interesting. He grew up with an amazing mom, one of three boys. She was a single mother, worked two jobs as an intensive care nurse. We share a little bit in common there.

He started with those beginnings, and little by little, he joined a firm called PLANCO, was super successful there. Then he goes to Prudential, super successful at Prudential. Now he’s at Lincoln Financial running a retirement division and coming up with unique strategies for people like us to be able to improve the lives of our clients.

There’s just something Tim, because of the impact that you’ve had on other people, you have become super successful. What a privilege it is to have you on our show again.

Tim: It’s great to be back. We share that, Patti, and you know that. It’s the saying, “Enthusiasm excites, but passion persuades”, and our passion that you and I share is helping others. I’m humbled to be here once again. It’s always fun. Let’s have some fun.

Patti: Absolutely. Let’s start off with the basics because, Tim, some of the people that are listening to this show, they may be just starting out, right?

Tim: That’s right.

Patti: Let’s start out with some of the basics. You and I didn’t start out where we are today. We were learning as we go. Hopefully what today’s podcast is going to do is save them from some of that learning curve because there are certain attributes, there are certain things, that great leaders, great people do.

Tim: That’s right.

Patti: Let’s talk about that. What are the basics?

Tim: It’s great. Patti, as you said, I run the retirement division at Lincoln, but my true passion is training and development, and it’s really training the future leaders of Lincoln to leave that legacy of leadership. When you talk about the basics…I mean, we’re going to get down to the basics, so how about a little two-step. You and I have been to the dance floor together…

Patti: Yeah, baby.

Tim: …so we’ll do the two-step. Number one is what is the one thing that all leaders must have to be deemed a leader? It’s not a tricky question, it’s pretty plain for you.

Patti: You know what? To me all great leaders have followers.

Tim: That’s right.

Patti: Right?

Tim: You nailed it. It’s like, “Follow the leader.” In fact, I had this conversation a little bit ago with a young developing leader. I asked him, “How was that leadership going?” and he says, “It’s going great.”

I’m not quite hearing that, and it’s because you have no followers. You’ve got to have followers. We could talk a little bit about that, what does it mean to be a great follower? That’s step number one.

Tim: It’s that simple.

Patti: Can I ask a question?

Tim: Mm-hmm.

Patti: That’s a tricky thing, isn’t it? You can’t just say, “Follow me. Follow me.” It’s something you must earn.

Tim: You earn it. You absolutely earn it. Then the two-step, the two is the two questions that leaders ask themselves every day. Question number one is, what am I doing to develop myself to grow as a leader in the skill sets of great leadership? What am I doing to grow myself?

A lot of people say, “Tim, that’s kind of selfish, right?” I said, No, it isn’t,” because we can’t give, Patti, what we don’t have. We can’t.

Number one, we’ve got to develop ourselves, and I know you are a continuous learner. I know you are a reader. Leaders are readers, and readers are learners.

Question number two is, only once I’ve learned and I’ve developed, and I think about that question every day, then what do you do to develop your followers? I know at Key Financial, you set the path. There’s nobody studying as hard as you are, improving the skills set as far as you…

Every one of your followers around this great office see that. They see Patti’s work ethic record because nothing works until you do, but it’s what are you doing to develop yourself, and then what are you doing to help develop your followers?

Patti: Development can come in many forms, can’t it?

Tim: It sure can.

Patti: Let’s talk about that a little bit. When you have these conversations with the people that you work with, your followers, where does that conversation lead in terms of what they’re doing to develop themselves? Is it focused on their professional life? Where does that go?

Tim: Let’s talk about this. This is really great work from the academies. I learned this from a mentor, Coleman Ruiz. He teaches at the Naval Academy. He was a Navy Seal. They’re developing leaders. What they determined is they don’t do a good enough job teaching followers.

When you go into that, there’s really a couple of steps, I would say. Patti, I’ll go through these five quickly, then you can say, “Let’s talk about some.”

Patti: I’d love that.

Tim: These are the five characteristics of great followers. This is from the Mission Critical Institute at the University of Pennsylvania, Coleman Ruiz .They’ve got a great podcast themselves. Number one is they take responsibility. That is being prepared. It is responsibility, it is respond with ability.

Two is serve others, the other people in the team. It’s not all about your great followers, or part of a great team. It’s serving each other.

Number three is, you and I love this, participate actively in change. The world is not sitting still. We’ve got to develop our skillset. You’ve got to be ability to change and be adapt to whatever it is.

Number four, take action. It’s not what you know that counts, it’s what you do with what you know that counts. Massive action. You and I are, “Take action, take action, take action.” If you fail, it’s OK. This is a safe place. We have a safe environment. We’re going to learn.

The fifth one is participate in the transformation. For who? The benefit of our clients. We must transform. Who would have ever known that two years ago, we got sent home and went into a virtual environment? I know you are active still in the office here.

All of a sudden, we had to change, and we’ve got to meet our clients where they want to be met, not where we think they want to be met.

They are the five standards of being a great follower. That’s what we have to counsel and teach. Again, that’s the one thing all leaders must have, in order to become a leader, you’ve got to be a follower.

Patti: It’s interesting because when I was having that conversation, my child said, “In order to be a great leader you have to be a great follower. I don’t get that.”

My response was – not nearly as articulate as yours was – “Yeah, because, when you’re a really good follower you kind of understand what it feels like to be the follower, what you’re looking for in your leaders, and you learn from all the different people.”

I love that response because that just says it all, the ability to take it all in, to take responsibility, and to work on getting better. I love what you said about the failure part too. I’ve always believed that failure is a label that sometimes people take on, and I’ve never liked that. I’ve never accepted it.

People are not failures. Failure to me is just feedback. It just says what you did didn’t work. Let’s try something else. It’s all part of the growing process. To your point, and I know you do this, is for people to feel safe in doing that. Otherwise, they’re never going to take a chance.

They’re never going to do these things. They’re never going to be part of that adapting, thinking forward because they don’t want to look bad.

Tim: You and I had this discussion at one of our conferences around this topic. I think we both came to the agreement that when we took a look back at our careers, not only did we have great mentors, we were we great mentees.

On this idea of failure, when you change your relationship with that world, that word rather, failure… When you change your relationship with failure, your life changes. We have a saying around our household, and you know my boys, Anna-Marie, right?

Patti: Absolutely.

Tim: We’re siphons. We don’t lose. We either win or we learn, so please, learn more. We learn a lot more. We learn and we learn and we learn because we’re not winning, but we are learning. That’s a mindset.

It’s a mindset of, “take risks.” Not risk that’s going to hurt yourself in a way, but take what we call safe risks with your career. That is, what are the little things that you are willing to go out on the edge and dare to be different, dare to something new, where it’s a safe fail? We have those going on at Lincoln all the time. We do because it’s part of our mentality.

Patti: That’s how innovation occurs. That’s how you become who you are. Some of the things that you’ve come up with for long term care, nobody had ever done any of that stuff. This is actuarial science here.

It’s amazing what Lincoln has done and were the first out of the gate and have improved, improved, improved, improved and are making a difference in the lives of everyday people. That’s a big deal, but it takes that culture of safety to innovate to say, “I think nobody’s ever done this. No big insurance company has ever done this. And I think it could work.”

Sure enough, fast forward, it’s incredible to be able to do that for all kinds, whether it’d be in financial products, and things of that nature, it’s interesting to me.

Tim: Safe environment. Remain curious. What if? You and I asked this question all the time, “what if?’ and then we said, “How?” Once we start getting there, then we say, “How do we become a virtual host?”

Are we asking that question of ourselves before we ask our followers? What if we did this? How would you go about doing it? Some of it works out, some don’t, but you’re able to have that environment to move forward. It’s really good, be curious.

Patti: It’s interesting. I’m reminded of a quote, something my team always knows, “Don’t let the tyranny of ‘How’ get in your way.”

Tim: I love it.

Patti: “Don’t let the tyranny of ‘How’ get in your way.” If there’s something that you think could be different, could be better, we’re going to figure it out. It’s just the important thing for people to feel safe.

Tim: Safe because, Patti, you’ve created the trustworthy environment. It’s something that we think about all the time, is that if you take a look at some of the most successful leaders, they build trust and we could spend some time on that.

They build processes. They build simplicity into the process while elevating the client experience, always right there. I know you talk about that. We don’t rise to our high scores, we fall through the process.

Lastly, it’s just outstanding communicators and when we talked about that. How do you communicate? You?

Patti: Listen.

Tim: Yeah. We talked about that last time.

Patti: You listen actively.

Tim: We don’t have to get into that.

Patti: I know Lincoln is very big into research. You guys will drill down, do surveys, do a lot of research. Tell me about the research that you’ve done on super successful human beings, people. What are the characteristics that you’ve found, time and time again, in your research?

Tim: It’s really five key elements, that makes great. You can do it in athletes. You can do it in financial services, the great human beings. Number one, the way they think. They think abundantly and they think win-win. You and I are big believers in the law of reciprocity. There’s another one we can drill down.

Number two is the way they prepare. We talked about learning, but it’s prepare. It’s practice, it’s process, but it’s the way they prepare. For anything in life, they prepare.

Next is the way they show up at work. High passion, high enthusiasm, high energy. That’s why I look forward to being here. When Patti and I get together, it’s energy, “Let’s go.”

Next is when you follow through. It’s that when you make a commitment, I hold to that commitment and I follow through. You teach that throughout this in our entire team. We will drop anything to serve our clients and serve them well.

Lastly, it’s something that we believe in, whether it’d be nursing, or my mentor, mom, is the way you live. You live with humility and being that humble person. As mom always said, there’s only ever two doors that open up any room. The first door is, please and the last door is, thank you.

Remember the two doors that open up into any room, so live humbly. We both come from humble beginnings.

Patti: Absolutely. At least for me, it gives me such a perspective in terms of the things that people think about, things that they worry about because I get it. I was there. You were there. As we’ve had our families and our kids have grown up, some of that stuff never leaves.

To understand the human element of things is not about people’s money. It’s about their lives, and to live their best lives.

Tim: That’s it, and then what? Can I give another? Mom, can I give another part?

Patti: Yes, tell me.

Tim: I know your customer cares. I’m drawing a blank on it, but it’s your client concierge, your service answers, but you care. You have the wisdom, but here you really, really care. You’re right about anxiety. You’re right about fear, Patti, it’s greater today than it’s ever been.

So, this is a bar visitor, and she said…It changed my relationship with the thought, and that is, the presence of anxiety is unavoidable. Everybody’s got an anxiety.

You and I talked about being a young mother in the business. I can’t wait to have you at Lincoln to talk to our people or young people, but the presence of anxiety is unavoidable. The prison of anxiety is a choice. It’s your choice.

I was going through a really tough time, and mom reminded me of the quote because we all go through tough days. We all have a hard day.

I said, “Mom, how do you get out of prison?”

She goes, “You have to remain calm.”

I said, “Well, that’s easy. What do you mean?”

She goes “No, Tim, it’s not actually calm, it’s C-A-L-M.”

C, count your blessings. You and I are big attitude of gratitude. You start day with gratitude and count your blessings. A, and I know you are big into this, ask Patti Brennan for help. The greatest four-letter word in the English language, help, “Patti, I need your help.” What do you need right now? I’m there, so ask for help.

Next, the L was, leave it. Leave it. Ask for help and leave it with them. Then M is make chocolate chip cookies.

Who doesn’t like a chip? Mom said, “Get away from it.” My mom is famous for chocolate chip cookies. It’s that the presence of anxiety is unavoidable. Don’t put it in prison. Don’t put it in prison.

Tim: It’s really great stuff. Isn’t it powerful?

Patti: Wow. That is so powerful. So many people need to hear that message today, Tim. Your mom is amazing. Yes, I’ll come to Lincoln, but your mom better be there because I want to meet Barb.

That is for sure. Wow, that is so interesting. It’s so important. Anxiety can stem from a lot of different issues.

Tim: It sure can.

Patti: I think about all of the things that you’ve done. I think about if there is one thing that everybody says about you in terms of what you’ve done, it’s that people, they love you, and they trust you. How do you develop trust? How do you do that, Tim?

Tim: We talked a little bit about this on the last podcast. I would urge everybody to go back and maybe take a quick listen. It’s this philosophy of others. It’s a philosophy of really caring about others. It’s the ROCC theory. Have you heard of the ROCC, be the ROCC? Have you heard about that?

Patti: Tim, I have never heard it until you brought it up. Tell me more about it. What’s the ROCC? I think I know.

Tim: You display it every day, you and the team. It’s R-O-C-C. The R is be reliable, is do what you tell people you’re going to do. The O has to do with asking great questions and listening. It’s being open. It’s being honest. It’s bringing your authentic self to your leadership. It’s admitting mistakes when you have them. You and I talk about that. We make mistakes.

Patti: You bet.

Tim: It’s our authentic self. I bring my whole self. Open, honest, and transparent is the O.

The C is competent. You’re an outstanding planner. You build your team around outstanding people that, remember, come to work every day and ask their self the question, “What am I doing to develop myself?” That’s competence. You’ve got to build the competence in what we do for a living.

Then the last one is the C. The last C is care, we really, really care. It’s on all your logos. It’s care. When you do that, you practice those four disciplines every day, guess what happens to trust?

Patti: Yup.

Tim: All right?

Patti: Yup.

Tim: I trust Patti Brennan. “I trust,” I hear that all the time. When we say why, they’ll tell you about all the great things that you and the team have done. Right?

Patti: Yeah. I know that for me it’s important to follow through. There’s a certain basic level of service, we have taken that to the nth degree with our concierge approach. The most important thing to your point is to be reliable. Follow through and do the things that you say you’re going to do. To be open, to listen, to be competent. It can’t be all fluff.

I say that all the time to people here. I’ve I especially say it at industry conferences. You heard me say it on the stage, “Enough of this fluffy stuff. You guys got to know what you’re talking about. Otherwise, people aren’t going to trust you. And then you’ve got to care.”

I think caring, for me, is the thing that drives everything because that’s where the motivation comes from, to really care. When you really care about another human being, think about our kids. Think about somebody in your life that you really care about, you’ll go through a wall to help them. That’s powerful motivation. Right?

Tim: It is.

Patti: There’s something else that you talk about, which I think is so interesting to me. You talk about “Hall of Fame leaders”.

Tim: Right.

Patti: What’s “Hall of Fame leaders”? What’s that all about?

Tim: It’s HOF, the Hall of Fame. We all have those leaders in our lives, and I am so big in being a mentor. I’m big in my mentors. I am honored to be a mentor. I’m a mentee. When I think about those people who are most influential in my life, and there are so many of them, is they provided a young kid from Norristown with hope.

Number one is hope, right? Hope for a better and greater tomorrow. Coming from where I came from, and my driver was that I had two brothers who were in the autobody business. I was like, “Who’s going to take care of mom?”

I went on to the financial services business because I wanted to make sure that she was going to be OK. They gave me hope.

Patti: That’s so interesting. I’m so sorry, Tim. I just have to point that out. I just know you as a friend. That says it all right there. That was your purpose. You wanted to give to your mom what she gave to you.

Tim: Exactly.

Patti: You want to provide her with some sense of security. You saw her working two jobs as a nurse. Made you hot breakfast every single morning before you guys went to school.

Boy, I think about your mom. I think about Barb – and this stuff is not taught to nurses. Yet, intuitively, she just understood the values that would make you the successful person that you are. Yes, you’re successful in business, but I’m going to tell you and all of you listening.

Tim is a successful human being. He successful as a leader in our community, church, and with his family. You’re amazing. You’ve done it all – successfully. Maybe not all the time, but you’ve had your challenges.

Tim: Absolutely.

Patti: We all have, and I think about your mom and the impact that she’s had in your life and so many other people. OK, that’s hope, what’s the next one?

Tim: Optimism, right?

Patti: Yeah.

Tim: Optimism. You have this idea of glass half-full, glass half-empty. Half-full is abundance. Half-empty is scarcity. I believe, I choose, I decide to look at the glass half-full. It’s that optimism. Not some kumbaya fake, it’s real optimism right into the future. That’s right, I choose to look into the future that way with optimism.

The last one is faith. I talked a little bit about this, but it’s just not faith from a religious standpoint of view. It’s looking someone in the eyes and say, “Patti, I’ve faith in you.” That’s where it gets here.

Patti: That’s big.

Tim: It gives you the courage. I believe in you. I have faith in you. I have faith into the future, and you give them that courage. Patti, you got my back and you’re willing to do those things that others just aren’t willing to do when you have that. That’s the Hall of Fame leadership – hope, optimism, and faith.

Patti: Can I add one word?

Tim: Love it.

Patti: You said it, love. I have one of my favorite quotes. If you went into my office, it’s plastered right in front of me when I’m on the phone or on my computer. You guys have probably heard me say this before. It’s John Ruskin’s quote, “When love and skill come together, expect a masterpiece.”

I think about hall of fame leaders – hope, optimism, faith, and love.

Tim: That’s right.

Patti: When you combine all four of those, there’s just no end in sight for what people that you work with, what they’d be willing to do for you, with you. They know you have their back and it’s just a beauty, it’s a masterpiece.

Tim: It is.

Patti: Again, love and skill. You got to do the work. You got to have the substance. To your point when you have that leadership, that person who believes in you that you can, even when you don’t think you can do it yourself, oh my goodness, that’s so powerful.

That is what keeps people “working for you, working for me.” This, we talked about the great resignation or we’re doing just fine, right?

Tim: Right.

Patti: Now everybody’s happy. We’re doing our thing. They know that. Everybody is a professional here, they come and go. It’s not a prison. It’s wonderful. It’s just the coolest thing.

I got to tell you, for me, the most beautiful thing, and I know this is for you too, is to see the growth in the people. It’s just to see them trying doing something and then getting better and better. It’s just pretty. It’s really the greatest thing in the world.

Tim: I love it. That’s so powerful.

Patti: Tim Seifert, thank you so much. Is there anything else that you’d like to bring up in our podcast today? Anything that we haven’t talked about, whether it’d be climbing Kilimanjaro, which is unbelievable to me?

I saw you working out. You’re working out to climb this…It’s just incredible. I think about fear and the amount of fear that you might have had, and the fact that you overcame that and how, what a great lesson that must have been.

Tim: Such a great lesson. So many lessons on the mountains. There’s a couple of different people that you meet on the mountain. You meet the quitters. You meet the campers. A camper is just not willing to go at summit. Then you meet the climbers. The climbers do that, they take that step. It’s based in fear.

Then the greatest thing in the world is what helps you do that is your guide. I had one of the greatest guides. He’s a legend in the climbing business, David Hahn. No one’s ever summited Everest as many times as David Hahn.

I guess the last thing is, we talked about followers. Patti, I know you do a lot of mentoring. You and I talked about this earlier is that you’ve got to be a great mentor, but you also have to be a great mentee. Maybe just a little bit on that, we’ll go over just real quick.

Tim: Let’s do it real quick.

Patti: Let’s do that. I’ll love to do that because everybody talks about leadership, culture, and all that kind of stuff, but what does it take to be a good mentee? There are certain things. People will call me. Sometimes if they’re not walking the talk, if they’re not willing to come up, do these things. It’s like, “I’m kind of busy.” We’re really busy. It takes time to do that for people.

Tim: Sometimes you have to put it into money terms, for some of these folks, in other words, a half-hour of my time. This is like you writing a check for me for X dollars. They go, “What?” and I go, “That’s how important this is,” because time is our most precious asset.

I always give them the guidelines. This is the guide – Number one is, coming in with a possession, a teachable spirit. Make sure that you’re a learner, are you and I talk about this, leaders are learners. Leaders are readers. Possess that teachable spirit.

Number two is, always come prepared with questions. 24 hours in advance, send me an email, “Tim, these are the three or four things that during our half‑hour together, I would really find beneficial,” but a lot of them are life experiences.

It’s just not about work. It’s about life. It’s simple, that’s the agenda. Then set the agenda. We always set the agenda. “We can’t hit these four. Let’s hit these tools. These are the two things we want to do is demonstrate.”

You’re actively listening by taking notes and sending an email. Tim, “This is what you said, this is what I heard. Would you like to add anything else?”

Patti: Beautiful.

Tim: Lastly, is demonstrate that you’re actively implementing the ideas that we talked about in your career or in your life and a lot of it is life stuff. Like Kim, how do you handle this to manage? If you follow those, it’s great.

Then the last one, Patti, is there are so many times during these sessions, guess who the student is? Me. This is humble, I want to learn.

A lot of them are younger than me because I’m an old guy like him right now, but is technology and some of these skill sets and these apps and building simplicity into my life? They teach me.
I always ask, “How do we make Lincoln better? How do we make the situation better? Give me guidance.”

They’re like, “Tim, you want me to make a recommendation to you?”

I’m like, “Yes, please. I’m a learner. I’m the student. You’re now the professor. Teach me.”
When you put that five to six characteristics into it, that’s a great session.

Patti: That’s powerful. Again, going back to something you said earlier, that’s win win. You’re both winning. That’s fantastic. You’re listening to it and taking it all in. That’s fantastic stuff.

Thank you so much for that. I’m going to implement that one. We’re going to have the transcript. I’m going to highlight that part. You’ve taught me so much over our friendship over 25 years that I’ve known you and boy did I learn a lot today.

Thank you for that. Thanks to all of you for joining us today. I hope you got as much out of it as I did.

Tim Seifert is phenomenal. He is so well versed on so many subjects it was hard to choose which ones we were going talk about today. Thank you for joining us. This is your time, your energy, hope you got lots of notes.

If you didn’t, if you’re listening to this in your car, go to our website, we’ll have the transcript, you can print it right out. Let us know what you thought. Let us know if it helped you, how it helped you because we want to make sure that we’re providing content that makes a difference in your lives.

Thank you so much for your time today and I hope you have a great day. Take care.

Ep105: Issues To Consider When Reviewing Health and Life Insurance Policies

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this episode, Patti addresses multiple issues that the listener should consider when reviewing health and life insurance policies. Reviewing all your coverages on various policies is an important aspect of your financial planning. Mandates within insurance companies can and do change and it is important that each policy is reviewed at least once a year to make sure the terms of the coverage haven’t changed and still remain relevant. Patti offers actionable steps for a variety of coverages, available to most consumers, that will help keep them protected without the policy lapses.

Patti Brennan: Hi everybody, welcome to “The Patti Brennan Show.” Whether you have $20 or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. This episode is part of the “Ask Patti Brennan” series.

Today we’re going to be talking about insurance issues; things to consider whether it’s health insurance, disability coverage, or life insurance. Not a great topic. Nobody really likes talking about insurance but let me frame it for you because it is an important aspect of your financial planning.

We talk a lot about portfolio management and risk management, making sure that you’re not subject to lots of ups and downs – especially the downs.

Well, we could do all the greatest planning in the world, but if you got sick and needed, for example, long-term care, that could wipe away all the great work that you’ve done to save your money with portfolio management, etc. Think of insurance as another form of a risk management tool.

Instead of you taking on that risk personally, and when I say you, you, your assets, your spouse, your spouse’s assets because it’s all one big pie, right? Instead of you assuming all that risk of an event occurring, you’re just going to transfer that risk to an insurance company. For that, you’re going to pay them a premium, quarterly, semi-annually, or annually.

Think of homeowners insurance. We all have homeowners’ insurance. We pay an annual premium. In the unlikely event that a fire rages through our homes and burns it to the ground, instead of us having to rebuild it ourselves, we’re going to let the insurance company take care of it.

Let’s talk about some of the more personal lines of insurance. First, starting off with medical insurance. This is an important topic because that is an exposure everyone has. We’ve seen it over the last couple of years with COVID. Those bills can get really high. If you have a coverage through your employer, occasionally just review it.

If you are married and your spouse has coverage, this is not something you want to fool around with. Get the highest quality coverage that you possibly can.

Review your premiums. Do you want to get a high deductible plan? That might have some tax advantages if you have the savings to be able to take care of those deductibles, those high deductibles, $8,000 to $10,000. You’re on your own. You must pay that first before the insurance kicks in.

If you go with a high deductible plan, those monthly premiums are often much lower. In addition, you would be eligible to set up an HSA, which is a neat tool that has tremendous tax benefits.

The long and short with health insurance, if you are working and have employer-provided coverage, occasionally just review it, and review what else might be available. If you are not working and you happen to be on the marketplace, there are wonderful subsidies that you might qualify for.

If you have an advisor, that’s an important thing for your advisor to know because whatever they’re doing with your portfolio will have an impact on whether you actually get that subsidy. We have a family of four people who happen to be on the marketplace, and because of the work that we did on their portfolio, they were able to get a really big subsidy.

Now, subsidy is not something that is a tax deferral type of tool. They’re saving $1,000 a month on their medical insurance because of the subsidies. That’s a big deal for this family of four. If you were on the marketplace, I really think it’s important for you to review the coverage from year to year because the company that you’re with may change their provisions, their coverages, etc.

Even though it might automatically renew, please make sure that that’s the company you want to remain with, especially if you are moving to a different state. That goes for Medicare as well and supplemental plans. If you happen to be changing your state of domicile, it’s a whole new ballgame, guys.

Review your coverage with an expert who focuses on that area. This is especially important if you have drug coverage through an employer. If you are eligible for Medicare, you only have 63 days to sign up for Part D. Otherwise, if you change your mind later or if you decide that you’d like to get Part D, you’re going to have a penalty on that coverage for the rest of your life.

If you have drug coverage through your employer, and it’s no longer there, make sure you’re signed up for Part D, ASAP. We did a whole separate podcast regarding Medicare, the supplemental plans, the Part D coverages.

If this applies to you, go back to that Medicare podcast we did earlier this year, because it was important. There are important dates, drop-dead dates and considerations when it comes to Medicare and those coverages.

As it relates to the Part D, my suggestion to you is, like any insurance, you’ll want to review it, and that’s especially true if the meds you take are different.

Company A might provide wonderful coverage, but then the doctor is prescribing something different, and you may not have great coverage with this company anymore, but company B will give you 100 percent.

Every once in a while, and especially at the end of each year, just review your drug coverage, make sure that this is the same company that you should remain with.

As it relates to life insurance, I don’t know about you, but I don’t like paying my life insurance premiums. It reminds me of something that’s probably going to happen someday, but it’s important.

The thing with life insurance is, as we get older, your needs do decline. Now, it doesn’t always happen, sometimes they increase. If, for example, you purchase a second home and now you have another mortgage, you might want to have coverage in the event that something happens. You want to make sure that that mortgage would be covered.

Every once in a while, run the numbers to see whether or not the coverage that you have is necessary to cover the expenses that they’re supposed to cover. Again, that’s what life insurance is there for. It’s there to create money when it is needed most. The thing that caused the problem also solved it.

A loss of an income, that’s the problem. In comes the life insurance, it solves it. Someone passes away, they’ve got a big estate tax, you’ve got the life insurance to pay for it. Now, that’s a simplified way of looking at life insurance especially in the estate tax area. There are a few other caveats that I would highly recommend as it relates to that area.

When you think about your disability coverage, you could have coverage through your employer. Most employers do provide coverage.

First thing to ask is, how much of your income will they cover? A lot of employers will provide up to 60 percent of your salary to a cap. What happens if you’re at a higher income, and you’re living on that higher income? In that case, you might want to consider getting private coverage to fill that gap.

The other thing to think about with disability insurance is as we get older, the value of the disability insurance declines. For example, most disability insurance will cover you to age 65. When you were 50 years old, that was 15 years of income that was going to be replaced. If you’re 60 years old and healthy, that’s five years of income that’s going to be replaced.

If the premiums are significant, and if you’re healthy, then you may want to consider maybe dropping or reducing the coverage. Again, if you are retired, you’re not going to have the coverage. Even if you have disability insurance, they’re not going to pay. So, you have to have the income. You must be working for the insurance company to actually pay the insurance benefit.

Let’s go back to life insurance. If you have permanent life insurance, that’s whole life, universal life, variable universal life, etc., please take the time, doesn’t take much time to pick up the phone, call your insurance agent and get a re-proposal because the projections that were originally run probably are going to be different today.

If it’s universal life that’s interest sensitive or whole life that’s based on dividends which are also interest-rate sensitive, chances are that projection’s going to be very different. That’s really important.

Also, if you’re using your cash values to pay your premiums, you do not want that policy to lapse, because the policy isn’t performing as you had hoped or as was projected 10 years ago. Call your agent, get a re-proposal and make sure that the strategy that you have for that insurance still applies.

Now let’s talk about something just plain-vanilla and that’s term life insurance. Most term insurance is not the annual renewable kind. It has a term. It could be 10-year term, it could be 20-year term or a 30-year term.

We met with someone recently who had significant health conditions and really needed to keep that insurance in force, but just realized that that insurance was not terminating, but his premium was going to skyrocket in three months.

When I say skyrocket, we’re not talking about a double or a triple of the premium. They were looking at a premium that would have gone from reasonable, say, $700, a year, closer to $10,000 a year, because he had hit the end of that particular term.

If you have term insurance, please be aware of when that chosen term is going to end, and then do an evaluation in terms of whether you’re still going to need it. If you are going to still need it, it’s important to see whether you can convert it before that drop-dead date.

Many term companies, I’m going to say most, will allow you to convert it into permanent insurance at a higher premium, of course, but this way, it’s permanent. As long as you pay your premium, it will never end.

In this case, with the story that I was just telling you, that person is basically uninsurable now because of a decline in health, but because of this term insurance, he got a preferred rating when it was issued 20 years ago. Guess what, he’s going to get a preferred rating on a permanent policy, even though he would probably be completely declined.

Again, term insurance, know when that term ends, determine whether you still need some coverage or all of it, and then figure out the best strategy that’s going to work for you and your family.

Last but not least, let’s talk about long-term care insurance. Long-term care is not one of those ideal scenes for most people.

We don’t want to imagine the time when we are dependent on another human being to help provide care for us, activities of daily living, whether it be eating or getting to the bathroom or what have you. If there is a need, it’s really important.

If you have long-term care insurance already, from time to time, review your coverage, it’s certainly increased in cost significantly, like everything else has with inflation. As more and more of us get older, I suspect that the cost of this is going to rise even faster. It’s a supply and demand thing guys, the lower the supply people to provide the care the higher the price will go so.

As it relates to your long-term care insurance if you have it, review your coverage. If you have it, you probably are like most Americans and been getting these nasty-grams in the mail.

These nasty-grams are saying, “OK, your premium used to be $3,500,” for example, “but the insurance commissioner has approved an increase in your principal.” When I say the insurance commissioner, they can’t just arbitrarily go to John Smith and say, “We’re going to double your premium.” An insurance company is not allowed to do that.

When there is a premium increase, it must be approved by the insurance commissioner of each state. The way that works is ABC Insurance Company says, “Hey, listen, we’re in the business of providing coverage, but the claims are much higher than we originally projected, and what we estimated or guesstimated.”

It’s not really a guesstimate. They do calculations. “We did not anticipate these claims, and so we have to increase the pool of capital, the pool of money that’s coming in every year. Otherwise, we’re going to go out of business, and then nobody is going to have any insurance.”

Let me tell you guys, that has happened. That is not fun, especially for people who have their insurance with these companies and were counting on it to pay for the care. We had a situation a few years back where the insurance company did go under, and my client was on claim.

She was receiving the benefits, and this company basically went into receivership. It was a very, very difficult situation. Again, with long-term care, number one, make the determination. Can you self-insure? Do you have sufficient assets to provide for the coverage to pay for it if you did need help?

Whether it be at home, assisted living, or a nursing home. If that’s the case, that’s great. If not, then you want to look and see what insurance coverages are out there. There’s a lot of new designs of this long-term care insurance, some better than others, as with anything.

Make sure that you’re working with a reputable agent who can give you different options and shop the coverage for you.

As I alluded to earlier, check on these insurance companies. There’s nothing worse than paying into these coverages year after year, and the insurance company not being as prudent with the way that that money was managed and not being able to provide the coverage that you are hoping for.

Insurance, not a great topic, don’t love talking about it. Most people don’t like hearing about it, but it is important for your financial security. You don’t want too much, right? You don’t want too little. What’s the right amount for you?

Thank you so much for tuning in today. I hope this was helpful. If you have any other questions, please go to our website at keyfinancialinc.com, submit your questions. We’re happy to talk about anything that you’re curious about, you have questions on. If you want us to have a guest on, on a related topic or something that you’re thinking of, let us know.

It’s been fun to do these podcasts for you. I’m so grateful to all of you for tuning in, for going to our website, and for giving us all these great ideas to talk about. Until next time, I’m Patti Brennan, Key Financial, Wealth Management with Wisdom & Care.

Ep104: Tax Planning Strategies and Updates with John Nersesian of PIMCO

About This Episode

Today’s show is part two of a two-part series, where Patti continues her conversation with John Nersesian of PIMCO Investment Management. John is the head of Advisor Education at PIMCO and provides advanced wealth management and planning techniques, as well as investment consulting education to financial professionals. In this episode, Patti and John discuss the importance of tax planning throughout the year – how to implement various tax saving strategies that can help protect as much of your portfolio as possible. They discuss the fundamental opportunities that advisors take on behalf of their clients that can provide critical tax relief – from charitable giving strategies to Roth conversion opportunities to the importance of imparting financial values to your adult children with legacy planning techniques.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me again is John Nersesian. He is the advisors professor. Literally, he is the advisors professor. I am so honored that he has joined us in our podcast studio today. John teaches professionals like me in the advanced education, advanced wealth management strategies. We’re going to be talking about that today. A lot of that. A lot of ideas.

For those of you who may not have listened to our previous podcast, I got to tell you, shut this one off and go to that one.

In that podcast, John and I talked about the tricks that our brains play on us, and have us do things that really sabotage the outcomes that we’re looking to achieve. Most of the time, we don’t even realize that that’s happening. It’s fascinating. John’s done a lot of work in that area, in a lot of areas.

Wait till you hear him again today. He’s brilliant, absolutely brilliant. He teaches at the University of Chicago and Yale, in a program called the Certified Private Wealth Advisor program, CPWA certification program. This is for advanced planning strategies.

Those of us who have been in the industry for a while, we think we might know a lot, but there’s still always a lot more that we need to know.

I was talking with John, about the podcast today. One thing led to another and he started talking. I was like, John, I got to take that. That sounds phenomenal. It’s so important for us to stay ahead, to understand the tactics and strategies that can be useful in the lives of the people that we serve.

John, welcome back. Thank you so much for joining us again.

John Nersesian: It’s my pleasure. That’s what makes you such a great advisor, the fact that you know a lot, obviously, and are so helpful to your clients, but you’re always looking to learn more. I think that desire to learn and to be more helpful to other people is an admirable quality.

Patti: The longer I do this, the more I realize the less I know.

John:  I feel the same way.

Patti: It just is amazing all the things, and just in the conversations that I’ve had with you over the past few weeks, it’s like wow. It is a humbling industry that is for sure.

John: Doesn’t that make it fun? I mean, if we knew the answers to every endeavor to every conversation that we were having, if it was the same thing over and over again. Did you ever see the movie with Andie MacDowell and Bill Murray, “Groundhog Day” I think it was called.

Patti: Oh yeah.

John: That guy wakes up and every day is the same day. It’s a pretty boring existence. The fact that our industry is evolving, the fact that there are more skills for us to develop and share with others, I think that’s what makes it challenging and fun.

Patti: It is fun. I also find, at least for me, for example, in my quarter letters, I’ve written a letter to our clients every 90 days for over 30 years.

John: Wow.

Patti: It’s interesting when I go to think about what I want to write about. I usually write about stuff that I don’t know. For example, the Russian-Ukrainian conflict, and I never realized where it all came from. What could it have been to make this person, Vladimir Putin, invade another country? What’s the history behind that? What one said, if you don’t know something, write a book about it.

John: There you go.

Patti: In my case I write a letter about it.

John: I love it.

Patti: I’ll also tell you that thankfully, with this podcast program, I think that’s one of the greatest benefits of this podcast program. For those of you who are advisors out there, and I know that there are a lot of you who are listening and tune into these programs.

For me, at least, and for my firm, what I found is that the podcast per se, yes it’s great to share this information with clients and with the public, but it’s also really important for my team. I was just telling them this morning – I didn’t plan on sharing this – but I’m renaming this team, and these guys are all my key mates. It’s key-financial, they’re my key mates.

John: Cute.

Patti: We are key to each other.

John: And to your clients.

Patti: And our clients, absolutely. What’s interesting is that the podcast program has become another avenue for us to learn. For example, when COVID happened, we talked a lot about COVID. I do have a medical background as you might know I used to be an ICU nurse. I didn’t know the difference between a virus and a bacteria. What is the difference?

John: Medically.

Patti: Exactly. Is that relevant to a person’s money? Mm, not really, but maybe a little indirectly. It helped us to make better decisions during that period of time.

John: I love it, just the fact that you wanted to learn about I think is really the key concept in this discussion, so stop and think about this. What we do for a living is we teach people, right? We impart advice, we teach them. I teach advisors, you teach the investors that trust you with their capital. In order to be a good teacher, the first thing you have to be is a good student.

Patti: Yes.

John: We have to learn first. We acquire the knowledge and the competencies required so that we can then share them with others. That desire to learn, that’s what gets you an eye up each and every morning.

Patti: Absolutely. Johnson, I’m going to learn more from that brilliance of yours about the tax laws. Let’s rewind to last year, you and I were frantically working the end of last year to get ahead of what was potentially a pretty draconian new tax law. Why do you think that didn’t pass?

John: Nothing happened. That was the biggest surprise. If you and I were betting last year, you and I would not have been alone, by the way. A lot of folks were assuming, or counting on some major tax reform coming. Stop and think about the evolution.

It started with Biden during his campaign, talking about tax reform, about making it fairer and more balanced. It then evolved into the “Green Book” publication back in April. We saw things about how capital gain rates going to ordinary for people over a million dollars, and maybe the loss of step up and basis, and then even the submission to House Ways and Means in November.

All three stages along the way, you and I were convinced that tax reform was coming. The advice I gave people back then was, “Wait a minute, I get it. We’re concerned about this. It has major implications for our financial decisions. But first things first, learn about what’s being discussed. Go ahead and plan for potential changes, but pause before you do anything.”

We had a suspicion that it may not evolve, it may not actually come to pass. A lot of what we were dealing with were the results of TCJA back in 2017, the lowering of ordinary rates from 39.6 to 37, the idea that capital gains were stuck at 20, plus your 3.8 percent NII, the increase in the estate tax exemption amount.

The good news is you gave great counsel to your clients. You said, “Let’s learn about this, let’s prepare for it, but let’s not do anything retroactively until we really understand what’s going to pass.” Of course, nothing did.

Patti: It’s so interesting, because that retroactive, that word, boy, did that stop a lot of people dead in their tracks. The fact that they were looking at, the higher capital gain rate retroactive to, I guess it was September. “What are we going to do now? It’s October, it’s too late for us to do anything.”

John: You can’t do anything about it.

Patti: It’s interesting, because I will tell you, and I admit, I went out and bought a software program …that would run an analysis of, “Does it make sense to go ahead and sell some of these assets, go ahead and pay the capital gains tax at the theoretically lower rate to avoid ordinary income rates later on?”

John: I hope you get to the seat so you can take that back to the store. [laughs]

Patti: I learned something though, we ran the numbers. It really came down to time. It came down to what your holding period is. That’s all that matters. Just as we talked about before, it is very personal. Some people might be paying that 20 percent plus the 3.8 percent today, but maybe they’re not going to be in that bracket 10 years from today, when they retire.

Why would we sell something when they’re not going to be subjected to it anyway? It was very personal. It’s so interesting, because at the end of the day, it makes me realize how important having good judgment, just exercising good judgment, that’s looking out for the best interests of that family, based on the information that we have today, which can change in a moment’s notice.

John: I love it. I love it. Taxes are an important part of that process that you bring to your clients, of course.

This comprehensive Wealth Management Program, looking at your obviously what’s important to you in your life, your financial security, your retirement resources, your ability to educate your kids to send them to Georgetown or Lehigh, and all the important things we do, taxes are a part of that equation.

I know that some advisors are somewhat reluctant to talk about taxes. “Hold on, John, I’m not a CPA. I’m not a tax attorney. I don’t want to get myself into trouble by talking about taxes. I’m opening up some liability issues here.”

Well, I have three rhetorical questions to ask, “Do you provide advice to your clients on the recognition of gains and losses?” Of course we do. “You provide advice to your clients on their charitable giving, what they give, whom they give to and how much and when? Do you provide advice to your clients on retirement accounts, contributions to their retirement accounts or distributions?”

You can tell from my simplistic examples, so much of what we do on a day-to-day basis has a tax impact on the outcomes our clients achieve. We have to be tax-aware. We have to include a tax understanding in the financial planning work that we do for clients more broadly.

Patti: Absolutely. I have no problem, whatsoever, talking about taxes. In fact, every year, we get every client’s tax return after the fact, and we review it.

John: Oh, I love it.

Patti: What I’ve learned over time is that every once in a while, we catch mistakes. They’re human errors. No big deal. Just file an amended return or whatever. We find opportunities that we didn’t know were going to exist in this calendar year. To me, that’s the whole idea, is to be proactive.

John: I was just going to use the word proactive, because the common refrain I hear from many investors is, “Well, wait a minute, Patti. My CPA is taking care of that. They’re going to file my tax return in April. They’re going to make sure I get all the deductions I’m entitled to and lower my tax bill through the filing process.”

Well, hold on a second. Next April, it’s too late to do anything. This is retroactive accounting that’s looking backward as to what already occurred. It’s not the proactive planning that you’re speaking of.

I think that is so valuable to have conversations with families today about the steps they can take, not that the tax outcome is necessarily the most important objective. It is a component of the financial planning process. Being on top of it, being aware of it, taking advantage of the unique opportunities that are before you is important.

Think about this. We try our best to allocate capital. Should I overweight international stocks versus domestic stocks? Should I overweight small cap versus large cap? We try our best to try to allocate capital in the most productive fashion, but the truth is we can’t control it.

Taxes are something that we can control. We know what the rules are. We know that when we contribute to an HSA that money comes out tax-free. We know that we put money in 529 plans, that we’re able to save money for college in a tax-efficient manner.

There are knowns within the tax code that allow the investor to enjoy more probable benefits that are maybe accompanying or available through traditional investment advice.

Patti: It sure is the case and also to understand the unintended consequences of certain actions. For example, we talked about this before. We run the numbers. We’re not going to guess we’re running the numbers. They are projections, cash flow, income tax, etc.

Especially, as a person is approaching or in retirement, a lot of times, they’ll go from a very high tax bracket, and it plummets. All of a sudden, they go from 37 percent. If we’ve done our job right, hopefully, in the three years before retirement, their tax bracket is going to go down to 12 percent.

Here’s a tactical idea for everybody listening. If that happens, what can you do at a 12 percent tax bracket? How about…?

John: Roth conversions.

Patti: Roth conversions, love it. Take just enough of a Roth conversion to get you up to the tippy top of the 12 percent tax bracket. However, be careful, because a lot of people who retire early may be on the ACA. That’s also known as Obamacare.

By the way, if you’re in a 12 percent tax bracket, you’re probably getting a juicy subsidy. Now that subsidy is something that you don’t want to have to give back. As we think about the tax planning – and these are great ideas – Roth conversions are, for many people, a homerun – got to be careful that we’re not creating an unintended consequence where somebody’s going to lose that $1,000 a month.

John: You know, it’s great that you’ve identified that because sometimes we make these decisions on the surface, “Oh, I’m going to go ahead and do this conversion, or accelerate income, or whatever the strategy might be,” but the tax code has ripple effects throughout.

That decision to either lower my taxable income or increase my taxable income may have ramifications that are not immediately available, items that occur below the surface, so to speak.

Patti: Yeah, exactly. Even from an investment perspective, for those people that you may be talking to, they’re managing an investment portfolio.

If they know that the client is going to be in a 12 percent tax bracket, for example, if that’s me, if it’s November or December and they’ve got a big capital gain, and I know they’re going to be in a 12 percent tax bracket next year, I think I’m going to procrastinate a little bit.

We don’t know what’s going to happen with markets. Why not sell that asset or the portion of it January 2nd. Guess what. They don’t pay any tax on it up to a certain amount.

John: My son just graduated from Northwestern. He works up in Chicago for the Chicago White Sox. He graduated in June of last year. He started his working career. Of course, being a relatively new employee, his income wasn’t very high. He only had six months of earnings.

My wife and I, of course, wanted to buy him a graduation gift. We decided to buy him a little Audi Q3. We thought about liquidating assets and then using the money to buy this new car, but we took the advice that you just provided.

“Wait a minute. Our son is in a low bracket, in fact, a zero-capital gain bracket. We can transfer that low-basis property from us to him, have him sell it with zero taxes, acquired the same car, made the same gift that we wanted to make but did so in a tax-efficient manner.”

These are the opportunities that so many people miss but that they can receive benefit from if they work with great people like you.

Patti: That’s a great idea. That’s called income shifting. It’s a great idea. You and I talked with a lot of people during the year. Very wealthy people do things like family limited partnerships to create that same kind of income shift.

OK, let’s go back. The tax law, the Build Back Better Plan did not go through.

John: Did not.

Patti: I’m curious, what do you think was the headwind? Is it because there was a change in any tax law? It’s complicated? Those complicated laws have to be enforced, and enforcement costs money? Was that the headwind, do you think?

John: I think that was probably part of it. You’ve got to get everybody on board. You have a very divided Congress, of course, relatively equal. You’ve got one side of the aisle that wants tax reform and the other side that’s opposing it. You have the tax cut and Jobs Act tax cuts that were implemented four or five years ago.

There are certain constituencies that want to maintain that, don’t want to reverse those benefits for those high-income earners. I think you’re absolutely correct, Patti. That was certainly part of it.

Part of it was just simply a loss of momentum and an appetite given all the other issues that were on the table, this ballooning Federal Reserve balance sheet, $9 trillion. How do we unwind that? There were other issues that gained more attention. The tax reform really became subordinated in that political process.

Patti: Let’s talk about what they announced this weekend. How about that? Was that unbelievable? Sure enough, we think we can breathe a little bit, and then an announcement comes this weekend with a tax.

Most of the people who are listening to this are not going to be affected by this proposed regulation, but what scares me, John, is the potential down the road if they pass it and are effective in that enforcement. Why don’t you tell our listeners what it was all about?

John: Before we get into it – and I’m happy to do so, Patti – let me preface my remarks by suggesting to you. I think there’s a very low probability that this sees the light of day. It’s likely to die on the vine, just like the loss of step-up in basis that was earlier proposed, just like the increase in capital gains from 20 percent to ordinary rates for families over a million dollars.

Those were relatively controversial. Those were big ticket items, and they all wound up dying on the vine. This is likely to see the same kind of outcome or fate. It’s the idea that families at a hundred million dollars would wind up paying taxes on unrealized capital gains.

Now your listeners know, of course, that we pay capital gain taxes on assets that have been sold. Gains that have been realized in the tax reporting system. This is the idea of maybe preventing or taxing dynastic wealth. Wealth that is created by me that is maybe going to pass on to my children that might escape the income tax system.

This is an idea to try to capture some revenue from it. The number was something like $350 billion that it would raise, which is a relatively small drop in the bucket but the enforcement of it, the concept of it, it’s confiscatory.

I don’t mean to be too negative on this because I do think we need tax reform to make the system fair, to provide benefits for those who are, maybe, less fortunate. I’m 100 percent on board with that, I’m just not sure this is the right way to get there.

Patti: It would be really hard to prove it, I would think. How do you prove that the value of someone’s business that might have been worth $50 million one year is now $150 million? How is the IRS going to know about that and therefore prove it?

That’s where I get lost, the enforcement of it. Even business valuation itself is difficult. I could say that my business is worth $50 million, and if you were looking to buy a business like mine, you would be laughing your head off. You’ve got to be kidding me. How do you value stuff like that? It’s just…

John: It’s counting cash flows. What is the interest rate I’m going to use to determine the net present value of that business today? Do I use comparable sales? Do I look at asset value? It’s a whole can of worms. The other problem that I think you and I would have with it too Patti is, once again, I think we’re OK with this idea of producing additional revenue…look COVID was expensive.

All the support that was provided. All the fiscal and monetary steps that were taken along the way. I get it. We’re going to have to pay the bill for that period that we endured. We’ve got to find a way to raise revenue, but let’s do so in a way that’s logical and easily enforceable, as opposed to some of these other ideas that I think are rather problematic.

Patti: OK. I’m going to throw three ideas at you.

John: Uh-oh.

Patti: I want you to tell me which of these three, do you think is most likely, which would be least likely. I’m curious what you might think.

John: This is just a layman’s interpretation.

Patti: Layman’s.

John: I’m not representing any sort of tax advocacy group.

Patti: Oh, I know. Boy, I’ll tell you what you are. You’re one of a kind.

Here’s one. Let’s raise the rates, that produces a ton of revenue.

John: Ordinary rates.

Patti: Simple. Easy. Go from 37 to 39. You just increase the brackets.

John: All right. Ordinary rates is one. Yeah. What’s two?

Patti: Option two, door number two, John is raising the capital gains rate.

John: Thank you, Monty Hall. Capital gain rates.

Patti: Oh, boy. I’d rather be Vanna White. Come on.

John: OK. Yes, I was dating myself with that reference.

Patti: There you go. Monty Hall, wow. Even I remember…

John: Do you remember that show?

Patti: I sure do. I sure do. That’s option two, door number two. Door number three is taking away the step up and cost basis at death, which is another very big deal.

John: I’ll give you my off the cuff remarks as to which of these are likely or unlikely, feasible or not. I think the loss of step up in basis would be rather controversial politically.

Stop and think about this. You own a closely held business, or you own a farm. You don’t get the step up in basis at death. That means that the heirs maybe have to liquidate an asset to pay the capital gain on it. That was part of a proposal earlier on that Biden Administration had floated. It met a relatively quick demise.

I would give that maybe the least likely or the most challenging opportunity for passage.

I think raising the ordinary rates…Let’s examine this concept of raising rates. What were the rates before TCGI at the max?

Patti: 39.6.

John: We’re at 37 today, right? Bringing them back to 39.6 isn’t really raising them. It’s restoring them.

Patti: Oh, that’s a good way to put it if you’re a politician.

John: Maybe I should be.

Patti: There you go.

John: We raised the rates back to 39.6. I think that could be acceptable to many.

Patti: Let me stop you there. Isn’t that what the sunset provisions going to be doing?

John: It is, automatically, at the end of 2025. A lot of the things that we’re benefiting from today, that lower ordinary income rate, the capital gains rate. You got the NII. You got the estate tax exemption. A lot of this will automatically be undone or revert back to prior policy at the end of 2025 or the beginning of 2026. What is that, about three years from now?

Patti: Right. That should be interesting.

John: I think the current administration, though, want to accelerate the process. Given once again that unforeseen expenditure and this big deficit that we’re running now because of all the outlays due to COVID relief.

Patti: When I think about changes in tax law, and if I’m a politician, I’m thinking three things – votes, revenue and votes.

John: OK.

Patti: That’s why you pass tax law changes. Here we are coming up to the midterms. What do you think about the possibility for tax law changes given those votes-revenue-votes?

John: When it comes to votes and politicians, I get it. Politicians are going to have a difficult time, winning any election when they talk about increasing my tax bill. What they often counsel is the idea of increasing your tax bill. [laughs]

Patti: Oh, that’s interesting.

John: Let’s go after the wealthy. I think 90 percent of the American population is in favor of that. Let’s go after those with the significant wealth or the significant incomes. They’re not paying their fair share. Let’s find the additional revenue there.

We all realize that the system itself needs reform, that the government needs the revenue. The question is, where do you get it, and how do you get it? The idea is to, once again, go after the wealthy. I’m OK with raising tax rates as long as it affects him, not me.

Patti: It’s so interesting that you bring that up in terms of what the politicians and how they’re communicating it. During COVID, in one of my quarterly letters, I wrote about everything that the Federal Government was doing, from the fiscal stimulus as well as what the Federal Reserve was doing.

I gave everybody that warning to say this isn’t going to be free. We should expect that our taxes are probably going to go up. In the letter, I said this, and I do mean this. The way that that money worked its way through our population, was it perfect? No, there’s never going to be anything perfect. Boy, it was sure effective, wasn’t it?

John: We had to react to the situation at the time. Nobody saw it coming. Nobody planned for it. Nobody wanted it, but the reality is, wait a minute. The government was forcing small business owners to shut their doors, causing them significant financial hardship. We needed to step in and provide relief support. I think you and I is individuals. We’re all for that.

I think we did what we needed to do, given the circumstances at the time. Now, we’ve got to figure out how we wind up paying for it? How we wind up resolving this big bill that we wound up footing back then?

Patti: Again, we rely on our politicians, which unfortunately sometimes it works and sometimes it doesn’t. I think about what government does with their tax revenues? What is the purpose of the government?

Then, I think about the poor people in Ukraine. You think about their government and what they’re not able to do. To think that they’re looking at the United States for that help. It makes me feel OK to pay these taxes.

John: I love that perspective. Stop and think about the hardships that they’re all enduring. The idea that you and I would pay a few more dollars in taxes to try to resolve this humanitarian crisis is an interesting thought.

In fact, I think you saw recent studies here about those. It was over 60 percent of Americans said, I’m willing to endure higher gasoline taxes by providing sanctions on Russia if it meant that I’m going to providing some support to those people in Ukraine. We’re willing to pay a cost for what we believe in fundamentally.

I’d like to think that as Americans. We’re OK in here. We’re good people. We want good things for other people. It’s not just about our own success and our own wealth. There is an empathetic side to us.

Patti: Absolutely. At the same point, you and I being the benevolent people that we are. We also have to be practical. I feel like my role in a client’s life is to make sure that they’re not paying more than their fair share.

At the end of the day, as we talked about in the prior podcast, it’s about helping them achieve the outcomes that are important to them. Taxes are definitely a headwind for many people.

John: No doubt.

Patti: To me, it’s about understanding what the rules are, black and white, maybe a little gray from time to time.

John: Sometimes.

Patti: The gray stuff is that we don’t know how the IRS would rule on it. We understand what the rules are, and then we apply the techniques that can reduce our client’s tax liabilities as much as possible.

John: Were it makes sense to do so.

Patti: Exactly. Let’s talk about that for a moment. You teach these courses at Yale and University of Chicago and just wealth managers all throughout the country. What are you telling all of us in 2022? What are your best ideas?

John: You got a couple of hours?

Patti: Yeah. Oh, if it’s a couple hours I’m all yours, John. Totally.

John: We’ll do a couple hours another time, but let’s go over a couple of them that may be relevant for the majority of the folks dialing in today. Number one, asset location. I mention that because I noticed that many individual investors miss this one, they pay a lot of attention to asset allocation.

How should my dollars be apportioned across different asset classes to provide the risk and return I seek, but what about asset location? Certain investments produce capital gains. Others produce ordinary income, some produce income streams that are tax-free.

What goes in what bucket? A great advisory firm like yours works with clients to not only allocate assets correctly but to think about asset location, to minimize the taxes, to provide the most tax-aware tax-sensitive outcomes for the investing that we’re doing.

Here’s the second idea, and this one’s huge. I just finished writing a paper on this over the weekend, charitable giving. It’s not to convince clients to give away more money, $470 billion were given away last year according to giving USA foundation, our clients are giving money to charity, but in many instances, they’re not giving correctly.

They’re going to some black-tie affair and at the end of the night, after their second cocktail, they’re writing a check. While I appreciate their generosity, writing a check, it may not be the most effective way for them to facilitate their giving.

I’m a big believer in intentional philanthropy, not reactive to actually have a plan. What do I want to give to? How much do I want to give? In what forms will I want to give? With the great help of an advisory team like yours to think about which assets I give and when I make those gifts.

Think about this without getting too wonky, the standard deduction is $25,900 MFJ. All right, on the itemized size schedule A, I get 10 grand for SALT taxes. The next $15,000 of charitable giving where I write a check to charity. I appreciate the generosity. I love it. I’m all in favor of it, but it’s not providing a tax benefit.

What we advocate for many people is the idea of bunching their giving, using a donor-advised fund. If I’m going to write 10,000 bucks a year to the Armenian Church, maybe I put $200,000 into a donor-advised fund today to fund this giving over the next 20 years. It’s not cash it’s appreciated property.

Patti: Oh, beautiful.

John: I avoid the capital gain on it. It’s that kind of thinking, not giving away more money, but being more tax-aware in the giving we’re doing that can help the investor achieve a better outcome and provide even greater benefit to the charities that we want to support.

Patti: It’s true. Some of the charitable trust that we looked at last year, especially when interest rates were so low, wow. Talk about home runs. Oh, my goodness. The charitable lead trusts were beautiful. Talk about win, win, win.

Everybody won with that kind of planning and it was very effective. It helped the charity. It helped from a tax perspective. Eventually depending on the term that we chose, etc. The family ended up getting the residual value that was left in the trust.

John: I love it.

Patti: It’s a great wealth transfer tool on top of it.

John: Yeah. It can provide not only the benefit of giving today or reducing my tax bill today but there’s a third benefit that you accurately identified. It can also help to facilitate efficient wealth transfer, as well as we think a little bit later on in the process. Hey, you want to talk about that a little bit? Wealth transfer?

Patti: Yeah, love it. Let’s do it.

John: We’ve been talking about income taxes.
There’s a big tax that some of our clients may wind up seeing down the road, it’s the estate tax. Not income, not capital gain it’s estate taxes.

Now, I know that a lot of people are saying, “Oh, I have nothing to worry about John and Patti $12 million exemption.” When I started in 1981, the number was 600,000. It’s 12 million today. That’s 24 per couple.

I have three questions to ask that client. Number one is when do you plan on dying? Number two how much will you have at the time of your death? And number three, what will the number be in the year of your demise? Of course, we can’t predict any of those things.

It really suggests that people should have a conversation with their advisors about where do you want your money to go? What’s important to you? What steps can we take to facilitate the efficient transfer of these assets, to the entities or the people that you want to receive them?

Patti: It’s so true. There are so many different ways to do that. Some more painful than others. There’s a lot of things to think about. To your point, it’s not necessarily whether or not you have a taxable estate today. That’s probably not relevant.

The question’s going to be, what’s it going to be in 20 years from now? Or even longer when the second person, if you’re married, passes away. What can you do today to reduce that exposure?

There are lots of things that people can do that don’t have to be necessarily painful. Do you want to talk about a couple of those? We could talk about slats. We could talk about annual gifting.

John: Yeah. Well, let’s talk about some of the basics first because sometimes some of the best solutions, or at least where we should start is with the more fundamental opportunities.

Like when we talked about charitable giving, I can look at CRTs. I can look at CLTs.

I can look at private foundations, but maybe for many people, “Hey, let’s start first with a donor-advised fund to derive the benefits of bunching my deductions and tax-free growth inside the account and the opportunity to give appreciated property and avoid the capital gain. Let’s start there. If a more sophisticated or complex solution is required, we can move on from there.”

Let’s do the same with estate planning. The obvious one that everybody misses annual gifting. I think the number one from 15,000 to 16,000, and so John and his wife Lucina can give $32,000 and can give it to Margo and to Daniel and can give it to their spouses if, and when they get married, keep your fingers crossed for me. Then grandkids, keep your fingers crossed for me.

This is a very effective way for families to not only reduce their estate tax bill, both the current value plus the appreciation on it but also to see the benefit and the joy associated with giving while they’re alive. I think that’s a pretty cool way to start the process.

Patti: There’s another unintended benefit that a lot of families get from it, and that is how are the kids going to deal with that?

John: Well, I like this idea.

Patti: Because it’s very interesting when you start that gifting, are they going out and putting it towards a nice car? Or are they funding their child’s 529 plan? That says volumes because that then helps me as the advisor to say, “You know what, maybe you wanna consider doing a trust in your will so that the kids get a little bit at a time.”

Maybe, 5 percent when they’re 30 and another 10 percent, when they’re 35, that way they can’t blow it all at once. They become used to this idea of having the assets, having the money, and what to do with it.

John: Love it.

Patti: If they get it all at once, it’s the sudden money issue. People who win the lottery, right? I had a client early in my career who won the lottery. I got to tell you, I was shocked at how quickly they went through that money. It was a lot of money.

John: We see it with professional athletes, we see it with lottery winners. We see it with people who wind up with a sudden windfall. Susan Bradley, that Sudden Money Institute.

Patti: Yes, absolutely.

John: She does some really good work on that subject.

Patti: Phenomenal work. I’ve learned a lot from Susan in terms of how to guide people. I didn’t have Susan Bradley when I had that client as a lottery winner. It is fascinating and really important.

The annual gifting idea that you’ve brought up, it’s just a nice way to put your toe in the water and get a feel for how are the kids handling it.

John: I love it. This idea of financial literacy for that next generation is so important to so many people. If you asked me, if we were having a beer at the end of the day, “John, what keeps you awake at night?” OK, I talk about retirement and how I’m going to have purpose in my life when I stop doing what I do. That’s something that’s on my mind.

Running out of money, knock on wood, hopefully, OK on that front. What keeps you awake at night are my two kids and they’re good kids by the way. Have I done what is required? Have I done what’s available to me to teach them about financial responsibility?

You see it all the time Patti, wealthy families, God bless their success but sometimes money does bad things to good people and it causes bad behaviors, entitlement and lack of motivation and materialism and big egos. How do we as financial advocates for our clients, how do we help them instill the right values and the right financial literacy in their children? I think we can do some good work on that front.

Patti: I think we can as well. I love the idea of these incentive trusts, giving the kids a sense of the values. A lot of people, we actually meet with the attorneys with our clients because I think it’s important for clients to realize that a will or a trust It’s just a letter.

It’s a letter from you to the executor or the trustee describing what you’d like to have happen with this money that you’ve worked your entire life to accumulate. You can share your values, you can talk about that and if you don’t want to put it actually in the document, you could write a letter and attach it.

I just think sometimes a handwritten letter in blue pen from Mom and Dad, is it like haunting the kids from the grave? Maybe a little bit but if its values oriented, and is there to teach the kids about the money and the responsibility that has been bestowed on them with the money, it can provide a terrific benefit.

John: I love that idea. We’ve developed a curriculum on how to help families instill the proper values in their children and the financial responsibilities. A really good book I just finished reading, actually two of them, one of them is called, “The Opposite of Spoiled,” written by Ron Lieber.

He’s a columnist for “The New York Times.”

Patti: He’s so good.

John: He’s good, and it’s a cool title, isn’t it? The Opposite of Spoiled.

Patti: I got to get this book.

John: It’s good. I’ll send it to you. I got a couple of copies back in my Chicago home office. The second one is called, “Kids, Wealth, and Consequences,” written by Richard Morris, and he suggests that we teach our children a number of really important lessons.

Now the children he’s referring to are probably elementary school children, but I think the concepts apply across the age spectrum. Number one is that we have to teach them how to hear, “no,” because too often as parents of a successful family we just give them what they want.

I’m not sure we’re helping them in that process. The second thing we have to teach them is the difference between wants and needs. What is it that you want in life? What is it that you need in life? Third, delayed gratification. My son asked me for an 85-inch Samsung 4K OLED TV when he was going to college. What was the answer? No.

You’re not getting the TV, and I said, “Look if you come on home, and work during the summer, Mom and I will match dollar for dollar everything that you’re able to save and put aside for it.” It took him a little bit longer to get there, but he got the TV, and I like to think he learned from the experience, and he probably appreciated it a lot more than he would have if I had simply given it to him.

Patti: It’s interesting. I didn’t plan on telling you this story, John, but I would like to share something with you. When my kids were little…of course we were really crazy, and life was work and it was family, and our idea of going out was going to Kmart.
When we take the kids to Kmart we had two rules. Number one, “stick like glue,” because my kids were always roaming, especially…

John: You don’t want to lose a kid in a Kmart.

Patti: It is happened, it is happened. The Blue Light Special was, “Patti, Carrie’s up at the front again,” right?

John: Exactly.

Patti: That was number one. Number two was no begging. No begging. Every once in a while, they were kids right, so they would test the boundaries, and they might ask for something.

My response was not, “We can’t afford it.” Because I heard that growing up. That made me feel financially insecure.

John: That’s not good.

Patti: What my response was, we don’t choose to spend our money this way. Six months from now, you’re not going to know what that toy is, where it is, etc. I think you’re going to thank me when you graduate from college.

John: I love it.

Patti: It was beginning that delayed gratification that you referred to.

John: These are great lessons you’re teaching the kids. Here’s a similar methodology that I’ve seen work for other families. Family vacation, not the Kmart shopping trip, but similar idea.

In our family, my wife does all the heavy lifting on the family vacation. From Wilmette, you’re going somewhere on for spring break. Of course, everybody does. My wife used to do all the heavy lifting, was a lot of work.

Finally, when the kids became teenagers, we said changing rules. You guys on the family vacation this year.

Patti: Wow.

John: We gave them a number. They then did the research. Are we going to Bermuda? Are we going to Hawaii? Are we going to Florida? Where are we going on vacation?

You’re going to decide where we’re going to stay. You’re going to decide if we’re going to fly coach or first class, or are we going to stay in a holiday inn or a four seasons? You’re going to decide where we’re going to eat at night. You are going to make the decisions on budgeting.

Our kids learned a couple of important lessons. Number one is how much work it is to go on vacation instead of just showing up with your backpack. You’re going to have to do all the work to pull this off. Hopefully, you’re more appreciative of the opportunity.

Number two is you’re going to learn the lesson of how expensive a vacation is. A lot of kids don’t know how costly it is to take a family of four on vacation. Thirdly you’re going to learn how to budget. Where you’re going to allocate or apportion your decisions in terms of what you want to use or what you want to spend while you’re on vacation.

Patti: I love the way you frame that. Allocating capital instead of using the word budget.

Everybody who knows me knows I’m not a big-budget person.

John: I hate budgeting.

Patti: It sounds like we have to give up something we really like, like a diet. I got to give up something that I love to eat.

John: It’s not a pleasant experience.

Patti: No, no. I don’t want to do that. Allocating capital is very positive.

John: There you go.

Patti: Allocating income is very positive. Now, let’s bring a circle back and say it’s taxes. That’s one form of capital that I don’t want to pay as much.
Charitable giving is huge. Estate planning is huge. I personally think and worry that people are becoming a little too complacent as it relates to their estate planning. One way or the other, we’re probably going to get the sunset provision. That amount that you can leave to the next generation is going to go down when hopefully, net worth people’s…

John: Is going to go up.

Patti: …is going to go up.

John: What do you think that number, excuse me, is going to be? I know it’s 12 million today. We had to saw a modest increase due to inflation adjustments for 2022. Any ideas on what people should be thinking about?

Patti: I think the low-hanging fruit is to go back and let everything sunset to prior to what it was in 2017. We’re talking around six million.

John: For per couple?

Patti: No, per person.

John: Oh, per person.

Patti: That’s what I’m thinking. What are you thinking?

John: We don’t know, but we do think it’s going down. Maybe there’s some sort of an adjustment between now and then that makes it a more modest number. Directionally, we’re on the same page.

Patti: Interesting.

John: It’s going to be a significant…Let me put it this way. It’s not going to be more than 12 million dollars.

Patti: No way. No way.

John: I’m willing to bet you anything you want that that number is going to be significantly lower. Families that haven’t thought about it, families that have chosen, who the heck wants to talk about estate planning?

Patti: I know.

John: What you’re bringing up two of my least favorite subjects – A my death and B the taxes I pay? That doesn’t sound like a very pleasant conversation. I’m hoping or assuming that you found a better way, a more enjoyable or productive way to bring this up with your clients.

Patti: The way that I try to frame it, John, is to really think about it in terms of the amount that you can leave to the people that you love.

John: I like that.

Patti: When we leave money, when we pay our taxes, we’ve talked about that that’s an important role that we all play. The Federal Government may not allocate that capital the way that you would want to allocate it.

John: That’s good.

Patti: By doing this estate planning, if there are charities that you feel strongly about. I don’t know about you, but I always tell people that the tax law is out there to create an incentive for all of us.

John: For behaviors.

Patti: Exactly. It’s not to punish us. It’s to encourage us to do things like save for our own retirement instead of becoming dependent on the Federal Government and Social Security. To save for our own medical care in the form of HSAs.

John: To be long term investors, because we’re going to give you a lower capital gains rate. It’s to incentivize good behaviors that are in your best interest.

Patti: Exactly. With that in mind, that’s fine and dandy. Why don’t you take that incentive, and think about how you’d like to allocate that capital. Your kids, or the people that you love, get the rest. They get to do the same thing.

It’s all again, just like you were talking before, it’s communicating the values to communicating what’s important to you about your money. At the end of the day, it’s a stewardship. Most of our clients, and those of you who are watching today. No matter how old you are, and no matter how much money you have, you really worked hard for that.

What you have is money that you have after you pay the taxes. It’s a stewardship over your hopefully very long life, or maybe it’s a little bit shorter. It’s a stewardship to determine what can happen over the rest of your life, and what do you want to have happened afterwards.

We talked about compounding being the eighth wonder of the world. I think it’s really cool. You’ll appreciate this. We’re talking about estate planning and taxes and all of that. I went to a meeting one time it was at a Forbes’ or a Baron’s, one of the conferences. I’ll never forget this, John.

While I was sitting in the audience with about 500 CFPs. The person that was up on the stage was talking about this estate planning. They asked the question. They said, “I’d like to see your hands. Raise your hands if you can remember the first names of your grandparents, at least just one of them.” Most of us raised our hands. Great.

“Now I’d like you to raise your hands if you can remember the names of your great-grandparents” Do you know that nobody raised their hands? Then he said something that has stayed with me ever since. He said, “Isn’t it a shame to think that 100 years from now, people aren’t even going to remember our names…

John: Interesting.

Patti: “…in our own family” We talk about this thing called legacy. We talk about estate planning and taxes and all of that. It’s more than that. It’s about legacy. While we’re alive, we get to do things that can create impact on other people’s lives. You do it by being here today. You’ve created so much impact from me, John, in the short time that I’ve known you.

I’m going to be enrolling in a graduate degree program, because I learned about it because of you.

John: Love it.

Patti: Hopefully that will make me a better advisor to the people that I serve. That’s what we do. We get to have impact in the lives of people around us. Taxes, yes, they are important. We want you to keep more of your own money so that you get to do with it what you want.

John: I love it. What you’re referring to in these great examples is control, right? In a positive way. Control that I decide where my hard work and efforts, where that goes. Does it go to my family? Does it go to a government program? Does it go to charities I want to support? I think that’s what all of us want.

As successful people, we want some control or influence over what happens in our lives and what happens in the lives of others. That’s empowering. That’s good.

Patti: What we’ve learned today from you between this podcast in the podcast before, and by the way, as John said we could be here for hours and hours talking about the tax planning techniques. Some may apply to your situation. Others do not. Take what applies to you and throw out the rest. There’s a lot out there.

What we learned with the prior podcast in terms of this concept of control, right? We can’t control markets. We can’t control a lot of things. What we can control is what we do about it. That’s what it’s all about. To understand the impact in your lives on a personal level.

John, I can’t say enough about you and what you’ve done. I appreciate your time today. I appreciate you Dan Miller at PIMCO for bringing somebody of this caliber to my office. It’s just incredible. I’m so grateful to you for tuning in today and listening to us and watching us. I hope it’s been helpful. John’s favorite four-letter word H-E-L-P. That sings to my heart. That’s what it’s all about.

Can we make a difference in your life? I hope we’ve done that for you today. Thank you so much for tuning in. I hope you have a great day.

By the way, if you liked it, go to our website. There’s a lot of information on our website. Almost a hundred podcasts on all different types of subjects. We’re here to help. We’re here to make a difference in your lives. Thank you so much for allowing us to do so. Have a great day.

Ep103: Cryptocurrency – Facts vs. Fiction

About This Episode

There has been a lot of hype about cryptocurrency since its creation and introduction to the markets a few years ago – but does anyone really understand what it is or how it works? Patti sits down with her Chief Planning Officer, Eric Fuhrman, to dissect fact from fiction to help listeners better understand what cryptocurrency is and if it has any value at all in today’s diversified portfolio management.

Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

After every show, I often encourage all of you to go on our website. If there’s something that you like to learn about, let us know because we’ll do a podcast on whatever it is you might be curious about.

I’ve got to tell you, in the last couple of months, I can’t tell you the number of people who have asked us to do a show on cryptocurrency. Bitcoin, Ethereum, what is it? How does it work? Is it something we should be investing into?

Joining me today is the Professor, Eric Fuhrman. He is our Chief Planning Officer. For those of you who are just listening today, you don’t get to see Professor Fuhrman in his Mr. Roger’s sweater. Eric, thank you so much for joining me today.

Eric Fuhrman: Well, I don’t know what to say, Patti. I woke up today excited because it’s podcast day. I just said, “It’s a beautiful day in the neighborhood,” so I threw on this sweater, and away we go.

Patti: It is a beautiful day in the neighborhood! That is one thing that you’ll find about us. We are brutally honest with each other, and it’s fun. You know what? It is fun! You be you, which is what we love about you, Eric. Thanks to all of you for joining us.

What is cryptocurrency? How would we define it? Here’s the deal. I’m going to give you the actual definition. Then we’re going to break it down in a way that you can actually grasp and understand. Cryptocurrency is a digital bank that doesn’t rely on banks to verify the transactions. That’s all it is. It’s a digital currency.

What’s the big deal about it? Well, when you think about Bitcoin, the big deal is that there’s only 21 million bitcoin coins that are going to be issued. There’s the scarcity effect, and it’s kind of taking advantage of a web.

Eric, you’ve got a great graphic to really explain the difference between centralized, which is what we really have today, versus decentralized, which is what crypto is all about. Why don’t you to elaborate?

Eric: Crypto is a fascinating thing. First, as we broached this topic and wanted to learn about it, unfortunately, I don’t possess a background in computer science, programming, or anything like that.

Our approach today is to think through it through the lens of, say, the common person or investment professional. Is this a medium of exchange that would say supplant government issued fiat like the dollar or the euro, or any of these major currencies?

Is it investment? Is this a new burgeoning asset class that can become part of the portfolio? Is it little bit of both?

Hopefully, that’s what we’re able to tease out through today’s podcast, but you make a great point. There’s a lot of technical aspects to these things that are far beyond my understanding, but when you think in broad terms…You’re talking about the organization.

If we think about a financial intermediary like a bank, or let’s say, Visa, or Mastercard, or even a central bank like Federal Reserve of the United States, there’s essentially a single point. Everything interacts to and from that singular point, so everything is, in essence, centralized.

Whereas, a decentralized network is series of nodes. There’s no single focal point, and so forth. That was the original infrastructure, if you will, for things like Bitcoin, which was created many, many years ago. That structure is what is really defining characteristics.

Patti: Before we go too far, let’s first put it out there. For those who are listening and/or watching, the most important thing I want you to get from this is this is not an endorsement or an investment recommendation at all. We’re just explaining it as a concept as Eric and I, and we at Key Financial, constantly do this brain-storming behind the scenes.

We talk about this all the time – as we are trying to grasp it and understand the application, whether it’s practical for our clients. I thought let’s just do a podcast of what you and I, and we, normally do behind the scenes.

Again, most importantly, as with all our podcasts, none of these are endorsements or investment recommendations. It’s just brainstorming. Let’s put it out there and try to explain it in a way that you can understand.

Eric: Yeah, absolutely. This is something that’s new and people want to understand. What does it mean? Is there something there? This is the new, shiny object, for lack of a better term. Anything that goes up a lot, captures the attention and the imagination of millions of people, just like the Gold Rush did way back at the turn of the century there.

Patti: It’s funny that you say that because I’m going to date myself, but this sort of feels like the Internet days back in the late ’90s when the Internet wasn’t adopted the way it has been adopted today. There were no smartphones. None of that stuff existed.

What happened in the late ’90s is that there were lots of people thinking about all the possibilities, etc. I don’t know that people understood exactly how it worked, but there were companies that were creating applications using the Internet. It feels like that.

I’m not so sure people understand how this thing called cryptocurrency works. I think we are just trying to think about the practical application and maybe some landmines that might be there because it’s different than the Internet.

Back then, you had Amazon. Amazon was one of those companies that was trying to take advantage of this new, shiny object. They started to do so by selling books. Well, that didn’t go so well. They were not profitable and books were very low margin.

They weren’t making any money, but they were testing the concept. Always keep this in the back of your mind. Nobody knew that Amazon was going to be what it has become. I don’t know that Amazon knew. Jeff Bezos might tell you that, “I knew it all along.”

Eric: Very well executed plan that was laid out.

Patti: Exactly. I think that with anything, it’s one of these things where you test something, you improve it. Then you test it again, and then you expand on it, and then it’s scalable. We just want to put that out there and help people to understand the possibilities with some caution.

Eric: Let’s get back to this notion – is it money? Is it investment? Is it both?

When we think about Bitcoin or any of these virtual or cryptocurrencies as a medium of exchange, I’m reminded of a quote by Mark Twain, which some say maybe or maybe not wasn’t attributed to him, but it’s basically that, “History doesn’t repeat itself, but it often rhymes.”

If you think back in the history of humanity and very early on people bartered, they exchanged different things, whether it might be bushels of wheat for cattle and things like that. The purpose of a medium of exchange is to be that oil to grease the wheels of commerce. To have a common unit of accounts that everybody has faith in and agrees upon.

If you look way back, for example, there’s a Pacific Island called Yap. Here, they use these very large stones made out of limestone. Their money was nothing more than giant pieces of calcium carbonate that they would roll around the island to show a unit of account.

Patti: Leave it to you to find this country named Yap. That’s an amazing finding.

Eric: Then other places, shells. The Solomon Islands individuals there used dolphin teeth. Europeans and so forth, it was coinage silver, bronze, and gold, and then paper notes and things.

This is the same idea that has been going on for a long time. It’s just an innovation of an idea that’s been with us for a long time which is just a different medium of exchange, but it’s not new, I guess.

Patti: When you think about what we use today for transactions, etc., we think about the dollar. It’s a piece of paper, but what makes this piece of paper different is that it is backed by the United States Government. I think that is the key.

Always remember that when you’re thinking about cryptocurrency, what is it really backed by? That’s an important differentiation. There is nothing backing crypto.

Eric: That gets into the investment aspect. I think what’s interesting is that there has been such growth in the number of cryptocurrencies. If you go back to 2013, there was 66 cryptocurrencies. Today that number is more than 17,300.

There’s about $1.7 trillion tied up in this asset class. The growth has been phenomenal, but ultimately, there is a very familiar pattern of industry growth and eventually consolidation that occurs in virtually everything in life.

When you look at all these cryptocurrencies that have emerged, the reality is, as time passes, only few of them will end up being the dominant players and will probably survive long term. You can look at industries like say railroads, automobiles, to get a sense of this.

Patti: Before we get into that, it’s fascinating when you think about that. Let’s go back to what Eric just said. Just seven years ago, there were 66 different types of crypto. Now, there’s 17,000 different types of crypto. Bitcoin and Ethereum are only two of them. In fact, in the last month, we’ve gone from 9,929 different types of crypto to 17,000.

The issue there is that there’s no barriers to entry, so anybody can come up with a crypto currency. In fact, Elon Musk, did it on “Saturday Night Live” when he was talking about Dogecoin. Tesla had already purchased bitcoin, $1.5 billion worth of bitcoin. It still sits on its balance sheet.

In fact, this time last year as I recall, Tesla announced that they were going to start accepting bitcoin for the purchase of their cars. Then, Saturday Night Live came on, he talked about Dogecoin. I swear this guy’s so smart, I think he did it all on purpose.

He wanted to test the market to see what would happen and to see if people started to buy this new thing called Dogecoin, that he just basically invented. It’s a supply and demand. It’s a hype-up thing. I think I could be wrong, and don’t quote me on this, because this is my gut feeling and nothing more. I didn’t research it.

I just can’t help but wonder whether that was testing the market because, soon after, Tesla announced that they would not accept bitcoin for the purchase of their cars and they stopped buying it because they were on a program of buying bitcoin. They stopped at 1.5 billion, and you look at their balance sheet recently, and it’s now worth 1.3.

It just makes me wonder. Again, I don’t mean to be a Debbie Downer type of thing when it comes to this kind of stuff, but it does make me think. I certainly wouldn’t want to put anybody else’s money in something that may not be backed by anything. Does that make sense?

Eric: Yeah. That’s a fundamental question. As any investment professional, you have to look at an investment and say where’s my return going to come from? If you’re thinking about, let’s say, a piece of real estate, there’s a tangible asset there. You can touch it and admire it from the street. It provides rents.

There’s an income stream. Supply and demand can affect the value of the real estate. If it’s a stock, it’s a future stream of cash flows that could be paid in dividends or reinvested. If it’s a bond, you receive interest income. If it’s a field of soybeans, there’s a physical value. There’s some value there to society.

But something like a digital currency, its value is determined by those that use it. It’s supply and demand, but there’s nothing tangible there. There’s no cash flows there as it would be in a traditional investment.

I can’t speak for everybody, but for me, it’s a bit of an enigma in terms of where the value comes from, because it just comes from the confidence of those that use it and nothing else.

If there is a convenience factor there, something about it that provides a utility to the user relative to any other form of payment, then I guess that could be value, but that’s a little hard to ascertain. You can’t touch that. It’s hard to see.

Patti: Let’s talk a little bit about history. Let’s talk about the railroads and the auto industry. There is definitely a pattern of innovation and new ideas, and the lifecycle of those new ideas and what tends to happen. Go ahead, professor, let’s talk about that.

Eric: Yeah, just drawing from observation. History teaches us a lot of valuable lessons. There’s this similar cycle of developments, rapid growth, and eventually a period of maturity. When you think about these rapid ascents of all these different types of virtual currencies that are out there, and who’s going to win the day.

Look to the railroads, for example, they peaked in 1917, with 1,500 different railroads, a quarter million miles of track. Today, there’s just five domestic operators, seven operators in total that basically are responsible for 94 percent of the freight revenue.

If you look at, let’s say, the automobile, 1899, 30 American manufacturers produced about 2,500 cars. In the next 10 years, there were 435 entrants into the market. By 1929, 80 percent of production was controlled by just three companies – Ford, GM, and Chrysler.

You see this similar pattern that I think is applicable in this domain, where this is new, the barriers to entry are low. There are many challenges with the design so there is constant new innovation to address some of these issues.

Eventually, there will emerge just a handful that will succeed, and most of these things are likely not to work out in the end. If you’re trying to pick it, as which one do I buy? That’s a hard thing to say because we’re in this rapid growth phase. Ultimately, it’s impossible, I would say, at this point, to really determine who’s going to be there 10, 20 years down the road.

Patti: I think that this idea of technologies and how long it takes for households to adopt technologies, for example, it took 67 years for Americans to get to 90 percent adoption of landlines. The cell phone, it took 18 years to get at 90 percent saturation. The smartphone, probably 10 years to get to 90 percent. That is also an important factor in all of this.

It’s also interesting that what makes this whole thing work is something that we’ve already adopted. In other words, what makes Bitcoin and cryptocurrency so attractive is the thing that it’s so easy to use on our smartphones. There’s a domino effect on all of this, and I can’t help but wonder what this thing is going to look like in the future.

Even though the barriers to entry are very, very low, anybody can start a crypto, but there are some big headwinds that we need to be cognizant of as it relates to is this going to really be around, and is this going to be as big as, for example, the Internet has become?

Eric: I think you’re highlighting an interesting point with the adoption of technologies. A technology like, say, virtual currency and that blockchain technology that underlies that, is dependent on the success and adoption of smartphones.

The smartphone gives access to the Internet, access to these alternative payment platforms, and so forth. The widespread adoption of the smartphone has really laid that foundation for something like this to take off.

We have to be aware. In a wealthy nation like America, we have very well-developed financial markets, financial intermediaries, and banking services, but most of those in the world don’t have access to the global financial system, to banking services, and so forth.

Most people in the world do have access to a smartphone or the Internet. That has provided a mechanism to bridge the gap and give them access to these peer-to-peer networks, the payment systems and financial services that is not presently developed or available in so many different areas of the globe, especially in the emerging markets.

Patti: It’s very interesting because I don’t know that I thought about how important it is to have access to reliable currency. That’s important, isn’t it?

As you said, that is the grease that makes this thing run. To your point about that, not every nation has something like that. They don’t have the regulatory oversight of these payment systems to make sure that they’re legit, right?

Eric: Also keep in mind historically, there are many nations that have terribly mismanaged their financial systems and wrecked their economies, high inflation, and things like this.

Argentina is a good example, not to pick on them. That’s another attraction for people in some of these other areas that don’t have well-developed and well-managed financial systems, that it’s a way around that where they can access a store of value.

Patti: Let’s go on that. We’re going to go out of order a little bit here. When you think about that – rapid inflation, etc., but if digital currency isn’t backed by anything, like the US dollar is backed by the full faith of the US government, the Federal Reserve, you’ve got that centralized entity that is there to create stability during times of crisis.

We’ve seen them do that, and I think they’re doing a little bit better than they used to. We are human beings and they’re learning. With Bitcoin, if there’s rapid adoption of this cryptocurrency, there’s nothing backing it up. What happens if there’s a crisis and things go nuts? Who’s going to be there to stabilize crypto?

Eric: That’s a very intriguing question. If you think about the banknotes, so the Federal Reserve, there is no credit risk. There’s no liquidity risk by holding Federal Reserve money, the notes, the coins, and things like that. That’s not the case with some of these virtual currencies because there’s no centralized authority.

The other thing that I think is more interesting is, when you look through the history of our experience, there’s been massive economic disruption, booms and busts, depression. Over time, our modern monetary system has been designed to address those prior inadequacies to figure out ways to create a shock absorber.

Not to eliminate the business cycle, but to soften the amplitude of the peaks and valleys. There is a system in place, and institutions in place. Something like these virtual currencies, there’s nothing there that governs that.

What happens when there’s an issue? When there’s a liquidity issue or some kind of technical glitch? Who steps in that case? To me, that’s a very fascinating question because there is no mechanism like that like we have with, say, in the United States financial system.

Patti: As we were talking about this in preparation last night, we were talking about the Depression and how banks during the during the ’20s would issue banknotes. Because of what was going on in the Depression, many of those banks failed and those notes were worthless. It just created insult to injury, and it really made the crisis that much worse.

As a result, the Federal government basically outlawed banknotes. A bank doesn’t issue notes that has that guarantee. They have CDs, which have the FDIC insurance.

Again, we have evolved. Ultimately, in the United States, we do have a system of making sure that as these crises occur, that they are not as deep as they were during the depression.

Eric: Keep in mind, anyone that was thinking about buying it, there is also the risk that the government could step in through decree and outlaw the ownership of it. There’s been numerous instances in our history where certain types of things were outlawed. The convertibility to gold or silver has been constantly updated and changed.

I think in the great depression, they outlawed the ownership of gold. Who knows? If they deem it a risk, they could always step in and pass laws that could severely impair liquidity or devaluation of some of these things.

Patti: We’ll talk about a digital dollar in a second. Let’s now go to some of the challenges that exist already as it relates to using cryptocurrency. First and foremost would be the fees associated with the transaction, right?

Eric: Back to that idea that we have this exponential quality to the number of virtual currencies that are growing. If you’re trying to peer into the future as far as you can, you need to address the fundamental challenges if you’re going to isolate the ones or the groups that may be there 10 and 20 years into the future.

One of the major challenges is the number of transactions per second. If you’re going to have something that’s an alternative means of payment that is a challenge to, say, the current system or the dollar, you have to be able to process a massive volume of transactions.

Look at Visa, they have the capabilities to perform up to 24,000 transactions a second. They don’t do anywhere near that amount, but they claim they have the ability in terms of capacity. If you look at let’s say Bitcoin, they process three to seven transactions per second. The order of magnitude is so vast.

There’s going to be a lot of technological improvements that are going to have to close the gap there.

Patti: I love the conversation we were having last night – what if one of my kids go into Starbucks and they try to use bitcoin to buy a cup of coffee. They have to stand there because it takes 7 to 10 minutes to confirm a transaction for bitcoin. They’ve got to stand there for their coffee whereas Visa, it’s instant.

Eric: Basically, if you’re at a point-of-sale system, you tap your card, you scan it and in a matter of seconds, it’s approved. Now the settlement doesn’t occur that quick, but the approval, the authorization does. If you’re talking about these peer-to-peer networks, your transaction has to be established.

It has to be approved and that can take, depending on the traffic on the network in any given day, that could be 6, it could be 10 minutes. If you’re buying your latte, the latte might be cold by the time they hand it over when your transaction is approved.

Patti: By the way, based on the fees associated with it, the fees for the transaction, depending on how many other transactions are occurring at the same time, could be anywhere from $1.78 to $62. You’re buying a cup of coffee for $4, and it costs another let’s say $10 just to do the transaction. That’s not practical.

Eric: That’s the nature of the design. Again, when you have a centralized network, there’s a single intermediary like Visa or Mastercard. They’re verifying the payment, they’re charging the vendor and so forth. In a decentralized network or virtual currency, these are peer-to-peer. They’re voluntary.

In order to entice someone to verify the transaction, the validity, there has to be compensation there. You have these individuals that are structured to solve these very complicated financial equations and they receive payment for that. That takes them time to be able to do that.

Depending on the volume, that can drastically change the fees. That’s another issue or criticism that I’m sure will be resolved with time, but that’s a big impediment. This notion of processing speed and capacity, wait times, and cost, whoever can best address those three things stands a good chance of being a viable candidate going forward.

Who that will be? There’s lots of them that have some of those problems solved but not others, or they just haven’t attracted liquidity so, who knows?

Patti: The other issue is the sheer amount of electricity it takes to confirm these transactions. It’s become a very big red flag for a lot of people – the environmental impact of cryptocurrencies.

Eric: It’s amazing. Another problem, especially in terms of climate and so forth that people are concerned about, but extremely energy intensive because for the system to work, for this verification and process to work, there has to be competition.

People invest in massive computing power and there’s lots of different computer programs competing to verify transactions, but only one computer can win. You’ve got all of these people competing to verify and get paid, there’s only one winner.

All that energy of everyone competing on a transaction-by-transaction basis, most of that goes to waste because there’s only eventually one winner that receives compensation for that. It’s extremely energy intensive.

Patti: This is one of those topics, every time we talk about it, I feel like there’s so much more I need to learn. I have this image of all these people in these garages all throughout the world trying to do this calculation on this computer, and I’m like who are these people? Can we even trust them?

Like I said, I’m probably thick when it comes to something like this, but I’m just trying to wrap my brain around exactly how it works and the practical application of this either as a currency or an investment.

Eric: What about the investment aspects? When it comes to a currency, these are some of the challenges when we think about a well-functioning liquid payment system. The other thing, in order for it to be a reliable store of value and payment, it would have to lack the thing that is attracting most people’s attention, which is volatility.

That’s what gets it on the news, is these breathtaking increases and declines. A dollar in your pocket, week in and week out, for the most part you know what that’s going to buy in terms of goods and services. One day the bitcoin will be able to buy a Tesla, the next day it’s well-appointed Toyota.

That’s not a good medium of exchange, given the fluctuation. That would have to be resolved for it to be a good alternative to bank money. That segues into the investment aspect so it’s not that.

Patti: Before we do that, the other thing that we have to think about is OK, you use a bitcoin to buy a car. Guess what, folks? That’s a transaction, and you’re going to have to pay a tax. You buy the latte, you’ve got to keep track of what your cost basis is for the bitcoin that you used to buy the cup coffee because it’s a capital gain.

It’s not the same as currency is as we know it. When you use a dollar to buy a cup of coffee, you’re not paying a tax on the dollar. It’s a lot more complicated, and there’s a lot of things that haven’t been worked out yet.

Eric: That’s an interesting concept. We, as consumers, we go in, payments are so easy. We have a card or a phone and you just tap or you swipe, away you go about your business, but let’s say now you want to use virtual currency to buy that same cup of latte.

Now, when you go to initiate the transaction, forget about the time, and the cost and all that stuff, now you have to consider am I creating a capital gain or a loss? Is it a short-term gain or a loss? Is it a long-term gain or a loss?

Because since 2019, at the very top your tax return, there is a question that must be answered as to whether you received, sold, exchanged, or disposed of any interest in a virtual currency. If you answer yes, you better get acquainted with Form 8949 because virtual currency is property in the eyes of the IRS.

It is not currency, meaning that if you use it to buy goods and services, you have effectuated basically a capital transaction. There’s a gain or a loss. You transfer property, that’s got to be reported on your return. It’s crazy. It’s very complicated.

How do you keep records of this and then keep track of your basis? How are you selling certain bitcoin that was received three months ago or a year ago?

If you don’t specify, the IRS assumes a first in, first out basis as it relates to virtual currency. A whole new web of complications that doesn’t exist with the bank notes in your pocket or using your debit card, using bank money or anything like that.

Patti: Let’s just put that aside and say we’re not going to do that, but we like the fact that you could buy in at 36,000, say, for Bitcoin, and it grew, grew, grew. It’s one of those things where it’s a momentum thing.

People are people, and boy, if it’s going up, that means it’s going to keep going up, so let’s buy it as an investment. When we think about the qualities of a good investment, what are the qualities that we look for? What is the business model? Does it create cash flow?

Is it a tangible asset, something that you can hold in your hands? What are the prospects for your future value? It could even be a biotech company. Granted, they may not have a drug today, but they’ve got research capabilities, and they’ve got their own ideas.

That’s going to be equally as volatile, but if they hit it, you could do really well. What do we think about the investment aspect of Bitcoin or any crypto?

Eric: This goes back to the discussion at the very beginning, which is when we think about let’s say a stock, when you buy a stock, you’re getting a share of future profits, dividends. A stock, if it’s a company, also has tangible physical assets, cash in the bank, buildings, equipment, people, patents, things of that, intellectual capital.

If it’s a bond, that’s a secure claim. You receive interest. If it’s real estate, rents. There’s a building there, but none of those qualities exist for virtual currency. There is nothing tangible. There is no income stream. There is no physical asset of any kind.

It’s purely a supply and demand thing. Probably the greatest example of supply and demand would be commodities like coffee beans, wheat, corn, things like that. At least you can touch that. You can eat those things and consume them.

None of those things exist with this. That’s as an investment professional, we’ll learn to look at the cash flows to value an asset, things of that nature, but it doesn’t exist.

Patti: You know what this feels like, Eric? It sort of feels like the Tulip Craze. When was that? That was probably the 1300s, 1400s, with tulips, the Dutch.

Eric: The Dutch Tulip was crazy.

Patti: Exactly. It was fast and furious, and boy, did it die a death that ruined many, many people.

Eric: It sure did, but that might be the case, but at least you have a tulip that you can admire and you can…

Patti: For a couple weeks, right?

Eric: Yeah, before it dies out, but at least you had something there that you can look at and admire.

Patti: I don’t know how much we want to get into this. I thought that the other thing that was fascinating is the fact that the Federal Reserve is looking into maybe a digital dollar.

MIT is doing some studies. We’ve got this wonderful little white paper that you and I were studying. I thought that was a fascinating idea and thought that the Federal Reserve might look at a digital dollar.

First of all, why would they look to do that? What would be the implication? Then, do they become a competitor to the banks that are out there, the banking industry, or the Visas and the Mastercards of the world?

The Federal Reserve is not there to be a competitor to capitalism. They’re there to support it, to provide that steady hand, to support it, but now they become a competitor. Is that possible? Is that what they’re really looking at?

I thought that this paper was interesting and that it brought out a lot of some of those ideas. They’re just studying it, they’re really taking a look at it for other reasons. I thought that the reasons were also compelling.

Eric: I guess the program you’re referring to is a pilot program with MIT, dubbed Project Hamilton as a tip of the cap to Alexander Hamilton, first Secretary of Treasury, brilliant, brilliant mind, far beyond his time.

It’s an interesting idea. It’s a project that’s worthy of consideration for necessity to remain competitive, because virtually every other central bank in the world, whether it’s the European Central Bank, Japan, the People’s Bank of China, they’re all evaluating programs of their own to have a central bank digital currency.

As the world reserve currency, it’s vital, especially for interest economic or otherwise, to be ahead of the curve and to have a form of payment where that would be the preferred mechanism as the dollar is today.

To not study the possibilities, the pros, and the cons, other people and economies around the world are looking at doing it so we have to take part in that.

I think you make an important point, which is the distinction here in America is we believe about private individuals, private businesses making decisions making the investments, and pursuing decisions that they deemed to be appropriate.

The tough balancing act that the Federal Reserve is going to have is that there is certainly a need and a benefit, globally and for our society, to have one. They have to draw that fine line where they are not competing directly with our domestic financial intermediaries.

If they come into the space, then they begin to compete directly with, let’s say, banks, credit unions, and threats, and other things like that. It’s got to be done in a partnership way that still allows private industry to be involved, but to take it to the next step to invest and funnel the innovation that America has been known for over the decades.

Patti: All right. Let’s pull this all together. We’ve talked about what cryptocurrency is. Is there’s something else that you want to bring up, Professor?

Eric: No, I was going to say boohoo. You make it sound like it’s the end, and I guess that meant to wrap up.

Patti: Bummer, right. I think it can be overwhelming for many people as we talk through these things. It’s out there, and it’s something that is evolving and will continue to evolve.

Think about the pros and the cons of investing in anything, understand what the attributes are, and whether or not something like that belongs in your portfolio at this point.

Is it a practical tool as an alternative to currency? If so, which one is going to be the big winner of the 17,000 cryptos that are now out there? What are the strengths? What are the weaknesses? What are the threats?

Eric: The other thing is that when we design portfolios for our clients, we design them with the idea of addressing specific issues. The question is if you’re thinking about this as an investment, what problem is it solving that isn’t already being addressed by a well-balanced and diversified portfolio?

That’s a question I don’t have an answer for, but to me, that’s the most critical thing. If you can’t definitively answer or identify the problem it’s solving, then you realize that what you’re doing is just making a speculative gamble, for lack of a better term. It’s important to always think about it in terms of what is it addressing or not.

Patti: I’m not so sure it’s a hedge. I don’t know that it’s a hedge, against anything.

Eric, as always, thank you so much. This was great. I have so enjoyed these conversations with you. Thanks to all of you for tuning in today. I hope this was helpful.

As always, please go to our website. All of the show notes will be on our website, the graphs and the charts that we’re referencing today.

Let us know if there are any other topics that you want us to discuss. We like it because it gives us the opportunity to do the brainstorming and say what can we say about that? What do we understand? What don’t we understand? Let’s research it.

It’s an evolving process, and we can’t do it without all of you. Again, please go to our website at keyfinancialinc.com.

Thank you so much for tuning in today, and I hope you have a wonderful day. Thanks so much. Take care.

Ep102: Behavioral Finance with John Nersesian of PIMCO

About This Episode

In the first of a two-part series, Patti welcomes John Nersesian of PIMCO Investment Management. John is the head of Advisor Education at PIMCO and provides advanced wealth management and planning techniques, as well as investment consulting education to financial professionals. Patti and John discuss their shared philosophy of continuing to further their learning and developing their skillsets so that they can help clients in a meaningful way. They agree that there are two main goals in retirement that a trusted advisor works toward for their clients. Listen today to find out what those are and how to best navigate these turbulent economic times with your financial advisor.

Patti Brennan: Hi, everybody. Welcome to the Patti Brennan Show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. I am so excited about today’s guest. His name is John Nersesian. He is amazing. In fact, before we went live, he and I were just going off on so many different subjects and it makes me wonder if we going to be talking about all these topics today. You’re going to hear some amazing stuff from John.

Just to give you a little bit of background. John is an educator and he continues to educate all of us in the profession. That’s his leverage. He made me aware of a program offered by the University of Chicago as well as Yale, called the CPWA certification program.

John, please tell our listeners and people who are watching exactly what that’s all about. John was introduced to me from my friend Dan Miller at PIMCO. Dan brings John into advisors like me, and teaches us advanced planning techniques. This is not the typical funding IRA kind of stuff. This is advanced tax planning, advanced investment planning, etc.

He was telling me about this program and I thought, “Wow. I would love to take that.” Even though I’ve been doing this for a while, I feel like there’s always so much more to learn and people like John, provide that education to people like me. It’s just incredible, it’s leverage.

He could be retired at this point. He doesn’t have to be doing all of this anymore and yet, his heart wants to go out to teach and to share his knowledge with people like me and through programs like this so that we are delivering the best information to all of you.

John, how’s that for an intro?

John: That’s fantastic, Patti. I think that comment exemplifies why you’re such an exceptional advisor. The fact that you’ve been so successful at what you do, but the fact that you’re always interested in learning more and that’s the fun part about our business, right? The financial markets, financial planning, helping people live their very best lives. It’s not a process that has a beginning and an end. It’s a constant evolution.

I think we have a responsibility. You, as a financial advisor, me, as an industry professional, to constantly learn, because our industry comes down to a very simple four-letter word. It’s all about help. People come to us because they believe that we can help them. Help them not just in terms of the rates of return that they achieve or the results on their investment statements, but help them achieve things in their lives that are meaningful and significant.

In order for us to be helpful to others, we have to invest in ourselves. We have to constantly learn and develop our skill set so that we can help these people in a meaningful way. I love that introduction.

Patti: You know, John, it’s not necessarily the things that are measurable. This weekend, yesterday, I went to see a client whose wife is on hospice. I went to see them and I have to tell you, there’s just something about that feeling that you get when you have someone say, “You helped us to get to a certain point where we could experience this without having to worry about how much it cost to have home healthcare when she was really sick, and then now she’s on hospice.”

What an amazing feeling. It’s awful in a way that they’re going through all of this and wonderful to be that person that they trust.

John: We can look at it two ways, right? It’s the challenges that our clients are facing, that we’re trying to help them overcome, or maybe let’s look at it in a slightly different context. It’s their aspirations. It’s the things in this world that they want to accomplish, that they want to successfully achieve and maybe that’s where we’re having a positive impact on the lives of these individuals.

I’m with you. I thought I understood the investing client when I was a financial advisor. I did my very best to try to deliver the kind of advice that was helpful to them, etc. But I think I really gained an appreciation from the clients’ perspective when I became the client.

When the process became more about what’s important in your life, what keeps you awake at night? What is it that you want your money to accomplish for you? Beyond just the tactical functions of, “How do I allocate capital, and how do I produce positive rates of return?” So, I love your orientation on that.

Patti: In our prep call, we were talking about this, and I love your focus on driving better outcomes. We don’t really have a risk tolerance questionnaire. I don’t believe in them. I think that people don’t know what their risk tolerance actually is until they’re in it.

But I do ask a question. That question is, what’s more important to you – outcomes, or performance? I want to get that answer. It’s interesting some people do check off performance, “I want really good performance,” while others check off outcomes.

I think that’s so important because returns can be manipulative.

John: Absolutely.

Patti: You can tell whatever story you want to tell just by changing the dates. Also, even looking at average rate of return, we talked about it in previous podcast, that doesn’t really tell the real story in terms of true wealth accumulation. Volatility can sabotage the average rate of return, in terms of wealth accumulation. Seven percent doesn’t necessarily equal seven percent.

John: I’m with you.

Patti: It sounds simple, and it sounds like it doesn’t make sense. “How could that be?” This is what advanced techniques and advanced education teaches us, and hopefully what people like me can share with clients.

John: I love your comments about averages. There’s an expression that I often use, which is, “Averages can hide lots of sins. You put my head in the oven and my feet in the icebox. On average I’m 72 degrees and I should be comfortable, but that’s not a very pleasant experience.”

Patti: It sure isn’t.

John: So, averages, to your point, can be manipulative for even from a more positive perspective. Averages don’t really tell the true story. What is it that I’m trying to accomplish with my money? What is the experience that I’m willing to endure? How much volatility? How is the average rate of return actually achieved?

Most importantly, what has it produce for me in my life? Does it produce cash flow? Does it produce wealth accumulation? Does it help me maximize my tax savings opportunities? What is that money ultimately going to do for me in terms of its purpose or its objective?

Look, I teach Statistical Analysis at the University of Chicago. It’s part of the senior certification. We can do time-weighted rates of return and dollar-weighted rates of return, and standard deviation.

This goes back to your comment about risk. We use this term, “Standard deviation.” I’m not sure that the average investor is concerned about the volatility of their returns around the central tendency. That’s what standard deviation means.

What they’re concerned about is emotionally. How’s it going to feel in one investment vehicle versus another, based on market drawdown, based on the actual dollar loss that I might experience? Can I afford it financially, can I stomach it emotionally?

I think that’s the great work that you do as you help to align clients, their investment portfolios and experiences, with a particular experience that they are able to or willing to endure. There’s an art and a skill to that process, and I suspect you have them both.

Patti: Well, thank you for saying that. I do think it’s really important, and it is so personal. We talk about measuring performance, but how do you measure outcomes? I don’t know about you, I think that you feel the same way, it is very personal. It’s different for everybody. And that’s where the analysis…doing the work, it can’t be fluff. I am not a fan of fluff.

You guys know that by now, right? You got to do the work. It’s got to be customized – run the numbers, look at cash flow and really stress test the portfolio against the client’s cash flow needs, and really against their emotional ability to withstand it.

These…excuse my French, but these stupid risk tolerance questionnaires ask questions like, “Well, if the market went down 10 percent, what would you do? How would you feel if it went down 20 percent?” People don’t relate to that. But if I said, “Hey, if you lost a million dollars, would you want to fire me?”

That would say something quite different. To quantify it in dollars and then run the numbers to say, “If that happened, would you be OK?”

John: I love that perspective. I’m giving a lecture next week on finance, behavioral management, the emotional side of investing beyond the quantitative component.

One of the key things that we talk about is risk, because returns are relatively easy to measure, Patti. If you give me a calculator, I can calculate the average rate of return. I can calculate all the numerical data, but risk is different. Risk is difficult to capture.

What does risk mean to an individual? Well, to my friend, Dan, risk means volatility – the portfolio returns. Risk to our friend behind the camera means something completely different. It means this idea of a draw down during periods of market decline.

Risk to you and I may mean something completely different, like the risk that I’m not going to be able to travel when I’m older or send my kids to college. I think it’s our responsibility. It’s our opportunity to really understand what risk means to our clients on a personal level, beyond the risk tolerance questionnaires and the mathematical equations that we often rely upon.

Patti: It is so true. John, what a gift you are to this profession, because I often talk about raising the standard of the profession and people like you are allowing that to happen. I do find that the profession is different today than it was 10 years ago.

I really do. I’m hearing more of this from people from all different types of business models, because there’s a lot of good advisors out there and the ones that really care that are taking the time to learn. It doesn’t come naturally to a lot of people.

Especially the behavioral economics approach, because it sounds wishy-washy. It’s almost like…I’ve heard some advisors refer to themselves as behavioral coaches and I don’t know about you. I almost find that insulting. It’s like what I did with my toddlers and my teenagers when I put them in time out or took away the keys.

No sophisticated intelligent person wants to feel like they need their hands to be held. That’s insulting. Yet, there are some unconscious – subconscious, unconscious, whatever we want to call – biases that we all have. If we could, John, let’s take a step back. What is this thing called behavioral finance? Why is it important?

John: I’m with you a hundred percent and it doesn’t have to be that negative experience that you referred to in your discussion about, “Oh my gosh, we’re going to admonish people because they’re not properly equipped. We’re going to take away their keys. We’re going to restrict them from doing things.” We’re here to help them.

I think what’s important to understand is that, as human beings, sometimes we’re not always logical. I remember reading the Samuelson Econ 101 book when I was at Lehigh many years ago, and they talked about guns and butter.

If we were rational, if we were logical, we would look at the opportunity set between producing guns and producing butter, and we would optimize our manufacturing capabilities to maximize the returns, to maximize the profits that we were able to enjoy.

Well, that works in the textbook. It doesn’t work that way in the real world. We are not unfortunately always rational. We are subject to these biases. Some of them are cognitive the way that we process information and draw conclusions.

There can be a flaw in the methodology. Others are emotional because each and every one of us, each and every one of the very valuable clients that you work with, they’re different emotional beings. They’re going to respond to stimuli in a different capacity.

One of our opportunities is to not punish them or restrict them, but to understand them and to present information to them. To present recommendations to them in a way that is consistent with their emotional makeup. Let’s talk about some of the biases. I’m guilty of one. In fact, I’m guilty of many.

Patti: Oh, yeah. You and me both.

John: Here’s the most obvious, it’s overconfidence. We think we know more than we actually do. We know that markets are sometimes irrational, illogical, unpredictable, but we sometimes fool ourselves into thinking that we have greater control over the outcomes than we actually do. I think an understanding or an acceptance of that can help us make better decisions and a more enduring investment process.

How about loss aversion, Patti? You probably see this all the time with your clients. “Patti, I want you to invest my money safely. I don’t want to suffer any losses.” Well, let’s back up the truck for a second.

After I pay taxes, after I account for inflation, that safe investment earning two percent doesn’t get me where I need to be. How do we overcome, if you will, an individual’s tolerance for or willingness to accept losses? There are a couple of biases.

Patti: That’s a perfect example of somebody sabotaging themselves and not realizing it. By wanting, I often tell people don’t confuse stable with safe.

John: Oh, I haven’t heard that. I like that.

Patti: What you’ve just described might be stable, but is that safe? Especially, I don’t know in the last 20 years, more than half of the time, you actually had a loss of purchasing power after taxes and inflation. Even this year alone, you look at the inflation rate of 7.9 percent.

Well, granted we’re not even getting one percent on the bank accounts. That is a guaranteed loss of 6.9 percent. That tends to be sticky. It’s not volatile because inflation doesn’t go up and down. It just affects you. Basically, you need eight percent more dollars to buy the same stuff you did just a year ago. That’s going to stay. It is very interesting.

In terms of all of this, what do you think are the ways that people can prevent themselves from allowing these really unconscious biases that we don’t even realize we have, but are affecting our decisions?

John: Well, I love what you started with. They don’t realize that they have them, or we don’t recognize our own deficiencies sometimes. Sometimes just bringing awareness to that is the first step in a productive process. Making ourselves aware of some of the mistakes that we make.

We make these mistakes, Patti, not intentionally. We don’t make them because we’re ill-equipped or unintelligent. We make them because successful investing is often very counterintuitive. As Ted Lasso said in Season 1, I think it was Season 1. “If it hurts while you’re doing it, you’re probably doing it right.” Successful investing works the same way. Markets go down.

The initial inclination is to bail out because it’s not fun. It doesn’t feel good. Often during those periods of significant volatility, there’s opportunity created. We identified a number of best practices that we think investors with the help of their advisors can implement.

Number one, have some discipline, maybe a policy statement or an asset allocation guideline that gives you some guardrails, that gives you a methodology that eliminates the knee-jerk reaction. That we often exhibit during periods of volatility too. I know, you know this, to diversify. Why? Because diversification is the free luncheon investing.

Every time I diversify my asset classes, they get all the returns that I’m entitled to, but I automatically reduce the risk or the volatility of my portfolio. It’s that volatility, it’s that drawdown, it’s those negative experiences that cause me to unfortunately do counterproductive things.

Thirdly, let’s instill some discipline. Maybe we do that by utilizing automated investment programs. Like dollar-cost averaging, like models where we take ourselves out of the equation and allow things to happen productively for us without having to make day-to-day decisions that can sometimes lead us astray.
Here’s the last one I’ll give you. It’s rebalancing. We talked about discipline. Rebalancing forces me to do what is emotionally uncomfortable, but financially productive.

Think about this, Patti. I’ve got a diversified portfolio. Some things at the end of the year did pretty well and others didn’t do as well. My natural inclination is to do what? Get rid of the things that are not doing well and reallocate the money to the things that are. Rebalancing forces me to essentially reallocate capital to the asset classes that are undervalued in my portfolio.

It’s a sense of discipline. It allows me to stay the course. It allows me to earn better returns and to reduce the risk I’m assuming along the way.

Patti: John, it’s interesting as you were talking, I was thinking about a story that I often share with clients. I’m the mother of four children, right? I have my own business, my husband has his business. We started, he was in the living room and in the dining room, I was in the basement. We were really on a shoestring.

I was fortunate to have graduated from Georgetown without any student loans. My husband, on the other hand, had a lot of student loans. The one thing that the two of us decided when we began to have our family was, we really wanted to give our kids a really good start in life by not saddling them with student loans.
Way back when I did this quick calculation and I came up with a number and I said, when I got pregnant with my oldest, Michael, I found that if we could save $387 a month, earning eight percent per year, he could go to any school in the country.

John: Love it.

Patti: Literally, we set it up through the mutual fund company and that $387 a month was yanked out of our account, whether we could afford it or not.

We could never could afford it. Right? Sure enough. Fast forward have the second baby, third baby…I add another account, another account.

When I got pregnant with our youngest, Jack, I went to my husband. I said, “Ed, I have some news for you.”

He’s like, “OK.” I said, “We’re expecting.” The first words out of his mouth were not, “Oh, this is a miracle. Thank you so much.”

John: So blessed.

Patti: “Thank you for putting up with another nine months of water retention and all the not being able to sleep.” No. His first words were, “Where in the God’s name are we going to get $387?

John: I love it. You trained your husband well, apparently.

Patti: That’s the interesting thing. The emotional side of him is we can’t afford it. We can’t afford it. We’re not going to do it. My response was, “I don’t know where we’re going to get it, but we’re going to do it anyway.”

John: You made it automated. That’s probably the key to have something that would happen automatically.

Imagine if each and every month we were tasked with that decision. Do I have $387? Should I put it in this month? What should I buy with it? The fact that you recognized the opportunity, the fact that you were long-term oriented, the fact that you recognized the benefit, that eighth miracle of the world compounding. That all worked to your advantage.

Patti: Yeah, exactly.

John: Of course, your kids all wound up going to great schools.

Patti: Absolutely. Graduated, and there was money left over to boot.

I think that the automated investing is so important so that you don’t have to think about it. It’s just automatically dollar‑cost averaging, which is a really important principle.

I think that so much of what we do is to coach people and help them to make the decisions that they would make if they were in our position.

John: Yeah, I think so.

Patti: Are there any other things out there that you would think of that could prevent, especially when markets are volatile, which they are right now.

I had a conversation last week with clients, I basically said, “I hope it’s OK. I know that you want to reduce your allocation to equities. For whatever it’s worth, nobody hates bear markets more than I do. The key is what do we do about it. It’s OK to feel the way you feel. I totally get it.” “It seems to me that part of what I’m here to do in your life is maybe to save you from yourself.”

These things happen. They are going to happen. There’s no real true free lunch. We have to accept this volatile nature of the way markets are. Typically, they go down for a random reason. We can never predict them.

We never know what it is that’s going to cause the market to go down. What we do – and thanks to you, you’ve taught us this – we just expect that it’s going to happen.

John: It’s good.

Patti: We set it up in the beginning, the portfolio with those guardrails in advance. Assuming that the next wicked bear market is going to start today. Clients can have that peace of mind knowing they don’t have to think about it for seven years, because we have allocated that capital accordingly…

John: I love it.

Patti: …into three pools of money. I find just that simple concept. It’s so effective in helping people to understand what we’re doing behind the scenes.

I tell people all the time, John, most of the work we do, you are never going to see. You’re never going to see it.

John: It’s behind the scenes.

Patti: It’s behind the scenes. Yet, when you get to those milestones in your life that we’ve talked about time and time again, that are important to you and you reach them. You’re going to realize all of the work that has been done by you and us, because it’s a collaborative process. It takes all of us together.
The work that you’ve done and the help that we’ve hopefully provided has helped you hit every milestone that’s important.

John: I love your conversation around volatility. Unfortunately, it doesn’t feel really good when the markets are volatile and these bear markets are not very much fun at all, but I have an expression which may or may not necessarily help. “Volatility is the price that we pay for the opportunity to earn higher returns.” The two come together.

You don’t want to experience volatility. OK. Well, I can give you an investment portfolio that doesn’t experience a lot of volatility, but you’re probably not going to get the returns you need to enjoy the outcomes that you seek. I think it is important for people to keep that in mind, that volatility is the price of admission.

Here’s the other thing about bear markets. I know that all of us are looking at the market volatility currently here and the significant drawdown that the market experienced with the Fed and with Ukraine and with inflation. There are probably numbers of things that we can point to.

I believe that there’s more money lost by investors, in anticipation of bear markets than in the actual bear markets themselves. We try to outsmart the system and unfortunately, the data and the study suggests that we’re just not capable of doing it.

There has to be a better methodology because all things being equal, we’re going to make decisions that actually detract from our returns. There was a study done by the fellow who wrote “The Behavior Gap,” Carl Richards.

Patti: Oh, Carl, he’s phenomenal.

John: Isn’t he great?

Patti: Oh, he is terrific.

John: For our friends on the podcast with us, if they haven’t read the book, it’s an easy read. You’ll bang it out in a day or in an airplane. It’s called the Behavior Gap. He illustrates his concepts, very pedestrian they’re handwritten caricatures on the back of a cocktail napkin.

He talks about this behavior gap, the return that the markets make available and the return that the investor actually produces. Sometimes there’s a disconnect.

Sometimes there is a gap between those two and more often than not the gap is not because they don’t have access to great investment vehicles or great financial advice. The gap is due to their own behavioral biases. It is important to try to manage that.

Patti: It is fascinating. That study has been replicated time and time again, whether it be a Morningstar or Dalbar, all of them. It’s fascinating, not just that it happens, John, but that it consistently happens. Year after year. It’s very interesting.

I think when the likes of a Vanguard even brings it to everybody’s attention, they talk about the three silos of business that they have. Basically the 401(k) business, the investor, the do it yourself and the advisor-led business. I guess they can tell who’s making a particular trade.

They back tested and they looked at where was the performance coming from and which one of those silos was actually doing better.

John: OK. Give us the results.

Patti: The results were the advisor led.

John: Oh, interesting.

Patti: In fact, they published a white paper called “Advisor’s Alpha.” It wasn’t by a little, John. It was by a lot. It goes back to what you’re referring to those biases, those knee-jerk responses, those reactions that so many people do.

The idea of the automating things is a fascinating thing, and so powerful. What I think is great, even though the different studies suggest that this is still a major issue, what I appreciate is that our industry is coming up with solutions. So is the federal government in terms of ways that they are encouraging people to save for 401(k).

John: Think about that, you get the Roth opportunity, a 401(k) automatic investing, get automatic distribution opportunities. They are trying to make the investing process more productive for all of us because it is important that we manage our capital.

Patti: It sure is. Really to make it as easy as possible. To make it easy so that people don’t have to think. It sounds crazy but when we think that is often followed by doing and a lot of times that’s the worst thing that you can do.

John: It goes back probably to that overconfidence thing. We get a piece of information, whatever it might be or wherever it came from, wherever it was sourced. We think that this information is going to be useful to us, and we act on it. That’s the knee-jerk reaction. We act on it. We’re overconfident assuming that we can manipulate the system, or make decisions that are going to add value to our outcomes. It doesn’t always work that way.

I love your reference to the cost of investing. I’m a big believer, and I hope you would agree with me on this one, the biggest cost to today’s client, it’s not the nominal fee that they pay a great advisor like you, a great partner in this process. The biggest cost to today’s investor is the cost of the mistakes they would make without the kind of qualified help or guidance that people like you provide. That is often the biggest cost of investing.

We constantly make mistakes. I’d like to think that by partnering with people like you, I’m less likely to make those mistakes. I’ve got an advocate, I’ve got somebody sitting on my shoulder, somebody on my team, who’s going to help me identify opportunities, going to help me make better decisions, and, ultimately, achieve better outcomes.

Patti: I will take that one step further, and say to you and to Dan and to anybody that’s listening, what is great about our industry is that we have access to people like you who can help us prevent those mistakes. Perfect example, “Wall Street Journal” had an article, probably three weeks ago, about TIPS. The best inflation hedge out there.

I don’t know about you guys but it is way too late for TIPS.

John: Yeah. They’ve had a pretty good run, haven’t they?

Patti: Yeah, inflation-indexed bonds. I can’t think of anything that is almost guaranteed to lose money than that right now. Yet, people read this stuff, they think it’s from a…and it is a great source. These journalists are great people also. They are trying to give really important information.

John: They are well-intended.

Patti: Very well-intended. It’s just the timing is off. It’s interesting because I call the folks at PIMCO. PIMCO is a fixed income…

John: Behemoth.

Patti: …They are. They really are.

John: Trillion dollars or something like that.

Patti: In 2008, when the federal government goes to the folks at PIMCO and said, “Help us out with this.” You got to know that these people are smart.

John: Smart people over there.

Patti: Very smart. I called Dan and I said, “Dan, what do you think about this?” He said, “I’m not a big fan of it.”

John: That’s good.

Patti: Gave us additional, not just a gut feeling, but gave us really viable reasons why that may not be a good thing to advocate for our clients.

Instead of that, maybe think about this or that, because nobody’s looking at this over here, and it doesn’t look great from a past history perspective. All the more reason why we should include it.

John: I love it. I love it.

Patti: I tell people all the time. It’s not really why people are listening.

When we’ve been able to provide value for over 1,000 people, families, help them to accomplish the goals that were important to them retiring, comfort, and never run out of money. Clients get to do it once. Why not leverage the experience and the talent that we have access to by finding a good advisor. It can’t get much better than that? Right.

John: I think that’s so great. I’m dealing with it personally. I hope it’s OK if I…

Patti: Yeah, please.

John: …share a personal story with you. You do this regularly and you do it obviously very well. Given all your accomplishments and accolades. The individual investor, this is their one shot at getting it right.

I’m 63 years old, don’t let my suntan fool you. I’m an old man and I’m getting ready to retire. Given everything I do in the industry, these educational programs that I teach, and the help I try to provide advisors and their investors, you’d think that for a guy like me, I should be able to figure that out. It’s not that easy.

Retirement asks us to solve for two very important objectives simultaneously. Objective number one, I got to make sure that I don’t run out of money. That’s kind of important. Objective number two, of course, is enjoying the maximum quality of life while I’m still here. We do realize that those two objectives are equally important, but in direct conflict with each other.

This process of retirement, what does it mean? When do I do it? What’s going to be fulfilling to me? It’s not just about having more money so that I can look at a larger number on the bottom of a statement. What does financial security means? It means not necessarily having more cash. It means being able to enjoy retirement more fully because I’m not worried about the capital. I’ve got a great partner like you who’s helped me figure that out.

As I said, I thought I understood it way back when. I’m beginning to learn it now that I got to deal with it personally. I need all the help I can get.

Patti: It’s so interesting, and it takes a big person to admit that. To say, “Hey, I don’t know everything.” It takes a big person to walk into our offices and walk down the hallway and into the conference room and say, “I need help.”

These people are really smart people. I mean incredibly successful in their own right. Yet, this isn’t something that they studied, they learned about, and yet, intuitively they know how important it is.

I think about you, John, and I think about those people, and we’re talking today about behavioral investing, and the importance of it. To me, it’s almost like the 12 steps of AA. The most important thing is to admit that there is an issue.

John: Not everybody can do that. We’re all very proud people. We think we know more than we probably do.

We were talking about the CPWA program. Which is an advanced educational curriculum for great financial advisors to help them develop the skills that are required for advising or serving wealthy families and I teach equity compensation there, so restricted stock units and stock options and the tax consequences, etc.

The funny thing that I’ve learned in the work that I do there is that these individuals who receive these very valuable awards, these are C-suite individuals who are, obviously, very bright, very accomplished professionally, but they actually don’t have a lot of familiarity with these tools, with these issues.

They don’t know how they work. They don’t know what the tax consequences are. They don’t know about vesting, they don’t know about 83(b) elections.

It’s once again, not that they’re deficient or uneducated. They just don’t have any experience with it. So they need help. Now, they may not always know that. They may not always recognize that, but they do need help. They do need an educated partner to guide them in that process. That’s why people like you and I continually do programs like that.

We continually read and go to great conferences, like the Barron’s events that you’ve been involved with for so long. We do that because we have a responsibility to build the skills and obtain the knowledge required, so we can help our clients achieve better outcomes.

Patti: John, I could talk to you all day.

I know our listeners and the people that are watching could probably watch us all day long. It is really fascinating and there’s a lot more to this. Let me first say thank you from the bottom of my heart.

John: My pleasure.

Patti: This is a big deal that you’re here today. I’m so grateful for your knowledge, your friendship, and for telling me about this wonderful program.

Thank you so much.

John: You’re more than welcome.

Patti: Thanks to you for joining us today. If this has been helpful, let us know. If you have any questions, if you’d like to learn more about this, go to our website at Keyfinancialinc.com. Send us a message if you’d like more about this topic. Let me know. I’ll get John back on the program. We’ll talk more about this.

To me – and I don’t know, John, if you would agree – I think this is it. If we can help people make better decisions, that’s everything.

John: There’s nothing more rewarding.

Patti: Nothing better than that. Thanks to all of you. Thanks to you, John. By the way, a little tidbit, John is going to be joining us again because, in the next podcast, we’re going to be talking about tax planning and things that we can do in 2022 to save money on taxes.

It doesn’t matter. Again, you know me, whether you have $20 or $20 million, there are things that everybody can do to save money in taxes. It’s going to be a different ball game because of the midterm elections. John is going to share his thoughts on all of that. Please join us again for the next podcast.

In the meantime, thank you from the bottom of my heart for tuning in today and sharing this with as many people as you do. It’s incredible to me the thousands of people who are now watching and listening to this podcast. That doesn’t happen if it wasn’t for you. I’m grateful to you. Thank you for giving me my purpose in this life. Have a great day.

Ep101: What Issues Should I Consider During A Recession Or A Market Correction?

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this timely episode, Patti acknowledges the volatile state of today’s economy amidst rising inflation and interest rates. She defines what a market correction is versus a recession and shares the specific steps investors should take during each. It is human nature to want to make sudden changes within a portfolio, but Patti cautions against that with considerations taken for all aspects of an investor’s life – not just portfolio performance. Listen today to hear the actionable steps to take, whether you are retired or still employed.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today’s episode is part of an ongoing series called AskPattiBrennan. It seems to me that, given what we’re experiencing this year, a few tips on what to do during a market correction and potentially a recession might come in handy. That’s what we’re going to talk about today.

Now, first and foremost, at the risk of sounding like Debbie Downer, I’m going to say to you, always be ready for it. Expect that these things are going to happen. When they do, you won’t perhaps feel as uncomfortable when they do because you knew it was going to happen, and then you’re going to have a strategy for dealing with it.

Number one, expect that these things are going to happen. I’m going to take that one step further and tell you that not only do they happen, but a lot of times, market corrections turn into a bear market. Let’s define that. A correction is defined as a loss of 10 percent or more.

It’s basically a market adjustment. It doesn’t mean that you actually lost the money because you only lose the money when you sell. A bear market is when the market goes down 20 percent or more, which frankly does happen.

Call it every three to five years, I would expect, and you should expect that the market is going to lose 20 to 30 to maybe 50 percent in a really bad situation and in a completely unexpected event that the market could go down by a lot.

Now, along with that, for those of you who are working, we should also understand that it can lead to a recession. Recessions also happen. It’s all part of the natural business cycle.

Along with recessions come layoffs. For those of you who are working, as these things occur, you really want to be prepared that if your name comes up and you’re getting that pink slip, that you’re ready for that as well.

Number one question is, if this did happen, will cash flow be tight? By that, I mean if you are working and you lose your job, you’re going to get unemployment insurance, assuming that you don’t get a severance. After that, if it takes a little bit longer for you to find your next position, what are you going to do?

How’s that emergency fund looking these days? There’s a rule of thumb, three to six months of expenses. That rule of thumb came about because most companies do not provide disability income coverage for the first six months.

People like Patti Brennan would say, “Keep six months of expenses in an emergency fund in the event that you’re unable to work.” Now, most companies do provide short-term disability insurance, but they don’t provide insurance in the event that you are part of a layoff.

It lasts longer than unemployment provides coverage for. Are you ready for that? That’s number one. When you think about your cash flow, again, is cash flow going to be tight?

For those of you who are watching, you may be retired. What are you going to do then? You don’t want to necessarily sell investments. In that situation, why don’t you turn on the tap?

Instead of reinvesting your dividends and your capital gains, have them paid in cash. You’re building up your cash accounts that way. You’re paying taxes on that money anyway, so you might as well just put that on the side for a rainy day fund.

In addition, you want to prioritize where you’re going to go. For example, when markets are going down a lot, your fixed-income funds tend to remain fairly stable, maybe even going up a little bit. Instead of going here, let’s go here instead.

That’s why making sure that you’re looking at this within the framework of your non-retirement accounts versus your retirement accounts because most people don’t want to start tapping their retirement accounts too early.

You’re losing that incredibly powerful tax-deferred compounding. Really focus on your non-retirement accounts and do the triage with those.

In addition to that, think about your payments, maybe renegotiate, extend your payment dates, maybe looking at your mortgage. You may have a 15-year mortgage, maybe a 30-year mortgage may be better for you. That’s really important.

A lot of people don’t take into consideration those unfortunate times when people are laid off and the impact of their cash flow if they’ve got these fixed expenses that have to be paid every single month.

In addition, the most important thing I would say during this time period is, watch your credit rating. Please, make sure that you’re still making those payments to any credit card balances. I hope none of you have credit card balances. But just in case you do, don’t miss those payments.

This is the last thing that you need, especially if you are looking for a new position. New employers are going to be checking your FICO score. If you don’t have a halfway decent FICO score, they’re going to question your ability to deal with responsibilities, like making payments on time.

If you’re hoping to retire soon, for those of you who have planned and who have prepared, this could be the best news in the world, because a lot of times during recessions, companies are asking for voluntary layoffs. You could raise your hand.

You were planning on retiring in the next year anyway. You were fully prepared, and guess what? You’re going to get some extra perks as a result of this unfortunate situation called the recession and these layoffs. If you are not prepared, it’s bad news.

If you are watching this today, just do everything you can to shore up your finances so that you don’t become a victim of circumstance, something that nobody can predict and nobody knows whether or not you’re actually going to be impacted. Assume the worst, hope for the best, and you’ll do fine.

Now, when you think about where we are today, we deal with your investment portfolio. Remember the three R’s, reallocate, rebalance, replace. Reallocating is when you take a look at the balance, the percentages you might have in certain asset classes.

From time to time, it does make sense for you to revisit those allocations, maybe you want to overweight large-cap growth. Maybe you want to go and overweight dividend-paying stocks or small companies. That’s reallocation.

Rebalancing is when you take that mix of assets and take a look at those percentages, the goals, and realize that because of the correction or the bear market, they’re out of whack. What do you do? You just simply sell high, buy low to get you back into the original allocation that you had intended for your long-term financial goals.

Reallocating, rebalance, and then replacing.

Replacing is that idea of taking a look at the managers that you may have chosen in each of the investment classes that you have and keeping an eye and make sure that they are doing what you want them to do. Now, let’s go back to the beginning. Let’s go back to the purpose of this podcast.

We’re in a correction. We’re in a bear market. We’re in a recession. What do you do with your investment portfolio? Of the three R’s, I’m going to tell you right now, I only want you to do one of them. Now is not the time to be tinkering with your allocation.

It’s human nature to want to sell the things that are losing money, reduce the amount that you have allocated in that, and move more money into safe areas. Don’t do it. Please don’t reallocate.

I would also say it may not be the time to replace your managers. Sometimes, managers are going to underperform for a period of time. Wait for the full cycle to go all the way around, and then do an evaluation, and determine whether or not you’re doing what you would hope that they would do for you.

This is absolutely the time to rebalance though. Of the three R’s, that second one, rebalance, absolutely do it. Now, do you have to wait until the end of the year to rebalance? Absolutely not. Do it now.

Can you only do it once? No, you can do it as often as you want. Just be aware of short-term versus long-term capital gains. I would encourage you to only rebalance those assets, especially in non-retirement accounts, where you’re going to get the long-term capital gains treatment.

Rebalancing – it’s a home run because you don’t have to think about it. Sometimes when we talk about this stuff, we, as human beings, have these biases. We tend to overthink these things, “I think this is going to happen,” and then adjust our portfolios accordingly. I’m going to tell you right now, stop thinking.

You want to have the discipline. You want to have those strategies laid out, hopefully well in advance, so that you can execute on them. Ignore that noise that’s going on in the back of your head because nobody knows for sure what’s really going to happen. We talked about the portfolio. What about cash?

Once you know that you’ve allocated, and you’ve got plenty in your emergency fund; hopefully you have a home equity line of credit as a backup.

If you have extra cash, research has shown time and time again that the people that have the courage and the discipline to go ahead and invest when everybody else is selling, those are the people that tend to do much better over time.

If you do have extra cash, go ahead, start to invest it. Do you invest it all at once, or do you do a little bit at a time? Human nature, you’re going to want to do a little bit at a time. My suggestion is the markets are already down, plunk it. Again, for those of you who have a financial advisor, talk to your financial advisor about that.

With that in mind, for those of you who are doing IRA contributions, don’t wait until April. Get that invested while the market is down. Whether it be Roth, or regular, or after-tax, get that money invested.

If you’re considering doing a Roth conversion, that can be powerful, taking money out of pre-tax retirement accounts and converting them into Roth IRAs that will grow tax-free.

I got to tell you guys, there is no better time to do that than when markets are down. You get a much bigger bang for your buck. Again, nobody knows what’s going to happen. It’s even more powerful when you do it when valuations are low.

In addition to that, for those of you who are looking at doing some estate planning, again, a great time to begin to think about and execute on the strategies that really favor low valuations, low-interest rates.

A few examples of those would be charitable lead annuity trusts. It’s a wonderful technique for those of you who might be charitably inclined. It sounds bizarre, but intentionally defective grantor trust, again, I know it’s a lot of Greek for most of you out there.

In the right situation, home run, all the way. Walk off home run. They are especially powerful when valuations are low.

In addition, private annuities that deal with a family member or intrafamily loans when interest rates are low. There’s a lot of things that can be done and a lot of different ways to turn this lemon, which is a bear market or a correction and a recession, into lemonade.

Thank you so much for joining me today. I hope this has been helpful. Remember, we do this hopefully to provide some value to all of you who take the time to listen to the AskPattiBrennan series. To me, we are much more than just a tagline. We really do provide wealth management with wisdom and care.

The goal of these podcasts is to give you a few ideas to either take to your advisor or to give us a call. Go to our website. Ask us a question. Ask for a phone call. We are here to help you in any way that we can. Thank you so much for joining me today. I’m Patti Brennan. I hope you have a fantastic day. Take care.

Ep100: Special Re-Broadcast of Hartford Funds’ Human-Centric Investing Podcast – Make Financial Planning a Family Affair

About This Episode

Patti was recently asked to be a guest on Hartford Funds’ Human – Centric Investing Podcast. Together, with hosts John Diehl and Julie Genjac, she discussed the importance of connecting with adult children of clients. Patti stresses the power of being a resource for the entire family – not just the client parents. Engaging young adults as they begin their professional careers sets them up for success, in a way that parents sometimes are unable to do. While it is not uncommon for client parents to reach out to Patti and her team, Patti stresses that what is most important is that the conversation is had when the adult children are embarking on careers, and they are then able to start making meaningful decisions about their financial futures and educated decisions about contributions to their retirement accounts. Listen today to find out what those tips for success are!

Julie Genjac: John, today we had the pleasure of speaking with Patti Brennan about the importance or the power in connecting and educating with clients’ adult children.

Maybe they’re in high school or in college and facing some life decisions as it pertains to things like leasing or buying a car, or paying off a student loan, or maybe even engaging in their first 401(k) for their first job.

I know that I remember that day fondly. I brought home the new hire paperwork for my first job and sat down with my parents and stared at the blank page and said, “What should I fill in here?” I know I certainly would have valued having a financial professional that was willing to educate me at that point and helped me understand the power of planning even at a very young age.

John Diehl: It’s funny, Julie, my eldest daughter just acquired her first car payment. The car came along with it, but it took me back. It took me back in my life, to that first new car that I bought.

I remember having to have my mom co-sign for it, walking out the door, driving home thinking I just made the biggest mistake in my life, because I’m spending 25 percent of my take-home pay on a monthly basis.

I think these conversations are important. But it’s an interesting conversation for financial professionals to have about how they handle these situations.

Julie: I couldn’t agree more. John, let’s go talk to Patti.

John: Hi, I’m John.

Julie: I’m Julie.

John: We’re the hosts of the “Hartford Funds Human-Centric Investing Podcast.”

Julie: Every other week, we’re talking with inspiring thought leaders to hear their best ideas for how you can transform your relationships with your clients.

John: Let’s go.

Today we’re pleased to welcome Patti Brennan to the podcast.

Patti is a graduate of Georgetown University. She’s a certified financial planner, and she’s CEO of Key Financial Inc. Patti not only provides comprehensive wealth management, she and her team create integrated strategies that are unique for each client.

Patti is not just a number cruncher. She has the ability to see the impact of small details in the big picture. She’s known for communicating complex financial concepts in simple meaningful terms. Patti is consistently ranked year after year as one of America’s top financial advisors.

As a wife, a mother of four children, Patti has learned to balance the most important job in the world with the needs of a growing company. Her husband Ed also owns a business so their children have a real understanding what it’s to be entrepreneurs. Patti is a believer in giving back and currently resides on the boards of the YMCA of Greater Brandywine and Penn Medicine/Chester County Hospital.

Patti has served her community over the years in a variety of ways including the Chester County Economic Development Council, South Eastern Pennsylvania’s Development Council, and the Royal Alliance Advisory board, as a former chairwoman.

Her favorite positions included her work at St. Agnes, as a kindergarten CCD teacher and field hockey, and lacrosse coach. Patti, what did you ever do in your spare time?

Patti Brennan: No such thing when you’re in this business, right?

John: That’s right.

Julie: Thank you, Patti, so much for being here with us today. We’re excited to dive into the multi-generational family topic.

What I mean by that is, I know Patti, you’ve shared with us that many of your clients have said through the years, “Gosh, Patti, I wish I had met you when I was younger. I wish I had sat down with you 20 years ago.”

I think oftentimes, we can all agree that our clients are looking for someone to counsel their children that maybe are still in high school or in college. They’re making some major life decisions. Are trying to determine things like, “Do I buy or lease a car?” Or, “Do I pay off that student loan?”

Patti, I know you’ve done such an incredible job of when you take on a client, you take on their entire family as a client. We’re excited to learn from you today, some techniques and ideas of how our financial professionals that are listening can engage with the entire family and truly be that valued resource to especially the young adults.

Thank you again for being here. To start, can we ask you, how do you engage in this conversation with your clients in terms of bringing the whole family into the financial discussion?

Patti: It’s a great question. Typically in these meetings, one of the most important things that I want to learn about, are the finance family dynamics, and I usually bring up my own family. I’m a mother of four, each one of my children is unique in their own way.

Then I go into I’ve had a lot of many other families, parents, things of that nature, who have basically said and I’ll always paraphrase it. I think this is so important. I wish we had met and started this when we were younger.

I think about my own children, but they don’t want to listen to me. They don’t want to listen to us. At that point, and I continue to tell this story, I just want you to know that if the kids ever have a question, whether it be they’re starting their first job, and they’ve got these benefits, these 401(k)s, feel free to have them give us a call.

I will sit down with them. A member of my team will sit down with them. We’ll go over all of their benefits their 401(k)s and teach them some of the fundamentals that none of us got when we were in high school or college. We have an internship program I think I’ve told you guys about.

It’s an 11-week internship program for juniors in college. We only have four kids. I call it the missing semester because this is the stuff that the kids aren’t learning in college, and it’s basic stuff. What is a 401(k)? What’s a 403(b)? What’s a mutual fund? What’s this ETF thing? Talking about the fundamentals.

Now, some of the kids know it, and some of them don’t. Honestly, we like to have a diverse pool of interns, just so that they can get an understanding that this is not common knowledge.

I talk about those things, we bring up the subject, and a lot of times the parents will say, “Wow, will you really do that?” Of course, we will. It doesn’t take long. It’s an hour of our time. We’ve even met with those same college graduates and worked on their resumes with them, taught them interviewing skills. We do mock interviews.

Anybody listening to this podcast today, you can do that too. There is one thing when we help our clients, it is quite another when we help their children.

John: Patti, I have one major concern and that is if I sent my kids to your internship, I wouldn’t get that joy that every parent gets to see, which is when your child gets their first real paycheck, and they go, “Where did all the money go?” Taxes.

Patti: You are so right. You know what John, I can totally relate. In fact, my son is moving out of the house. He just literally yesterday had to put his deposit down for his new apartment. He came home. He’s moaning and groaning. It’s like, “Oh, my gosh, that they took a third of my savings. It’s taken me a year to get that money saved and a third of it just evaporated into thin air.”

I didn’t say a word I said, “Yeah, that’s the pits.” Of course, the mom and me is thinking, “Yeah, welcome to the real world.”

They don’t want to hear about the real world. Sometimes they have to experience it. I think what we can probably do is just make it so it’s not such a hard landing.

John: Patti, from an advisor standpoint, I’ll be the skeptic on the podcast today, which what would you say to the advisor that says, “Hey, look from time to time I help kids if the clients say, ‘Hey, can you talk to him?’ But really I don’t get paid. They don’t have any assets. They don’t eat. Do I really have the time to spend with them?”

When you look at your practice, and this is something it sounds like you do pretty regularly, how do you think about that aspect of serving the client? Let’s be right upfront. The question is, how do you get paid for what you’re doing for them?

Patti: You don’t and that’s got to be OK. The way that you are getting paid is you’ve got this amazing annuity and that is a client for life. This is one of those things you do not for the money but because of the bond that you are creating with the parents, and also with the kids.

How many studies have we all read about the number of children who when they inherit the money, they do not stay with their parent’s advisor? It’s because they don’t know who that person is. They only work with old people. That’s not what we’re building here.

Some of the work that we do, guess what, we’re not going to get paid. You got to be OK with it. That’s my feeling about it. We do just fine in this industry, thank you. I will also say from a practical perspective, you’re not taking these people on as clients.

You’re spending an hour giving them tips, ideas, everybody is listening today, you can come up with some tips and things that are practical. Things to get these kids started on the right foot. A few lessons and tidbits. We don’t even think about it anymore. It’s these 10 things, this is what you talk about and send the kids on their way.

Julie: Patti, obviously as the leader of your team. I’m sure your time is spread thin and obviously, you have many competing priorities. How have you engaged your broader team in order to have these conversations? Is that a part of your process?

Have you assigned roles and responsibilities to others, in order to be able to engage in these deeper conversations with the next generation?

Patti: For me, I can just say it’s been much more informal. There was a point a few years ago, where we were thinking geez, this is the future, we should be engaging these young adults, these young families.

I really, honestly pushed back on that, because it was not practical. We could end up with hundreds, if not a thousand or more young families. Then the math doesn’t work. It’s not a practical business model, from my perspective.

Now, having said that, for existing clients taking care of their children. This is probably one of the greatest training modules we have. That is an example, just to give you a feel for my business model.

You’ve got me. I am the advisor but underneath me, I’ve got a bank of 40-year-olds who have been with me for 10 to 15 years. Underneath them, they are mentoring the Bank of 30-year-olds.

For these young families, we are mentoring the 30-year-olds and saying, “OK, this is your baby.” This is how you’re going to learn how to talk to a client. These are the ways that you can present and let them develop their own style.

We’ll give them the 10 bullet points that should be covered in the meeting, and let them run with it. I found that that’s not the most effective, so I also like to have someone who might be more senior.

For example, I just finished a meeting earlier today, someone else ran the meeting, but I was there. Fortunately, it was a phone call. I don’t really like to be in the room personally, because if I’m in the room, clients will always look at me instead of the other person that should be leading the meeting.

For phone calls, or even Zoom appointments. I will turn off my camera and turn off and mute my microphone and just listen in so that I can provide some feedback after the meeting to that young advisor.

John: Patti, one question I have – so we glossed over a few of the topics. If I were to ask you to backtrack a little and just list out for me some of the top topics that you get requested to talk to these young people on. If you were to just throw them out there off the top of your head, what would they be?

Patti: The things that come to my mind are to encourage the kids to if it’s practical to live at home. For a year or so. Get used to the new job and get used to maybe saving money. Pretend, for example, that they are paying rent, and instead of paying rent, just start to stash that in that savings account.

That’s how Jack was able to accrue, what he was able to accrue. He just put it in a separate account. That also gets them in the habit of saving.

Another thing that to me is a line in the sand is teaching them about the 401(k) and explaining to them that it’s going to be different than their parents and their grandparent’s pensions are going away.

10 percent is the line in the sand. No ifs, ands, or buts. They’ve got to sign up as soon as possible and put 10 percent of their income into the Roth into the 401k. Then I do go into the difference between a Roth 401(k) and a regular 401(k).

Depending on the person in this and what they had studied and what their goals and objectives are. I’ll probably recommend starting out with a Roth 401(k).

There’s a little bit of sneaky logic to that also. Just as lifestyle inflation can impact all of us, it really impacts the kids. Thirsty Thursdays can turn into fanatic Fridays and saturated Saturdays.

They won’t, they’re not saving any money. It’s a sneaky way of making them pay more taxes now. Reducing their cash flow their net cash flow after 401(k) after taxes. Giving them a little bit less money to live on, and helping them to make again better lifestyle choices.

As part of our internship program, they do a mock financial plan for us, and they have to justify recommendations. Basically, it’s for their first five years after they graduate from college.

What was interesting this summer is that this group decided that for Lauren, who was the one who was graduating and getting the job, but she couldn’t afford to get an apartment by herself that she was going to have to get a roommate.

Between rent, a car payment, car insurance, all the things that do occur, that she couldn’t afford as much as she wanted to, she couldn’t afford to live alone. That was a good choice.

We talk about if they’re doing their 10 percent, and if they can do 12, then do 12. For example, saving for a down payment on a home is an important thing that they’d like to do. Get them started on dollar-cost averaging and automatically take it out of the account, so they don’t have to think about it, or they don’t get to think about it.

$25 a month, into a mutual fund every month. Just get in the habit of saving money because when they start doing that, it’s going to feel uncomfortable when they have to stop.

Again, that’s part of that education and building credit. The importance of their FICO scores, because when they’re interviewing for their first job, or their second job, or their third job. If they have a bad FICO score, they’re not going to get that wonderful opportunity. The importance of their credit rating cannot be emphasized enough.

We had a young lady who didn’t realize that she had a student loan, and for a couple of years wasn’t making payments on the student loan. She couldn’t understand why her FICO score was so low. She paid her rent on time and she paid her car payment. She just didn’t realize it.

It’s important, it’s really key, to make sure that they understand the importance of their credit rating. It’s those kinds of topics that, mom and dad may have talked about with them over their high school years and college years. This is when it really matters.

Julie: Patti, I think that’s so spot on and you’re right. Something like credit, it’s a bit intangible. We don’t necessarily hold it, see it, or do anything with it. It’s one of those things that can close doors in our life before we even realize that if we don’t cultivate it and treat it carefully.

I’m curious just from a scalability standpoint, obviously, you covered a lot of different topics and all such crucial foundational pieces when one is starting out in life and sort of building their future retirement plan.

Have you compiled as a team, various tools, whether they’re articles, calculators, or resources that makes this process a little bit more leverageable for your team as opposed to creating a new sort of one-off resources conversation to conversation?

Patti: Julie it’s a good question. The answer is no. I think it’s a great idea though. It’s a great idea to just say that when this happens, this is what we do. Ironically, we have that in every other area of this business. Even from the very beginning, everything is work flowed, everything is automated.

From the moment that first phone call comes in, this is what happens next. This is what happens second, third, fourth. I am not even involved in it and yet somebody is writing a hand-written letter to that prospect.

These are the things that make our businesses scalable. This is not one area that I felt the need to scale but just like everything else, it can be. I would say that for us it hasn’t been to the point where we have to. I think maybe in a backdoor way it might be OK because, again, to me, it’s important for the families, it’s important for those kids.

For me, what we get out of it is tuition. It’s a great way for young people to feel more comfortable being in the conference room talking with clients. No matter how old they are. They’re not really going to know until they do it. I often use the metaphor of when our kids were 16 years old. Learning how to drive a car, there’s just so much they’re going to learn in the passenger seat.

Much as we dread it and I as the lead advisor, can say, “Oh my goodness, they’re meeting with a client. I hope it’s going to be OK.” You know what, it’s the same thing we got to give the keys to the car. It’s the only way they’re going to learn. As it relates to this topic I think it’s great way for them to learn with less to lose.

John: Patti, quick question for you and that is, a little bit off the path of education but, as you’re working with these young adults, do you ever utilize your network to help give them job ideas or interview opportunities?

I remember our friend Joe Coughlin saying, “If you can ever do anything for the child or the grandchild in terms of even a job interview or putting people together.” Is that crossing the line? Or is that something you would keep your eyes open for?

Patti: Oh absolutely. No question about it. I think just in general, anytime you can do that for anybody, you definitely want to do that. It could be a phone call, or it could be an email.

I can’t tell you this year alone, how many people I’ve reached out to on behalf of others. I know how much it meant to me and my kids when they were first starting out, and we are all in a wonderful position of influence, even if you don’t feel like you have the influence, you’d be surprised some of the people that you might know. Somebody might know somebody else that might know somebody else.

This is a true story, it’s kind of ironic I’m telling you, but have you ever heard the term, you’re nine people away from the Pope? Let me tell you something, there is a possibility that when we got to Italy in May, we just might meet the Pope. For exactly that same reason, you just never, ever know.

Any time you can help those kids, anytime you can help anybody, absolutely. Again, it doesn’t have anything to do with their money, isn’t that funny? That’s the kind of stuff that will keep clients for life. Honestly, it makes it personally rewarding for me as well, that’s a feel good. At the end of the day, we all do quite well.
Why are we doing this? Why am I still sitting in front of a computer late at night? Is it because I want to be sitting at a computer? No. It’s because this really is meaningful work that we get to do, and that’s how you do it.

Julie: Absolutely, Patti. Thank you so much for sharing those ideas on engaging with the next generation and I’m confident you have many very grateful parents as clients that so appreciate the guidance that you’ve given their children and obviously many very deep and long-standing relationships as a result of having these conversations so early in life.

Thank you for the guidance, the tips, and the tricks. We truly appreciate it and for your time today.

For those of you listening, Patti has a podcast of her own. It’s called the “Patti Brennan Show.” Wherever you see your podcast or seek out that information, be sure to visit her podcast, for more engaging and timely ideas for you to continue to deepen the relationships and grow your practice.

On behalf of all of us at Hartford Funds, thank you again, Patti, for being here with us today.

Patti: Thanks to both of you. Thanks to all of you for tuning in to this today. Thanks again.

Julie: Thanks for listening to the Hartford Funds Human-centric Investing Podcast. If you’d like to tune in for more episodes, don’t forget to subscribe wherever you get your podcast. Follow us on LinkedIn, Twitter, or YouTube.

John: If you’d like to be a guest and share your best ideas for transforming client relationships, email us at guestbooking@hartfordfunds.com. We’d love to hear from you.

Julie: Talk to you soon.

Ep99: Financial Decision-Making During Times of Crisis

About This Episode

Today’s episode is a special rebroadcast of an economic presentation Patti gave to the oldest and largest law firm in Delaware. During this presentation, Patti outlined specific financial strategies that young Associates, as well as seasoned Partners and Directors, should consider implementing during this very volatile economy. Drilling down to the various stages of life is also critical when making certain decisions because each stage also has its own particular financial challenges. Rising inflation, potential interest rate hikes, and the turbulent real estate market is also affecting financial decision-making. This episode is not just for attorneys – the issues discussed, and strategies offered, apply to any industry – especially during times of economic crisis.

Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan Show.” Whether you have $20 or 20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

I was recently asked to provide a presentation to the largest and oldest law firm in Delaware and talk about the different phases of life that people go through and the important decisions that we all have to make in those different seasons.

“How do we prioritize? What do we do first, second? What do we need to think about as we are making these choices? Then, what are we going to do?”

It occurred to me that, “Boy, you might like hearing about this, too….” There’s a lot going on. We’ve got Russia, Ukraine, rising interest rates, weakened inflation, retirement planning. This is a podcast where we bottle that up. If you have access to a computer, fire up your computer because there’s a lot of graphs that will help to laser into the concepts that I’m talking about.

Again, the whole goal here is to inform, educate, and give you actionable ideas that you can do. I’m so grateful you’re here. Thank you for joining me. I hope you really enjoy this as much as I enjoy doing it.

Sarah: Thanks. Everyone, please join me in welcoming Patti to our firm. Patti is the CEO of Key Financial Inc., in West Chester, Pennsylvania. As some brief background, after graduating from Georgetown University with a degree in nursing, Patti worked in oncology and as an ICU nurse before channeling her compassion for others to work as a financial planner.

Just over 30 years later, she has been named by “Forbes” as the number 1 female advisor in Pennsylvania and the number 13 female advisor in the nation. She’s also a Barron’s Hall of Fame advisor, which is a recognition held only by 150 men and women in the nation.

Today, Key Financial provides comprehensive financial and planning and portfolio management to clients and their families all over the country and manages under two million dollars of assets under management with the client retention rate of 99 percent.

With that brief introduction, I’ll pass it off to Patti for her presentation.

Patti:  Thank you so much, Sarah. It’s such an honor. By the way, I didn’t realize that you all are going to be getting CLE credits. That’s pretty nice. I had no idea.

Hopefully, you will find that it is worth that and more by the end of this meeting today. I think I will bring up my screen and start the screen sharing, and we’ll go from there.

Today, I want to focus this in terms of what is the best way, how do you prioritize financial decisions? There are so many things that are screaming for everybody’s limited resources. What do you do first? What do you do second?

We were talking offline. I don’t know about you all, but I find a lot of times you go to these things, and they tend to be wishy-washy. I hope by the end you’re going to have much more clarity and at least some things that you might want to consider.

First and foremost, we’re going to talk about the four stages of life. Depending on what season of life you’re in, the priorities are going to change as will what you do. Let’s first identify those 8,000 days per stage. We’ll talk a little bit about what’s happening today.

I was listening to Chairman Powell talking about the 50 basis points increase in interest rates that he just announced. What impact is that going to have, how is the economy doing, and, by the way, what, if anything, should you be doing about it?

Last but not least, we’re going to be talking about financial planning, financial advisers in general, and I really want to talk a little bit more about the difference between financial planning and wealth management. The latter, wealth management, it sounds really fancy. It almost sounds like a marketing term, but it’s not the same thing. Let’s hone in on that and differentiate the two.

Then, get your pencils ready to write some things down, because throughout the meeting today, and certainly at the end, I’m going to end with some action items to consider, some ideas that might make a difference in your lives.

We’ll also end with some Q&A. If you have any questions, write those down as well. I am all yours and I mean that from the bottom of my heart. This time is for you. Even if you have questions after the fact, send me an email. I’m happy to help.

Also thanks to Sarah. It’s a wonderful relationship that we have developed over time. Anything that you might need, just let me know.

As we go forward, again, four stages of life. Ironically, it’s about 8,000 days per phase. This is according to the work of Dr. Joseph Coughlin. He’s the director of MIT Age Lab. I happen to be on the board of the lab.

I’ve got to tell you guys, it is the coolest thing I get to do. We’re learning so much about longevity and the different decisions that we are making in these different phases of life.

The first phase is the learning phase. That’s from the ages of about 0 to 22. Now, we’re not giving economics lessons to these two-year-olds. But – there’s a lot, to be said, for piggy banks and simple math problems.

I was on a radio show a couple of years ago. It was a really interesting show. I didn’t listen to it before I did it. The premise of the show was our path in life is ultimately determined by the experiences we have from the ages of 8 to 14.

Think about that, if you’re a parent, in terms of, “Gee, what are we exposing our kids to?” This radio show was crazy. This host was asking me, “Tell me about your family? Did your mom work? Did your dad work? What did they do? What was your first job? Etc.”

It was very clear that being one of seven children, and the fact that my parents always talked about money, that I grew up financially insecure. The host then said, “Isn’t it any wonder that you became a financial planner?” What we expose our children to in those years, it may have more impact than you may even realize.

The learning phase, 0 to age 22. Then, we get into the growing phase. This phase is also 8,000 days, from the ages of about 22 to 44. There’s a lot going on here. College is in a person’s future. They’re graduating from college, maybe going to grad school. They’re growing, and a lot of important decisions are being made along the way.

For example, “Hey, you just graduated, TWIYO.” That’s my replacement for YOLO. The world is your oyster. You’re living independently, making money once and for all, loving life. You might have some of those student loans. What do you do with those? How do you pay them off? The interest rates are way too high? What are the options there?

Of course, you still want to go and have Thirsty Thursdays. That’s life. You want to keep on doing that stuff. Of course, for many people who are in partnership, it’s time for the ring. I don’t know about you guys. I don’t know if anybody is in my generation.

I was surprised that this new rule of thumb that one partner is supposed to spend three months of salary on a ring. That’s a lot of money. In any event, it’s a big-ticket item. How are you going to save for it?

Last but not least, retirement. Again, young professionals, “It is way off in the distance. I could care less. I’ll deal with that when I get closer to it. I’m having fun. YOLO, TWIYO, whatever.” I’m going to stop you right here. I’m going to say, “OK. Guys, we got a line in the sand. 11 percent. You just got to do it. Put 11 percent into your 401(k). Don’t even think about it, just do it.”

You might say, “Well, Patti, why 11 percent? Why not 10 or just going up to the matching contribution?” 11 percent has value in my mind because it’s one in one. You’re number one. You can borrow for almost anything. You cannot borrow for retirement. Think about yourself first. The second one is for a partner.

11 percent, line in the sand, just do it. Don’t think about it. You will thank me when you’re 50 years old, 55 years old, when maybe – here’s an idea – maybe you can look back and say or look at things and say, “Gosh, I’m working because I want to, not because I have to.”

It’s because of what you did in your 20s and early 30s that can make all the difference in your lives. I’m going to go through and give you not only that little nugget. I’m going to show you why. 11 percent into 401(k).

Now, you might say, “Well, I got this six-figure student loan from law school. How am I going to do 11 percent, then pay off that debt, etc.? We all know it’s a big issue. Also, keep in mind that President Biden would like to do some loan forgiveness on student loan debt. Time will tell what gets passed.

It’s not going to be $50,000 loan forgiveness, and whatever does get passed, it will probably be a taxable event to you. With student loans, I would say, continue to make your payments. Consider maybe refinancing with any one of these outside parties, if you will. I was surprised. We did some research on this.

These are specifically for law school loans, and they are specifically refinancing rates. For example, with Sallie Mae and a couple of these, you’re still possibly going to be able to qualify for about three and a half percent fixed. Earnest is down to 3.24 percent fixed.

If your interest rate is higher than that, you may want to give these companies a call and see if you can possibly consolidate, refinance, etc. You know that, as people evolve in that phase, a lot of stuff is going on. You might still have that student loan debt.

You might be thinking, “Oh, I want to save for a down payment on a home. How much should we buy? How much should I buy? What can I afford? Is now the time to do it? Housing’s gone nuts, interest rates are now approaching six percent. Is this the time?”

Then of course, if you’re married and you’re beginning to start a family, there is the childcare. That’s a pretty big nut for a lot of young family. Childcare expenses are going to pop up. You see what’s happening. As we get older, there are more and more things that are screaming for your attention and your resources.

The other thing is your career. Your career trajectory. I believe that childcare, for example, is a great investment in your career. The reason for that is, I know I’ve got four kids. I can tell you when I had good childcare, I was focused at work. I could get things done. I wasn’t worried about the kids.

When we didn’t have great childcare, I was running back and forth to the house. I was worried about the kids. I wasn’t doing quite the job I could have been doing. Last, but not least, some people are already thinking about saving for college education for their children, and retirement, of course. That line is still there. Always 11 percent.

Lots of different things are evolving as we get older. I’m going to stop here and let’s talk about a few fundamentals that you may already know. If you know it, great. If you don’t, it’s important we hone in on this stuff. Hopefully, I’m going to explain it in a way that makes it easy to understand.

First and foremost, it’s the thing of compounded returns. Why did Einstein called compounding the eighth wonder of the world? It’s because it’s a big deal, but it doesn’t work the way people think it does. We’re going to hone in on that. There’s more of a hockey stick phenomenon. I want you to remember this graphic of the dominos.

These dominos, it’s interesting. I think it was Gary Keller in his book, “The ONE Thing.” He said, “One small action, tapping that first domino creates an impact. Clap, clap, clap, clap, clap, clap, clap. All the dominoes go down.” That’s the way your financial decisions can work as well. There is always a domino effect.

For example, you put more money into your 401(k), it saves taxes. When you save taxes, you’ve got increased cash flow. You have increased cash flow. You can save for other things. You can get quality childcare. There is a domino effect in everything that we do. There’s this thing called taxes.

What’s the impact of taxes on that domino effect, and the ability to compound wealth over time? This is the rule of 72. Quick and easy way for you to figure out how many years is it going to take for you to double your money? If you’re earning six percent into 72, every 12 years, your money will double.

What you see here on this graph is, money doubling. It’s showing an eight percent rate of return and money doubling every eight and a half. Actually, it’s nine and a half years. What you see there is, it looks very linear. That’s not the way it works. The way it works is this. You got $100,000. In nine and a half years, you got $200,000.

It doubled. How long does it take to make the next $100,000? Not nearly as long. Closer to five years. The next 100, the next 100. Look at that. In fact, it’s so differently, you can see here. Your investment was $100,000. The longer you have that in there, the quicker it accrues the next $100,000.

Again, your money is the first 100. What happens is, your money, the earnings on your money is also making money. That’s compounding. It’s awesome. How about a year and a half to make $100,000 over this period of time? For most of you, especially when you’re starting out, it’s hard to keep the hope alive.

You’re putting the money away, you’re putting the money away, and it doesn’t feel like it’s growing to be millions of dollars. I’m going to tell you, keep doing it. Do it, do it, do it. It’s like that hockey stick. It doesn’t feel like much, it doesn’t feel like much. Beginning to accrue, beginning to accrue.

Then all of a sudden, boom, it takes off. That’s the way that compounding works. Oops, I’m going to go back here. I’m going to do a little game with you guys. I want you to think about this. I want you to mentally figure out a number. Let’s say that you have a penny, and the penny is going to double every day for 30 days.

At the end of 30 days, how much money do you have at the end of the term? A penny doubles every day, for 30 days. What do you have after a month? I want you to lock in a number. Is it 50,000? Is it 200,000? Hopefully, you guys are all sitting down, because you need to be sitting down.

At the end of the 30th day, you would have $5.3 million in that account. You’re going to hear me say this a million times. First of all, there is no such thing that will double every day. Also, anytime you’re talking about investments- past history is no guarantee of what you can expect in the future.

I’m talking conceptually here. What is it about compounded returns? What is it about that hockey stick phenomenon? It’s important that we get this. It’s slow. See this. At the end of 10 days, we’ve got five bucks. Doesn’t feel like much. How in the world does it go from five dollars to five million in the next 20 days?

It’s again, because of the compounded returns. Most of the money is made in the last three days. Day 27, it was $671,000, and in day 30 it was $5.3 million. That’s nuts. That’s a double. That’s compounded returns. That, my friends, is the eighth wonder of the world.

Now, here’s the thing. This is the mic-drop moment. You had to have the penny and save it on day one to get that to work. The sooner you start, the better off you’ll be. Remember those dominoes? They were all the same size. That’s great, but that’s not the way this stuff works.

As you get on in the years, the dominoes get bigger and bigger and bigger. You’ve got that same one gesture, that push of the first domino, but over time, they get bigger and bigger and bigger. That’s the way I want you to think about this. It’s not like you’re sacrificing other things. You are creating sustainable wealth for ourselves over time.

Now, all that’s fine and dandy. OK, so I’m going to go back because I’m going to take this thing one step further. Same penny, same 30 days, same double. Except this time, you’re in America, sorry about this. You got to pay taxes.

We’re going to apply a 30 percent tax rate to the account. That’s ordinary income taxes. At the end of 30 days, how much money do you have? Same double, same everything.

Patti:  Here we go. Net of taxes at that same everything, you end up with $48,000. Now you can all get up off the floor. I get it. It sounds crazy. Get out your Excel spreadsheets, I know you’ve got…Some of you are Excel wizards. Do it yourselves. It’s true.

Taxes are a very big deal. Anytime you can save money on taxes today, you usually want to do it. There are some exceptions. We’ll go through some of those exceptions depending on the different options you have.

Stage three. Stage three is the maturing phase. This is the phase from, say, age 44 to 66. Again, it’s that 22 years, give or take. I’m going to say to all of you and some of you that are in it can attest to this. This is the most expensive season in a person’s life.

This is the time when the kids are getting older and all of a sudden, the toys at Walmart are now iPads and fancy computers, their cell phones. They’re going to high school and college. These are big-ticket items. It’s an expensive season of life.

Unfortunately, a lot of Americans get to this period of time and they’re like, “Oh, my gosh. I’m 50 years old. I guess I better start saving for retirement.” Now you’ve got to really make up for lost time. It’s a really important phase of life and an expensive phase of life. Again, lots of things screaming for your money.

We’ve got to prioritize and understand what’s most important for you. It’s not going to be the same for the person who you may be in court with or who you may work with. Everybody is different. It comes down to what’s important to you about your money, your family, your life.

Last but not least, is the exploring stage. This is typically referred to as retirement. Dr. Joe also has broken this down into four phases. Boy, this is a really interesting area. I’ll tell you that we are living longer. He wrote a book called “The Longevity Economy.” It’s fascinating.

What we’re doing in the lab is looking at the different ways of improving quality of life holistically. Not just financially, but in all areas during those different phases. As cognitive decline begins to set in, what are you going to do? What’s plan B? Who can help you, etc.? That’s the last stage.

Let’s now cap it there. We’ve gone through the different life cycles. How do you invest? What do we do? First question is always, where are you now? That, my friends, is the most important question you’re going to ask or I’m going to ask, is in what phase of life, what’s important?

We’re going to ask the question, where are we now? We all know it’s not pretty. We’ve got the Russia Ukraine conflict. We’ve got wicked inflation, 8.5 percent inflation, rising interest rates as a result. A housing market that is off the charts.

We’ve got this thing in November called midterm elections. We all know what that can create. Not that politics necessarily impact the global economy or even the US economy. With all the rhetoric and all of the finger-pointing, people get nervous. When people get nervous, feel uncertain, what do they do? They move to cash. Don’t be surprised that there’s a lot of continuing volatility.

Eventually, it will all be baked in. Hopefully, things will recover. This was as of the 20th. It’s gotten worse since this time. The S&P is now down 13 percent. You can see here, even at this time, this is a weird environment.

You have to go back to 1976 to have a quarter, a period of time, where stocks and bonds are both down about the same amount. The old 60/40 isn’t working. In fact, I’m going to tell you all, there is not much that is working. Even cash is not working because of inflation. It’s a very unusual and difficult environment to wade through.

I would just say to all of you, this is not advice. I can’t give advice today. It’s OK to feel the fear. Don’t do anything. This is not the time to do anything. These times occur. You can see here on this chart you have periods of time, even in a secular bull market, where the market goes down a lot. Then it goes down, and then it goes up, etc.

Just hang tight and if you have an advisor, talk to your advisor. What is the implication for your plans for the things that are important to you? That’s all that matters.

Again, Russia-Ukraine. Let’s talk about inflation because inflation is wicked. It’s eight and a half percent core. This is interesting. This is what is very different. Food and energy are the things that are making inflation, making it hurt for every American.

When you think about the Federal Reserve, and this is a sidebar, the Federal Reserve’s got a dual mandate. Low unemployment, two percent inflation rate. That’s their target, but 100 percent of Americans feel inflation.

Fortunately, not 100 percent of Americans feel unemployment. The Fed, I believe, is going to get aggressive raising interest rates and trying to get rid of this excess in the economy. Some of it is overblown probably because of the trade deficit. Some of it is because of the supply chain issues. That’s probably going to be stickier because of China and because of the war. Time will tell.

I believe that it will eventually go down. The Federal Reserve knows how to deal with inflation. Is it going to put us into a recession? I can just give you statistics. There has never been a time when the Fed had to cut inflation rate by more than two and a half percent when we did not end up in a recession.

It’s OK. It’s part of the business cycle. No big deal. Don’t change your plans for something that hopefully, is temporary. It happens. It’s all part of the cycle.

Now, what is the real problem with inflation? Sometimes I’ll meet with somebody, and they’ll say, “I’ve got this money in the bank. I’m feeling very safe. I’m feeling really secure. I’m just going to leave it there.” That’s totally fine.

Always it’s their money, but then I have to ask them, “When you think about this time last year, you had $100,000 this time last year…I don’t know how to tell you this, but today it’s got a purchasing power of about 92,000. You’ve lost eight percent because of inflation.” Now, here’s the problem with inflation. It’s sticky. It’s not volatile. It doesn’t go up and down, typically.

Yes, it might go down, but those prices stayed. It’s not like whoever manages the salaries and compensation gave you a nice raise for cost of living increase and then your boss is going to come to you and say, “We’re going to cut that raise back down again.” No, you’re going to keep that same base. Inflation is very sticky. Wage inflation, in particular, tends to be a laggard.

That’s the most difficult thing to combat. Again, just keep that in mind. There are lots of things I hope that you remember. This is one of them. Please, don’t confuse stable with safe. Bank accounts, money market, they’re stable. In this case, you got about $70 of interest, not even one percent on your bank accounts.

Inflation, look at that, you needed to get 66.4 over the term of this chart. Just keep that in mind as you make your decisions. Now, I’m going to pour some salt in the wound. Just what you wanted.

I’m pouring salt in the wound because now I’m going to take that dynamic and put somebody on withdrawal. Let’s say that we have Mary. She’s a widow. Let’s say that she’s 50 years old and has a million dollars.

Let’s further assume that she’s getting seven percent rate of return and that we’re in a six percent inflationary environment. Hey, guess what, she’s beating inflation. She’s doing great. We can apply the rule of 72, and use that to determine the half-life of your money.

For example, again, if inflation is six percent. Six divided into 72, every 12 years, the purchasing power of Mary’s capital will half and so will her income. Initially, she is doing great. She’s got what she needs. She only needs about $50,000 from this money to live. She’s got 70 coming in, and she’s feeling very secure.

Living life, as my kids would say, living large. What happens is, over time, the value of that money halves and so does the income. Age 74, it halves again. In this example, if she’s unfortunate enough to live to age 86, her million dollars spends like $125,000, and her income spends like $8,750 a year.

That is the tragedy of inflation. People run out of money. People by the way with money, run out of money. There’s a solution to this. We’re not going to get into solving all of the problems. When do you think someone like me gets a phone call? I will tell you that I usually get a phone call probably around age 60, right around here.

It always goes like this, “Patti, I feel like my income isn’t going as far as it used to, and I’m beginning to dip into my principal.” Mary has to now also. $35,000 doesn’t cut it. What’s interesting about that is that in spite of what you may have read in terms of this magic four percent rule. Take four percent out of a pool of capital and you’ll be fine.

The problem is, people don’t pull out the same amount and increase it every year for inflation. That’s not the way life works. They may start out with the same amount, and then it gets chunky. She might start out for example with a certain amount and call it $6,000 a month, and then we’ll get a breakthrough call.

“My bank account’s getting a little low. Can you send me $5,000?” Or, a couple months go by, “Send me another 10.” It’s insidious. Think about it this way. Inflation, it’s like hypertension. You may not know you have it, but it can kill you. Same thing here. Just be aware. That’s why it’s such a big deal.

Last but not least, we got the midterm elections coming up. Who knows what’s going to happen? Who knows our reaction to what is going to happen? We saw the Roe versus Wade controversy and the release of that opinion. It’s an interesting time in our country. Time to reflect.

Here’s the deal, because I am very optimistic as a person. I’m making you aware of things to be aware of, is not all bad news. Look at this chart. This is pretty cool. This thing called the wealth effect is another important concept I want you all to get. Everyone has been getting wealthier.

The top one percent saw their net worth increase by 29 percent. You can see the next nine percent, etc. Look at the bottom 50 percent. The bottom 50 percent of Americans increase their net worth by 74 percent. It’s not all bad news. Again, we got to keep it real.

When you look at the relative value, and the relative effect of that, the top one percent of Americans own…If you think about household net worth of being about $150 trillion, which is what it is. $50 trillion is owned just by the top one percent. The next nine percent owns the next $50 trillion.

It is focused on that top 10 percent. The bottom 50 percent still only has about four percent of the overall household net worth. We do have quite a ways to go.

The other thing I want to hone in on is something that we’ve been learning about more and more. It’s not getting any headlines.

You’re hearing it here first, maybe. Basically, when you compare household and nonprofit net worth as a percentage of GDP, this is an important statistic for anybody. By the way, I apologize in advance for the econ lesson. Believe me, we’re going to be done in a second.

This is important because, people in my industry talk, “Oh, think long-term, think long-term.” OK, fine and dandy. The fact of the matter is, nobody lives in the long-term, we’re living today and this is not fun. Why long-term? Why is Patti Brennan optimistic? Here’s one of the reasons.

Household net worth as a percentage of GDP is now over 600 percent. Going back to the 1950s, we’ve never been close to that. America, we Americans, we are wealthy. We dwarf any other nation. They’re not even close. It’s also important when you look at the households, forget nonprofits and forget by the way, the government.

Remember, that’s not the net worth of America, that’s household to nonprofits. We’ve got government assets also. The government is fine too. You think about it, forget the White House, it’s worth whatever it is. Then I say all of this, because we are a nation of the people, by the people, for the people.

We are collectively owning the government assets as well. Look at this chart. Look at the GDP versus the household net worth and look at what has happened. I learned this from Tom Lee from Fundstrat. This is a very big deal. In fact, according to Tom, we almost don’t even need to focus on GDP anymore.

We Americans are so wealthy, that the wealth itself is called the wealth effect. Remember the earnings on the earnings themselves are sufficient. He refers to us as being. We could be the bankers of the rest of the world. This is an economic reality that is occurring and it continues.

It has been going on since the 1990s, and is getting stronger and stronger. Back to practical stuff. For those of you who are doing your own investing, this is important. How and when your returns are earned, it’s important. Here’s an example of $100,000 invested two ways. Investment A goes up 30. Down 10, back up 10.

The next investment 10, 10, and 10. Both are at 10 percent average annual return. Everybody focuses on performance, performance, forget performance. What do you want for your outcome? At the end of the third year, Investment A, a 128,000. Investment B, 133. The outcome is most important. How that compounded returns get to work.

During your accumulation years, OK, you can see this is…Call it Tom and George. Tom is red or orange. George is yellow. They’ve got different portfolios. Seven percent average annual return. It’s just earned at different times.

Now, if they just hold on and stay with the program, they both end up at the same spot. I’m going to tell all of you, this is not reality because I got to tell you, right around here, Tom is saying, “Wait a minute, look, I’m not doing nearly as well as George is.” “I’m selling this and I’m moving into this.”

Then he loses all of that positive growth. This is average returns, fine and dandy, but boy, for those of you who may be approaching retirement, sequence of return becomes a much bigger deal. Portfolio C, again, this person ran out of money. Portfolio A, they ended up with significant working capital.

Same rate of return, very different outcome. They both pulled out the same amount of money in the same inflation area environment. It was the way the money was invested. Kind of said differently, it’s dollar-cost averaging.

This is another example of 100 percent in the stock market over the last 20 years. Some markets done really well over the last 20 years. Yet, this person ended up with $17,000 on a $100,000 whereas the person in a well-balanced portfolio ended up with almost as much as they started with.

They were using it the entire time. Living life, having their increases, doing fine. How you invest is actually important, but it’s important relative to what’s important to you.

Market declines, I’m going to say this. When you invest in any kind of a market especially the US market is what’s reflected here, please go in understanding, knowing…Again, I don’t know anything. I can’t guarantee anything. Past history is no guarantee. Go into every year assuming that at some point, you’re going to lose 14 percent on the equities.

Historically, that’s what it’s averaged. That’s what it’s done. It goes down. Guess what? That’s where we are right now. It goes down. In many of these years, it ended up doing just fine. It recovered. If you go in with that understanding, maybe you won’t be as worried when it happens.

Again, we all talk about why stay the course? This trite stuff is for the birds as far as I’m concerned, but it’s true. Staying the course is important. As you can see here, if you missed 25 of the best trading days, you ended up with a million dollars. If you hung tight, $4.6 million. Missing the 25 days.

Now, here’s the problem with this whole dynamic. The best days typically occur very soon after the worst days. For example, in 21 of the 25 periods of time, the worst times, the best day occurred within a month. I would say don’t do the thing that you want to do. I get it. We feel it, too. Don’t act on it.

Here, this is not normal. This is normal. Let me begin to wind this down. We’ve talked about a lot of concepts, market volatility, decisions during different phases of life. Depending on what season of life you’re in, let’s talk about some action items. Some things that you might want to think about.

First, we hear a lot about active versus passive. In English, all that means is do you want to invest in an index fund or do you want to have an active manager? Whether it be a mutual fund or someone else. Buying and selling stocks based on their research, etc. That’s a big debate.

I think that there are times when passive is the way to go because it’s such low cost. Active managers don’t necessarily outperform the passive index. Hey, if you can’t beat them, join them. There are pockets of different markets where an active approach may be better.

For those of you who may be investing in single stocks, I would say at the end of this, you’ll see my email. I am happy to send you some studies. We do not. I’ve done it. I have done it. I’m going to tell you honestly because that’s the way I’ll always be with you. It’s hard to do it.

We live and breathe this stuff, and I am not going to look you in the eyes and tell you that we can outperform by picking 10 or 20 stocks. It’s hard to do. The research suggests don’t even bother.

Then, ask yourself as you look at your overall asset allocation, just ask yourself the question because, again, if you’ve got a 401(k) and you’ve got 15 different investments to choose from, it is human nature to say, “Wow, this one did well. This one stunk. This one did OK. I’m going to do the one that did well. I might diversify.”

We want to be diversified, etc., but just don’t pick your investments based on how they did historically. I’m going to tell you, it’s a terrible way to pick any investment. Ask yourselves, “Do I think that the next 10 years is going to be like the last 10 years?” Simple question. If you do, OK, fine, invest in those funds. If not, you may want to rethink your strategy.

Always once you establish your strategy, rebalance. Don’t think about it. I know equities are going way, way down. The last thing you want to be doing is buying. Feel that fear. Do it anyway. Rebalance. Go against what your heart wants you to do or what you feel like you should be doing.

Don’t be afraid of some inflation. Just be prepared for it and understand that your retirement planning has changed a lot. Just understand that going in and run some modeling. Sarah will tell you that. Everybody will tell you. I am very big on modeling this stuff out.

If you continue doing everything you’re currently doing, how are you doing? How are you doing over the next five years, the next ten years in retirement? How are you going to put the kids through college? Where are you going to come up with that funding? Do the modeling.

I always like to figure out in advance what’s going to make this thing fail? Where are you vulnerable? What risks are out there? If inflation stays high, is that worse, or is a wicked bear market like we had in the financial crisis, is that worse? Once you have that visibility based on your personal situation, you’re going to make better decisions.

Just understand that retirement planning has changed. I’m going to also say on that topic, retirement planning, yes, it’s important while you’re working. I believe that it is even more important when a person is retired because once you retire, you pretty much have whatever you’re going to have. Then, it’s just a matter of how that spends out for the rest of your life.

Monitoring that, that is the difference. We’ll get into this a little bit more in a moment, but that’s important. Always keep your three pools of money full. Pool number one is the money that you’re going to need in the next, say, two to three years. Pool number two, three to six years, and then pool number three is your longer-term money.

If we go through a period that’s down for, say, five years, you don’t even have to think about it. You’re not selling because you’ve got whatever you might need in pools, one in two to sustain you, so you’re not in a position where you’re selling low. That is the problem. That’s why people tend to run out of money.

More specific things. Again, where it’s appropriate, this is not advice, these are ideas. For those of you who are good with your 401(k), you’re contributing your 11 percent, then you might want to consider a back door Roth. I’m not going to go into the specifics of these things. Just going to give you the name and you can Google it.

If you have children and they have summer jobs, my goodness, can you imagine? Take some of that money and put it into a Roth IRA for them? I’ve done that for all four kids, even I’m shocked at how much money my kids have and their Roth IRA.

Roth IRAs for children, by the way, since I’m talking about kids and I’m preaching to the choir, but with yourselves, as well as your clients, get a power of attorney on kids, health care as well as financial.

My son had a traumatic brain injury when he was, by the grace of God, 17 years old. If he was 18 and we were stuck in New York, we would not have been able to authorize brain surgery. That kind of stuff. These are practical things that every parent needs to know.

Roth conversions. Roth conversions are phenomenally great. I love having tax diversification along with investment diversification. Roth conversions and I’m going to put an exclamation point, if you or if you know anyone that may be exposed to an estate tax issue, doing Roth conversions while they’re still alive is something everybody should consider.

Here’s why. If someone has a taxable estate, then the excess over the exemption, whatever that’s going to be, whether it’s 12 or 6 or what have you, the excess is going to be taxed at 40 percent.

Now, if you have most of the assets or a lot of the assets in retirement accounts, the retirement accounts, there’s an embedded income tax liability on that account. On $1,000,000, that’s a $300,000 income tax that eventually someone’s going to have to pay in the next 10 years.

To a certain extent, on a retirement plan, the kids are paying a tax on a tax. That doesn’t sound very good. You’re paying an estate tax on an income tax, and eventually, it’s going to be paid over 10 years. What do you do? Again, always run the numbers doing Roth conversions while alive.

Then, if you can, once people retire, there is often this opportunity. That’s the best time to do income tax planning because a lot of times we can get, or you can get yourselves into a 12 percent tax bracket.

If you’re in a 12 percent tax bracket, you can take capital gains and pay no tax on it. How about that for a concept? No tax on your capital gains. Strategic run the numbers. Is that going to be a possibility? Be ready to execute.

Estate planning, again, I’m talking to the choir, SLATs, IDGTs, QPATs. Again, these are the things that you already do for your clients. I just had a meeting this morning talking about IDGTs, the gifting strategies, CLATs, and donor-advised funds.

Finally, I was asked to talk a little bit about financial planning and financial advisors. What is the difference between financial planning and wealth management? Is wealth management just an upscale term for marketing? For some people, it is, but for the real legitimate advisors, it’s important.

When your assets get to a certain level, when your assets become sustainable, it’s because the planning worked. Again, remember, when you retire, you have what you’re going to have. It’s one thing to get there, it’s quite another to stay there.

Think of wealth management as the great outcome of financial planning that’s been well-executed. We can all have our numbers, and we can look at stuff, but you’ve got to do certain things along the way. It’s ultimately about the execution and the doing the things that work for you.

What separates financial advisors? It’s like looking at these two brick walls. Any structural engineer will tell you the one on the left and the one on the right, they have the exact same number of bricks, same amount of mortar, but the one on the right is a lot more resilient. It is a lot stronger. That’s what separates advisors.

You want the resilience. You want somebody who’s got the depth, the knowledge…I’m hoping you’re not seeing too much gray, but there is something to be said for experience. It’s also important to have a deep bench with a variety of backgrounds. You don’t want to necessarily be dependent on one person, a solo adviser.

You want that deep bench so that, in my case, if something happened to me, I feel like it’s my responsibility to make sure that everything continues seamlessly. That’s good business. There are big names you can go to.

Like one of the big wirehouses, Merrill Lynch, Morgan Stanley, or you can work with an independent advisor. I’m going to tell all of you, there are great advisors in both business models.

There may be some pros and cons to each approach, and it ultimately depends on what you want in your life.
That’s it. Four phases of life, things to consider, important for everybody.

No matter whether you’re working for a company, you’re already retired, I’m so grateful that you joined us today. I’m grateful that you tune in every couple of weeks and look at the newest podcast that we’re presenting. This one, in particular, I think can be valuable for anybody, whether it be yourself or anyone that you care about.

I’m Patti Brennan, Key Financial, Wealth Management with Wisdom and Care.

Ep98: Tim Seifert of Lincoln Financial Shares Top Leadership Traits

About This Episode

In the first of a two-part series, Patti welcomes Tim Seifert, the Senior Vice President and Head of Retirement Solutions Distribution for Lincoln Financial Group. Together they look back on the careers they began after college and compare them to where they are now. They discuss the specific characteristics of the leaders and mentors that shaped their career trajectories and how they, in turn, apply those leadership traits to their own teams. In doing so, they are developing highly successful and motivated team members that are all intentionally driven toward client satisfaction. These leadership skillsets transcend across all industries and are not dependent on the size of the team or driven by profit margin. Listen today to find out how you can apply any or all, of these ideas to your team today!

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Guys, I am so excited about today’s guest. Today’s guest is a very dear friend of mine. His name is Tim Seifert. Tim and I have known each other for 25 years. We live in the same community. Our kids grew up together. We go to the same church. The kids went to school together.

It’s been so much fun to watch Tim’s trajectory, his career. When I first met you, Tim, you were with a company called PLANCO, and grew that company to 10 times what it was when you first started. Then you went to Prudential and you tripled that.

Now, you’re at Lincoln and doing the same thing all over again. What I think you’re going to find is Tim has a gift of leadership. It’s his ability to connect with people and cultivate future leaders. When I think about Tim Seifert, I think about a quote that I just love. It’s on my mirror. It kind of keeps me humble.

I wish I could tell you who said this. The quote says that the one thing that all great athletes, famous actors, and successful business leaders have in common is that they all started their journeys when they were none of those things.

I think that’s really profound. I know it is for me. Boy, did I start when I was nothing of the sort, not that I am now. I think it’s especially poignant because I know, Tim, how you started. First, welcome to the show.

Tim Seifert: Patti, thank you so much. You look forward at your calendar, and I know you do this. There are certain events that you go, “That is gonna be a lot of fun, and that’s gonna be high energy. And I cannot wait to be with my friend Patti Brennan.”

Congratulations on your success. It’s been wonderful. We share that common bond and that journey together. It’s really fun to be with you today.

Patti: It is so much fun. I didn’t plan on saying this, but I will never forget, Tim, taking my daughters down to one of the Barron’s women’s conferences. I wanted them to get a feel for what successful women do.

I thought it would be a great example for them. Little did I realize that you would be the keynote speaker at that conference. I’m telling you, you stole the show. It’s amazing to witness this right here in our own community with our own kids, etc.

Again, thank you so much for joining us. We’re going to be talking today for everybody watching and everybody listening, about culture. How do you do the thing that you do? You and I had a wonderful opportunity to share the stage…

Tim: Sure did, yeah.

Patti: …when we talked about this. I thought it would be kind of cool to bring you back since you’re right here and let people get to know you on a personal level. Before I start, why don’t you tell us a little bit about how you grew up.

Tim: I grew up in Norristown, Pennsylvania. You and I talk about mentors in life. I grew up in a single mom household. I got two great brothers. My mom is my mentor, is my rock. Every morning at 7:00 AM we have a discussion to this day. She’s 80‑plus years old, 83.

We have a little phone call. We always end in prayer. It’s a special way. When you can start a day with Mom and you always end with gratitude, because you and I share that, that attitude of gratitude, it is going to be a special day no matter what’s going on in the world.

There’s all kinds of challenges happening in the world, but you’re finding that grace in that challenge, and you’re finding that attitude. It’s really something special.

I grew up in Norristown, Pennsylvania, a paperboy, athlete, flipped burgers. Went into Continental Bank where I was in the management trainee program. Then I discovered, like you mentioned earlier, this company called PLANCO.

Three of my greatest mentors above and beyond Mom is Joe Thompson, Ed Gold, and Jack Craig, who took a shot on this young guy, went out to be what they call the wholesaler. It’s really interesting. It’s been an incredible journey, not always great. Like we said, life’s uphill. It gets hard. It’s been, as you look back, a wonderful experience across the board.

You know Mom, Patti, when we talk about the kids and having your girls there at the Barron’s meeting. They’re like, “Mr. Seifert’s on stage.” I’m like, “What’s that?”

Patti: It was wild.

Tim: “I just saw him at church,” which is really bizarre in that big world that we live in. What was really special was mom also shares the passion for people like you did. Mom, for 40 years, was a registered nurse. I know you started your career out that way. It’s really special because I’m looking at your sign around wisdom and care.

Here she was with her three boys, and Patti, every morning when she had to head to that, she had two jobs when my dad left, and she supported this family, two jobs, but every morning she made sure her boys had a hot breakfast. I’ll never forget this. Talk about care.

She’s a critical care nurse, and she would repeat to us over and over again because she was so delighted to come to work, to go to work. We would often ask why. What is it?

She said, “You know, my patients are looking for a miracle. My patients are waking up and they’re just looking for a blessing. If I can for just that one moment be that blessing to them, to be their miracle, then I have a fulfilled, full life and/or day.” Just think about that, to grow up with something like that. Pretty special. Really special.

Patti: It is such a privilege to be that person at the bedside that that patient is looking to help them through their day, and to give it to them real, and to give them a sense of hope, whatever that might be, a hope that they’re going to get through the day, the hope that you’re going to do everything you can to keep them comfortable. It’s an honor and a privilege.

I used to say, “I get to do this. I get to do this.” I feel that way today also in this profession. I get to do this for people, to be that person that they know they can count on and trust when the world is falling apart. Russia’s invading Ukraine, and markets are going nuts, and inflation’s going rampant, and yet people know I’ve got their back, that I’ll look out for them. It’s just such a privilege.

We were talking about this before, and we were talking about gratitude. I was telling you the story that when I go to the store, whether it be the food store or whatever, especially on weekends or on a holiday, I always make it a point to look the person behind the register in the eyes and say, “Thank you so much for being here.” They look at me like oh.

I follow it up with, “You know, chances are, you probably don’t want to be here on a Saturday night, but you are. And because you’re here people like me who have crazy lives get to come and do their food shopping on a Saturday night instead of going out. This is my fun, and I’m just really grateful that you’re here to help me.” They look at me like wow, nobody’s ever said that to me.

I remember when my kids were little, and they’re like, “Mom, why do you always say that?” Typically, it’s not that long, but why do you always do that? I say, “You know what, it’s because it’s true.”

We have to recognize the efforts. We have to recognize that people have their lives, whether it be behind a cash register, or serving in our military, or working for a financial services company so that you could bring great retirement solutions to people like me so I could offer them to my clients. That’s a big deal because people worry about their money.

Tim: No doubt.

Patti: You are doing that for people. What’s interesting even for me even more so is that to a certain extent we have it really good because we get a lot of that psychic reward. Tim, you probably saw the pegboard of letters and cards thanking us so much for everything we do. Our clients tell us they don’t know what they would have done without us.

Our clients send us wonderful letters! I may send one of my quarterly letters or a video when things are going tough, or I’ll make my phone calls on a Saturday morning that I typically do, and it really means a lot to them. It’s really nice to know that that made a difference in their life.

I think about your role and the role of the people that work at Lincoln. They don’t necessarily get those rewards per se. I’m going to be interested today to learn more about how you generate that goodwill and give people that sense of purpose that they do have, because without people like you, what are we going to do for our clients?

Let’s get back to the gratitude thing because it’s so important that we are setting an example for our children, our families, our colleagues, etc. You told me a very interesting story about how you show gratitude. You were like, “Yeah, Teresa at Wawa.” I’m like, “You got to be kidding. I know Teresa.” Tell us about Teresa.

Tim: This is a master class. What you just started, this is like a master class in the servant leader. Often, the greatest leader in the room is one who serves. Whether it be nursing, or what you do for your clients.

Even at the grocery store, when you say, “I see you. I understand what you’re doing. I appreciate you, and then, Patty, you matter in my life.” Teresa. Wawa, that’s the low-key local…how many of your listeners know the Wawa realm.

Patti: Exactly. It’s like the 7-Eleven, or a Sheetz. It’s the go-to place in our area.

Tim: Right, and so if you want to receive, you want to receive, you want to receive, we give. We give, we give, we give. Here Teresa is. Teresa greets every customer with a “Good morning,” “Have a great day,” “During this time of day, be safe.”

People will wait at Wawa in a line, where the other service rep on the other side is like, “I’m open over here.” You know what I do? I wait for Teresa. Why? Because Teresa makes my day. She makes my day. I, in return, give to her. She knows me by name.

What they say, one of the greatest things, Patty, people, do you know their name? That whole idea of being the servant leader and building great culture. We build great culture because we serve and we care.

Patti: It’s so important because I tell everybody that every once in a while, I’ll be introduced by one of the people that work here, and they say, “This is my boss.” I’m like, “Oh no, no, no. Let’s get this straight. I am not your boss. You’re the boss of me. I work for you.”

I mean that from the bottom of my heart. I work for these people. This is what it’s all about. It’s a different realm. I get to do this. I get to talk with each individual who is serving our clients and find out more about their lives and find out what keeps them up at night.

People go through tough times. Sometimes, they’re very private, and they want to keep it to themselves. They don’t want the drama. At the same point, I feel like it makes a difference when someone like Tim says, “Hey. You know what? I was thinking about you today. How are things going?

“What’s on your plate? What’s happening in your life these days? How can I help you? Whether it be professionally, personally, how can I help you?” What I’ve learned is that that approach, people always say to me, Tim, “Gosh, your people are the best people.”

I literally had a conversation last week with a client who’s been with me for many years, almost 30 years. She was referring our firm to someone else. She said, “You know what I said, Patti?” She said, “Everybody I talk with is as good or better than the next one”.

“These people are so caring. They’re so smart. They go out of their way.” Then, she said, “How do you do that? How do you cultivate that, and then how do you keep these people?” To be honest with you, I don’t even know.

Tim: I know on your behalf.

Patti: How?

Tim: As we think about building that outstanding culture, this is what you and I talked on the main stage at the Forbes Top Producer…Congratulations on your success.

Patti: Thank you.

Tim: It’s these three things that we talk about. Number one is, how do I unite this team that you love and trust around a common vision or goal? This is what the most outstanding leaves. You say, what are the characteristics of great leadership? You are the model. It is vision.

They cast vision, and where there is no vision, they perish. In other words, write down your…I was just walking around the office, Patti. Your boards, your appreciation boards, your goals, we unite them around this common vision.

Write down your vision and make it clear so that those who read it will run to it. Although it may take some time, it will come to those who believe. You and I know that it’s a famous quote, forever and a day. Vision, purpose. Think about purpose, and then lastly is that mission.

Vision is everybody around your beautiful office, they know – because it’s in front of them, on the boards – they know where we’re going. They know what our goals are. Our vision is this. Where are we going? One.

Next is, you mentioned, we have a purpose. Our purpose here at Key Financial is to serve, but it’s a purpose that’s deeper than that. Our purpose at Lincoln, for instance, is to help everyday Americans retire with dignity. A purpose to have everyday Americans, we provide them with financial peace of mind. It’s that peace.

We all know in today’s world, anxiety is through the roof, fear. You and I talk about that. It’s this noble purpose, and we can double-click on that and drive way down deep. You all have a purpose, and everybody knows that we’re here to serve our client. We’re going to serve them where they need to be served. It may have nothing to do with financial.

You’ve told us stories on the main stage about helping your clients through a very, very difficult time in life. Did it have anything to do with their financial and their balance sheet? That would be two.

It’s vision, it’s of noble purpose, and then lastly is mission. This is where we’re going. This is why we’re going there. How specifically are we going to get there? That’s your pillars, your standards of success here at Key Financial.

When you talk about building culture, the reason I’m so excited about it is I teach you on it all the time. Patti, this is a case study in excellence around culture.

Patti: Thank you. Thank you.

Tim: That’s question number one is does everybody understand the goals, the mission, the vision? It’s really important.

Patti: For me, the goals are not so much for Key Financial. The goals are really for the clients. You mentioned it. It’s that financial peace of mind. I feel like if we just help enough people get that, the rest will take care of itself. Right?

Tim: That’s exactly right.

Patti: I find that people really can pick up on that. They just know. I mean, I’m just going to say it. Probably sound weird and we might end up having to cut it, but I could care less about the money. People ask me all the time, Tim, “What’s your minimum?” They are like, “You don’t have a minimum?” No. The question is, can we make a difference in your lives?

Tim: That’s right.

Patti: Can we justify our presence in your life? That to me is the most important thing. That’s our purpose. That’s why we exist. We exist because clients need help. Sometimes, the help they’re getting is not always the best help. I don’t mean to say that in a negative way, sometimes they just don’t know where to go. That’s all.

As I always say, it is a privilege, it’s an opportunity, and at least for me, I feel like my purpose now is to cultivate the young leaders of the future, of the people here. That’s something you do so incredibly well. You start out with those three questions, and then tell me how you do that a little bit more?

Tim: Under this idea of, and you and I share, leaders are readers. This is the culture code. Question number one is, am I clearly laying out that vision? Question number two is, how do I foster this feeling of community?

Patti: That is really important. I agree 100 percent, guys. This is really important. We’re all in this together.

Tim: We’re creating an environment where people can do their best work. I know that you and I share a lot of this passion around being that authentic, empathetic leader because at the end of the day every one of our employees, just like our clients, is what they’re saying is really three things.

Number one, we hit a little bit around. Do you see me? Do you understand me? Number one is do you really get me. Do you understand me? The only way we do that, Patti, just like you do, is we sit down with everybody around the shop, and we ask those questions. What are the two or three things that are most important to you?

Like you and I shared before is they automatically go into work, things that’s most important. No, no, no, no. I want to know about family. We call this FORC, family, things that are most important to people. What are they really, really passionate about. It’s family, FORC, F-O-R-C, not the K, family. What’s more important than family? We share all the children. Right?

Patti: Absolutely.

Tim: Family, my occupation. You think about how important this place is to you and everybody in this. Recreation, how important is recreation. Lastly is community and giving back.

There’s this idea around are we making this environment a place to do your best work, to do your best work, which is point number two to culture. That’s your we’re going to work hard. We’re going to work hard on behalf of our clients, but you know what, we’re going to have fun. As I walk around here, you got the ping pong table. You’ve got the corn hole.

Patti: The kitchen, the whole bit.

Tim: You got to have fun. You got to have fun and make that safe environment. That’s because you’re an authentic leader. You care. You care.

Patti: You know what, Tim, one of the things that I learned fairly early on, it probably wasn’t early enough, but I learned the importance of understanding what each person’s superpower is.

Tim: That’s right.

Patti: I believe every person has a gift, and it’s my job to figure out with them what that might be. I often tell the story about Brad, who is our chief investment officer. I was having one of these meetings with each employee and just finding out a little bit. We weren’t really going through a restructuring, but I just wanted to make sure that everybody was on the right seat on the bus.

I was having the conversation, and Brad is super smart. He is incredibly smart, went to Johns Hopkins, almost perfect SATs, probably perfect SATs, applied mathematics and economics, dual major, the whole bit. The thing about Brad he is one of the funniest people in the world. He’s hilarious.

We have a lot of funny people here. I’m almost want to make it a part of the job description. I’m not really funny, but I’m a pretty good audience. Every funny person needs somebody that’s going to laugh, so I’ve got a good sense of humor. That qualifies.

Anyway, I was having this deep and real with Brad, and I was saying, “Tell me a little bit about your day and the things that you really like to do during your day.” He’s like, “What do you mean?” I said, “For example, you’re really good with clients. You’re great on the phone. You just nip it in the bud. They love you. You’re great with the portfolios.”

He was doing financial plans. He was doing a lot of analytical work. I was trying to figure out the client piece. I said, “How do you like that? You know, you’re really good at it.” He said, “Eh, not particularly.” I’m like, “Really? You don’t like necessarily having the conversations with clients.” By the way, if you’re a client listening to this, don’t worry. You can still ask for Brad.

He’ll give it to you straight because I still say sorry, every one of us has work that we need to do. At the time, he was doing a lot of it.

Long story, short, I said, “Really?” I said, “So what do you really like to do?” He said, “Investments. Give me the portfolio. Give me the asset allocation, the strategic. I really like that.” At the time, he was doing comprehensive financial plans A to Z. I said, “Huh, that’s really interesting.”

Then I went to Eric, and I said, “Eric,” and I went through the same conversation.

He said, “I love looking at the tax return, doing deep dives on their cash flow, their budgets, even though I don’t like the word budget, looking at strategically thinking about where they are today and where they’re going to be in 5 years and 10 years and trying to anticipate and optimize on all different levels. I love reading trusts, etc.”

I’m like, “Really.” I said, “How about the portfolio stuff?” He said, “Ah, I could take it or leave it.” I’m like, “Hmm.”

As a long and short, we did a little bit of restructuring. Eric is our chief planning officer. Brad is our chief investment officer. I truly believe that they are really working on the things that they not only love but they’re great at. Right?

Tim: That’s right.

Patti: I had a woman who worked for me. Loved this person. This was the days when, Tim, you knew me when. I had graduated from the laundry room on Graystone Drive. Right?

Tim: Right.

Patti: We were down in the basement, and I had a wonderful woman named Helen working for me. Helen was just what I needed, Tim. I had four kids. I was running like crazy. I had this idea of what this business could look like, and it wasn’t like any business that was out there, so I was really trying something that nobody else was doing at the time.

As I was making my way up the stairs, because I would then go see clients at a business center small office, and every time I’d go up those stairs, Helen would say to me, “Go be brilliant.”

Tim: Love it.

Patti: For me, what I learned from that is she believed in me long before I believed in myself. She believed in me. She was so wise and intelligent.

I was doing something one day, and it was detail-oriented, filling out paperwork or something. She’s like, “Don’t…” I said, “You know, I’m really not good at this stuff. I work late at night till one o’clock in the morning filling this stuff out, etc. I need to be better at this. It’s a weakness of mine.”

Helen shot back at me. She said, “You know, Patti,” she said, “here’s what I think. You know what happens when you work on your weaknesses, you get a lot of strong weaknesses. Focus on your strengths, and delegate your weaknesses. Give me that paperwork. You shouldn’t be doing that stuff.”

Tim: That’s great.

Patti: It was very interesting because I’ve applied that to find out what is each individual’s strength, and we focus on their strengths because one person’s weakness is another person’s incredible strength.

We’ve got people, for example, who are so detail-oriented and have such a keen eye to spot things that may be a little bit out of whack, and it’s a gift. I’m not that way.

I’ll take a look at a plan or a portfolio, and I’ll say, “You know what? Something’s not looking right here. Here’s what I think, A, B, C, and D.” They’re like, “How in the world do you see that?” It’s something really small, it’s a tax situation, or whatever. I’ve got big picture.

Of course, you do something for 30 years, after a while, you get good at spotting these things. The point is that everybody has a gift, and to take the time to cultivate each individual’s gift, whether they realize they have it or not.

Tim: Let’s double-click down on that. In Greenwall’s famous essay in the ’70s, like I said, this is going to be a master class in servant leadership, because that’s what you and I are passionate about is leadership.

In his famous essay, “The Servant as a Leader,” which was the essence of servant leadership, the number one trait of the most fantastic servant leader is what you just demonstrated. You said it’s you sat down with each and every employee, wonderful people, and you found their superpower.

In other words, for our listening audience, you took the time to ask great questions, and then the number one thing that Greenwall has said about servant leadership, the greatest leaders of all times, they’re fantastic listeners. They ask great questions. What did Patti Brennan do?

You took the time to believe in them, but to listen. It’s one of those things, Patti, that we don’t teach enough of. I know in some of the things they’re doing in the leadership of military. We go to school and there’s courses on sales, there’s courses on strategy, there’s courses on tactics. Who’s teaching listening as a leader?

For the listening audience is take the time, like you do, to listen. Can I share three points to that?

Patti: Please, yes.

Tim: Here’s what we find. This is what all the research says is number one is watch your talk-listen ratio. You’ll find that the best, and when you sit down with your clients, just like your employees, you ask questions, and your staff’s great at listening. Patti Brennan is great at listening, because you say, “Tell me more.”

Watch that talk-listen ratio. Is it 60-40, is it 50-50? When I sit down with you, it certainly isn’t 90-10, Patti is 90 and the client’s 10. It’s the opposite. Watch your talk-listen ratio. Number two thing that you’re excellent is you’re so curious – now, the leadership’s good – is you don’t interrupt. Our parents taught us that, “Don’t interrupt. Let them finish.”

Why? Because Patti and team are making notes. You can’t interrupt when you are so curious, and tell me more, and you’re writing notes. Then, how do you build trust? It’s you build confirmation bias. “Mr. and Mrs. Brennan, Patti and Ed, if I understand you correctly, you said A, B, C, and D. Is that right?”

You say, “Yeah. Did we get it all here?” “You got it all. That was perfect.” What happens? You repeat it back, you’re confirming, you’re listening. It builds trust. The reason you’re able to build and find superpowers in your folks and your employees is you do what all servant leaders do. Point number one, we listen, and it’s fantastic, really is.

Patti: It is fantastic. Everybody’s got to make a good living. Everybody’s got to have good, but it’s understanding the human being, understanding that human side and that they are more than just what they do for you.

I will often say, especially when people are going through difficult times, “You are so much more important to me than what you do for me. You’re so much more important. What’s going on? How can I help? We’ll figure it out. We’ve got enough people. We’ll figure out. We have your back.”

How many times have we had to say that to people who work with us. It’s such a privilege. It’s so important. To your point, I don’t think that it’s done enough. I was presenting at an economic development seminar and I was talking about this Great Resignation that “60 Minutes” did a show on. I said, “It doesn’t have to be the Great Resignation. It all ultimately comes down to, why are people leaving? It’s because they don’t feel important.” People work for people. They don’t want to work for companies. People do business with people. They don’t want to do business with companies.

Who are you as an individual? That has a lot to do with this Great Resignation. For me, at least, as that person who can make a difference in their lives, it’s to understand that this has been a tough time for a lot of families.

For example, we built a desking system so that our parents could bring in their kids, whether they’re elementary school kids or middle school kids, because it was getting to the point where the parents are like, “Oh man, this is getting really old, this home-schooling, and having the kids on computers. I’d like to be around my friends at work.”

It was interesting how much we all missed each other. I built this desking system with a big plastic glass, and moms and dads brought their kids in. They could stand over the kids’ shoulders, but they could still get their stuff done, etc.

We were all doing this together, watching the kids, helping the kids. It was a great opportunity to recognize that some people had more challenges in that area than others. We had a couple of babies that were born. We found a way to make it all work.

I don’t know. For better or for worse, I’m not a corporate person. It’s interesting because I’ve hired a couple of people in my career. These people didn’t have any experience in the financial services industry. I believe that there’s something for everybody.

These people are like, “I haven’t been in the workforce for 15 years. I don’t know the technology.” Don’t worry about it. We can teach anybody anything, but there’s something that you can’t teach. That’s what we have here.

It’s just so interesting to see what these people are going through in different seasons of life. For them, they know we’re going to make it work. We just hired somebody brand new, no experience whatsoever.

It was so funny. They were, “Is this OK? I really don’t have any experience.” I’m, “It’s OK. We’re going to put you here. We’re going to teach you this. By the way, if you don’t like it, no big deal. We’ve got another area that you might like better.

“If you don’t like that, we’ve got another area. If that doesn’t work, we’ll just figure it out. You may not even like it here. Just let’s keep the lines of communication open and we’ll make it work for everybody.” This person said “Wow.”

Because to me, then that person’s going to be really happy, very productive, and they’re going to be loyal. Not to me, that’s important, but they’re going to be loyal to our clients. They’re going to go the extra mile.

To your point, it’s just incredible some of the things that these people have done for our clients that had nothing to do with their money.

Tim: That’s right. Because you believe in them.

Patti: Yup, exactly.

Tim: I believe in you.

Patti: Exactly.

Tim: You can give that life experience. I mean, you’re a mom. You were a nurse. Think about the working women today. All of a sudden, you’re in an office, you get sent home and you’ve got so much to juggle. What you’re able to do is bring this culture of saying, we believe in you so that you can turn around and believe in our clients and give them what they need.

Again, leaders ask great questions, they’re outstanding listeners, and they believe in their people above anything else. It’s special, and it’s not everywhere. Believe me, it’s not everywhere.

Patti: You’ve been around, that’s for sure. Tim Seifert, thank you so much. Your insights and the way that you just A, B, C, one, two, three, have got it down. Really, you’ve got it down to a science. If there is one thing, folks, that Tim Seifert is known for, it is his ability to lead others and to nurture others to be everything that they were meant to be.

I’m so grateful for your friendship. I’m so grateful that you are here today. I look forward to doing another podcast with you.

Tim: Let’s do it.

Patti: Let’s do it, Tim, let’s do it. Really, thank you for all of the work that you do at Lincoln to make our lives better, which ultimately, make our clients’ lives better. So thank you for everything.

Tim: Thank you for the opportunity. The energy in this room, it’s contagious.

Patti: It is.

Tim: It’s contagious. Thanks so much for having me.

Patti: You betcha. Thanks to you for joining us today. Leadership, culture, these are intangible subjects but they’re so important in your everyday life. It doesn’t matter what you do, you could be a mom, you are a leader of your family. You could have a religious leadership type of situation.

You could be Theresa at Wawa, leading her followers who go to Wawa every morning for their coffee and just really need that little piece of inspiration and have a really good day, very, very genuine and sincere. She makes a difference in the day of the lives of everybody that has waited in line for 15 minutes to see her.

Thank you so much, and thanks for joining us today. If you have any questions, please feel free to go to our website at keyfinancialinc.com. Let us know what you think about this subject as well as any other subject you’d like to learn about because we’re here for you. We do this for you.

Hopefully, it’s making a difference in your lives because I assure you, you’re making a difference in ours. Thanks so much. Take care.

Ep97: Master List of Goals

About This Episode

This episode is the next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this episode, Patti explains that there is a Master List of Goals that most clients tend to discuss in meetings – particularly at the beginning of a year or the beginning of the client/advisor relationship. These discussions are important in ascertaining cash flow needs, while also helping clients achieve their retirement goals. Each retirement dream and lifestyle is as unique as each individual, yet the questions that help design what retirement looks like are often the same.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have 20 million or $20, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

This podcast today is part of an ongoing series called “Ask Patti Brennan.” I thought it would be neat to go over the master list of goals that we have here at Key Financial. These are the questions that we tend to ask people to help them articulate what’s important and remind them that there are many possibilities for a lot of families.

I’m going to go over some of the questions that we ask, and the goals that tend to bubble up. Remember, there are a lot more than what we’re going to be talking about today.

For example, when it comes to retirement, do you need help in deciding when you want to retire? Would you like to slow down and work part-time, semi-retired, or do you want to cut cold turkey?

Do you want to take a few sabbaticals every once in a while and have a career that has breaks worked in? Do you want to feel confident about where you’re going to get your stream of income when you’re no longer getting that paycheck?

When it comes to your family, do you want to save for a child or a relative’s college education? If you’re younger and getting married, do you want to have a child or adopt one? What’s involved in all of that? How much is that going to cost?

Do you have any parents or other family members that you want to make sure you can care for and provide for? If so, what’s involved in all of that? When it comes to your own personal goals and your self-development goals, do you want to get some advanced education or certifications for professional reasons?

If so, what’s practical and what could that entail? Are you looking for professional advancement, a new job or even a whole new career? Those of you who have been watching me and who know me know that I didn’t start out as a financial planner, I was a nurse.

What was involved in that transition and how did we work within the confines of having a family, buying a home, and changing careers? That might be something that all of you or many of you are considering, especially after the pandemic.

You’ve heard or read articles about this thing they’re calling the great attrition, people leaving their jobs. I’d like to reframe that and call that the great attraction. In other words, instead of leaving something, what do you want to go towards?

Let’s talk about that and drill down in terms of what might be required. There’s a practical side to everything. We want to keep you moving forward and keep it real as well, particularly when it comes to your assets, your loans, and your debt.

Let’s talk about assets first. Your portfolio – do you want to reduce the volatility in your portfolio? We’ve had a great few years, who knows whether that will continue? If it doesn’t, will you still be OK? Are you tired of the ups and downs of markets?

Unfortunately, that’s going to continue. If you tone that part down, what does that mean for your financial future? Do you want to find ways to increase your cash flow or maybe improve it? How do you improve cash flow? Boy, that sounds great, but how do you do that?

You do that by paying attention to not just the big things, but also the little things along the way. Do you want to save more? Do you want to find that extra money on a monthly basis that you know is being allocated to the things that are most important in your life?

For example, do you want to begin to think about a second home or maybe moving into a different home or location? A lot of people are thinking about downsizing. When they start looking around, they realize that downsizing doesn’t mean it’s going to be any less expensive. We’re referring to that as maybe “right-sizing”.

What does that look like in your personal situation? Are you planning to move? Do you want to move to a different state? What are the income tax ramifications? If you do so. When it comes to tax planning, this is something that we always want to reduce – unnecessary taxes. That’s an important goal in and of itself.

Let’s keep that top of mind throughout the year. Lots of things that might occur to give you those opportunities, save money on taxes. Unfortunately, if you wait until the end of the year, it’s often too late. By the time most of us go to our CPAs, the year is already over and we can’t do anything about it.

When it comes to saving money on taxes, keep that top of mind as an important goal. When it comes to health care, what are your insurances? I’ve talked in the past about productive paranoia. If this happens, what are you going to do and what do you have to safeguard your financial assets and your peace of mind?

In the end, that’s what this is all about. It’s about peace of mind and always feeling you’re moving forward, it’s progress. That’s what financial planning is all about. Let’s measure and monitor and make sure that over time, you’ve got that wonderful sense of well-being. That peace of mind and that feeling you are making progress.

It can’t be something intangible, it’s got to be measured. At least, that’s the way that I like to approach these things. As you think about goals, the things that I’ve talked about now, know that’s just a few of the goals that might apply to your situation.

There’s 52 of them altogether. If you want to know what the other ones are, go to our website at keyfinancialinc.com. We’ve got this master list of goals. Click on today’s podcast, and it print right out.

It allows you to think about the possibilities. It will trigger those conversations with your spouse, the people that you care about, the people that are going to be working with you to accomplish them. That includes your advisor, your tax professional, your attorney.

When you have these goals, these objectives, and they’re on a list, it’s amazing what happens. Suddenly, that problem solving, that creative part of our brain begins to work, and you start making progress to accomplishing them. That’s what this is all about.

Thanks so much for taking the time today to listen to some of the master lists of goals that you and everyone can have. I’m Patti Brennan from Key Financial. Feel free to go to our website at keyfinancialinc.com to learn more.

If you have any ideas or things that you’d like to hear about, I’d love to hear from you! Many of the topics we discuss on our podcasts, are a result of people who went to our website and ask the questions, “Can you talk about a, b, and c?” I will tell you the list is incredible!

These are great ideas that we wouldn’t have even thought of if these people hadn’t written in. Thanks to all of you who have and thanks again for tuning in today. I’m Patti Brennan – have a great day.

Ep96: Issues To Consider When Filing Your Tax Return

About This Episode

This episode is the next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this episode, Patti addresses multiple issues that listeners should consider if still working, when reviewing your 2021 tax return. While many individuals choose to have their taxes prepared by a professional, that does not mean you should not review them or have your financial advisor review them for any mistakes. It is not uncommon for something to be overlooked or potential deductions to have been missed. With tax laws changing, it is only prudent to have an extra set of eyes reviewing your return to make sure all deductions are taken advantage of! Patti discusses the most common mistakes that are made every year and reminds the listener of some of the new changes to the tax laws this year.

Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan” show. Whether you have $20, or 20 million, this show is for those of you who want to protect, grow and use your assets to live your very best lives. Today’s episode is part of the ongoing series called, “Ask Patti Brennan.”

As we are in the beginning of 2022, a lot of you are getting your tax returns done. You might be preparing them yourselves, or you may have a CPA. It’s important that whoever is doing your tax return, you get an extra set of trained eyes on it.

An extra set of eyes, reviewing the return, making sure that you’re taking advantage of all the deductions and all the credits that are available to you. Every once in a while, in reviewing your tax return, you may come across a mistake from time to time. Let’s face it, accountants are like all of us. They are human beings. We are all painfully human.

I can tell you story after story of returns that we have reviewed, or taxpayers have reviewed, where something might have been missing – dividends, capital gains, something wasn’t taken advantage of. It helps to take a moment, step back, and look at the return.

What I’d like to share with you today are some of the things to look for, to make sure that you are paying the right amount of taxes that you should and not a dollar more. OK?

Number one, if you are one of those people, as most Americans are, that take the standard deduction. Under the tax law, as it stands today, the standard deduction has grown tremendously.

About 70 percent of Americans don’t itemize anymore. Between the deductions that were taken away on those Schedule A deductions, as well as the rise in the standard deduction, most people are just doing the standard.

You might ask, what are itemized deductions? The three major categories are medical expenses, state and local income taxes, and real estate taxes. Taxes in general, we call that SALT, to a max of $10,000. Then, charitable contributions. Many people are charitably inclined, and you’re donating to various causes.

If you take the standard deduction or when your CPA does your taxes, they’re running the numbers to see, what’s the bigger number – the itemized deductions or the standard deduction? For most people, the standard deduction is going to be higher.

As a result of that, those charitable contributions that you may have made, God bless your heart, but you’re not getting any tax benefit from them. I will say, though, that you can take a deduction if you’re single, up to $300, if you’re married filing jointly up to $600, above the line.

In that example, in addition to the standard deduction, because that was higher, you also get that charitable deduction as well. You are getting a benefit from that. If you have dependents, children, under the age of six, there’s a child tax credit. Normally, that tax credit is $1,600 if the child is under six. It is $1,000 for children between the ages of 6 and 17.

Last year, it was expanded, and, boy, talk about a perk. You received a $3,600 tax credit for any child under the age of six, and $3,000, from the ages of 6 to 17. I have to tell you, that’s a big deal. You must have about $10,000 worth of deductions to equal that tax credit, depending on your tax bracket, of course.

Tax credits are a very big deal. Make sure that you got the credit that you are entitled to. Do you have anyone in college? If so, fill out Form 8863 or make sure your accountant is running those numbers. Because there’s something called the Lifetime Learning Credit, as well as the American Opportunity Tax Credit. Again, these are tax credits, they are not deductions, far more powerful when it comes to saving you money.

It’s also important to determine whether you paid the Alternative Minimum Tax last year. Now, most people are not subject to AMT. If you are, you need to be aware of it.

By the way, for those of you who may have been exposed to Alternative Minimum Tax in the year 2020, check out Form 8801, to see if you got proper credit for the AMT and whether you’re able to use it, again, another tax credit.

Alternative Minimum Tax is a nasty tax, but you’re prepaying the taxes. You do get credit for that. The credit is only available to be used against certain types of income. Number one, did you pay it? Number two, do you have a credit? Number three, do you have the right income to use the credit?

For those of you who have an income, if you’re single, an income over $200,000, for those married and filing joint, if you have income over $250,000, you know about this nasty little sneaky tax called the Net Investment Income Tax.

That’s the 3.8 percent additional tax that you must pay on investment income. The important thing for all of you to know is that if you are close to those thresholds, it’s a cliff. Let’s say that you’re single, and you have a modified adjusted gross income of $205,000. Let me ask you a question, “Is there any way you could lose $5,000 worth of that income?” Because if you can lose it, you’re not going to be subject to the 3.8 percent tax. So, it’s really important to understand how close you are and whether or not you’re going to be subject to that extra hidden additional tax. Otherwise, you’re writing a check on April 15th.

Last but not least, you’ve heard me say it before, IRAs, IRAs, IRAs. It doesn’t sound like a big deal, $6,000, if you’re under the age of 50, or $7,000, if you want to take advantage of the catch-up contribution. It doesn’t sound like much, it’s a big deal. Just ask my kids, they did Roth IRAs with their money from their summer jobs.

Even as a financial planner, I’m shocked at what these balances have accrued. That continues to grow, tax-free, for the rest of their working life and for their retirement. It’s never too late to start an IRA. You need wages in order to set it up. It’s a great opportunity to teach your kids about money. Those are a few of the tips and a few of the ideas.

Those are a few of the ideas to consider when you’re reviewing your tax return. If you have questions, go to our website at keyfinancialinc.com. Send us a message. We’ll be happy to review your tax return with you so that you can be better prepared, not just this year but every year, to make sure you’re not paying more tax than you have to.

I’m Patti Brennan, Key Financial, Wealth Management with Wisdom and Care. Have a great day.

*Neither Patti Brennan, Key Financial, Inc. nor Royal Alliance Associates, Inc. provides tax advice. Please seek the guidance of a tax professional regarding your particular circumstances before making any financial decisions.

Ep95: Former U.S. Ambassador John Emerson – Part 2

About This Episode

In the second of a two-part series, Patti welcomes John Emerson, currently the Vice-Chair of Capital Group International. John previously served as the US Ambassador to the Federal Republic of Germany during the Russian Invasion of Crimea in 2014. In the first episode, Patti invited John to give his unique perspective on the Russian invasion of Ukraine and how it is affecting economies around the world. In today’s episode, John probes into the potential China-Russia collaboration and the impact that this uncertainty is having on the international markets, the war in Ukraine, as well as China’s trading partners. They also look toward the US Midterm elections and strategize how that might play out for both political parties.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me for a second podcast, how lucky are we, is John Emerson.

If you listened to the prior podcast, you heard my introduction there. If you didn’t get a chance to listen to it, I just have to tell you that I am pinching myself that I have THE John Emerson on my show today. By the way, I should also mention because we are talking about the Russian Ukrainian conflict, that today is March 21st.

This is such a fast-moving situation that a week from now it could be completely different. We can’t get anybody better to give us some insight into what might be going on over there, what might be in Vladimir Putin’s brain, and what his strategy might be and potential outcomes.

I thought, John, your insight in terms of what you think the end game is going to look like was fascinating. Before we go, let me just give you some background on John. John is vice-chair of Capital Group’s international division, in charge of global distribution.

In between 2013 and 2017, he was also the ambassador to Germany. If any of you are history buffs, that happens to be the time when Russia invaded Crimea. John has incredible insight into what was going on then and what might be going on now.

In 2017, he was awarded the CIA Medal and the US Navy’s Distinguished Public Service award. He was also awarded the State Department Susan M. Cobb Award for Exemplary Diplomatic Service. I didn’t mean to overdo it in the prior podcast, but I totally understand, John, why you received that award, because you understand the importance of the diplomacy.

For example, the fact that we can’t back Putin into a corner, because the erratic behavior could get worse, and more devastation could be the result. Again, thank you so much for joining me today.

John Emerson: Thank you. It’s great to be back.

Patti: Let’s pick up where we left off, OK? I’m curious what you think about this newfound love affair. It’s probably not a love affair but this newfound relationship between China and Russia.

I want to run something by you John, and again this is you and me talking. I can’t believe that I get to talk to you for all this time even though there’s thousands of people who are listening right now, but I am wondering if you could do a fact check for me.

Is it true that Ukraine has a particular type of oil that is the only kind of oil that you can use for computer chips? I am thinking outside the box here, I am wondering if Russia’s invasion of Ukraine to get control over that oil is a precursor to China’s strategy to invade Taiwan.

Taiwan happens to be the computer chip giant of the world. They make more computer chips than any nation and if they could dominate that technology, it would have incredible impact on all of us all over the world. Is that true or it that just…

John: I think the bigger issues with Ukraine is not so much the oil but the food. China is Ukraine’s great biggest trading partner today. Not Russia, China. Because it buys so much wheat and barley from Ukraine.

One of things we didn’t talk about that’s a potential dangerous tragedy that will have massive ramification for particularly in the developing world is Ukraine is missing a growing season here.

Who is out there planting fields? They are being invaded now. They’re trying to deal with that and much of Ukraine’s wheat, barley, and other grains obviously goes to China but much of it goes to the developing world as well.

Set that one aside, but that’s a big, big issue that isn’t impacting things today but in the next couple of years could be impacting markets globally and create humanitarian disaster globally as well.

In terms of the semiconductor piece, don’t forget if China invades Taiwan, they’ll probably be destroying the semiconductor industry. That’s not going to be an easy…We can talk about what are the takeaways that China has from this? The Taiwanese Army isn’t military isn’t necessarily as well trained as the Ukrainian military.

Let me tell you, Taiwan is way better armed in terms of planes, in terms of anti-aircraft, equipment, so on and so forth. You could easily see a shutdown of that. My sense is China and maybe the situation you’re talking about would play into this.

China would rather develop its own capabilities over the next five, 10 years in semiconductors and do it that way, whether they’re stealing intellectual property, or what have you. That’s probably more likely than a short-term.

Let’s get this oil ultimately through Russia, and then let’s invade Taiwan to take over the semiconductor industry. I don’t see it playing out quite that way.

Patti: Very interesting. What do you think about Biden’s handling of the whole conflict?

John: I think he’s doing quite well in that. He’s getting good marks for it. It hasn’t had that much of an impact on his overall approval rating. You see the polls that have come out recently including over this past weekend are, he’s getting very high marks on how he’s handled this. It is from a bipartisan basis, which is encouraging.

It’s nice to see the country coming together on something. Back to China, you’d mentioned this alliance they seem to have or partnership or whatever. This 5,000 word communique that Putin and Xi published after their eve of the Olympics meeting is hugely significant.

Because what it suggests is that, or it suggests, what it declares, is that China and Russia are going to work together to try to create a new world order. A different order than the rule of law order that the West established in the wake of the Second World War. They talk about it being a partnership for life without condition.

Of course, you’ve now seen China at least from the standpoint of its public statements be very supportive of Russia. Note two things. Number one, the word “Ukraine” did not appear anywhere in that 5,000-word communique.

Number two, while China has publicly said, “Yeah, we’re backing Russia.” So far, they’ve declined Russia’s invitation to supply the military. That is something to keep an eye on by the way, to supply military support to Russia. Number two, they keep calling for peace and communicating with Ukraine, and talking about national sovereignty.

Sovereignty is really important to China because they want to say, respect sovereignty, don’t tell us what we can and can’t do with Uyghurs or with Hong Kong or ultimately with Taiwan, which they see as clearly part of China.

At the Munich Security Conference, and I was sitting in the audience when this happened, Wang Yi, who’s the foreign minister of China gave this big speech and he talked about sovereignty in the speech. In the Q&A period afterward, Wolfgang Ischinger, who is the chairman of the Munich Security Conference asked him, “Does that include Ukraine?” He had to say, yes, which was pretty interesting.

My theory is that, while Xi Jinping initially thought, “Hey, this Russia, Ukraine thing is great. I get a freebie.” I get to watch while Vladimir Putin is taking all the risk and being the tip of the spear. What is the West response to this kind of invasion?

Will they in fact deliver on imposing the level of sanctions that they are threatening to impose? What will the military response be? He’s got an answer. I would think that the answer will certainly give him pause as it relates to Taiwan in two respects. Respect number one is, wow, the West came together. They were serious.

They imposed serious economic sanctions. That would happen here in all likelihood, and I’m trying to rebuild our economy, and I don’t necessarily need that, certainly not right now. That would give them pause.

The second thing that would give them pause is he knows he’s got the biggest military in the world. Technologically, superior military in many respects, but a very poorly trained and inexperienced military. To watch Russia, get bogged down in Ukraine, it’s got to make Xi Jinping wonder, how we would fare under these kinds of circumstances.

It’s interesting, he often talks about, he saber rattles and they do drills, in the part of China that is closest to Taiwan. They sometimes have overflights of Taiwanese airspace. The truth is, he always talks about having a world-class military by 2050.

He knows they’ve got a long way to go. In terms of that, they haven’t fought in a war since the end of our Vietnam War, when they fought against Vietnam for a while. That didn’t work out too well for him. That’s the second thing.

The one area of positive I suppose Xi Jinping could say, “Oh, this is interesting, the West and NATO did not engage militarily because they don’t want to engage with a nuclear power.” That would be maybe what he draws from that is the United States would probably be unlikely to send its own military in to support Taiwan, but you can never be sure.

That’s the good news for Xi Jinping, he got to learn those things. The bad news is this is turning out to be – maybe disastrous is too strong a word – but certainly turning out to be highly problematic for China.

The reason is that several of Xi Jinping’s objectives, in terms of geopolitics, and in terms of his own economy, are to make sure that Europe does not follow the lead of the United States. Which is getting much more restrictive, when it comes to China in terms of its economy, trade policy, so on and so forth.

He has been working hard traveling to Europe, European leaders traveling to Beijing. Germany, in particular, is in the middle of this. Audi has nine factories in China. Daimler just made a commitment to build factories in China and Siemens and other major German companies.

By the way, China is Germany’s largest trading partner, too. China’s largest trading partner of a lot of countries in Europe. He knows that Europeans are under pressure from the United States from the Americans to slow down there in deepening involvement with China and engage in more punishing behavior that we have inflicted on them. He doesn’t want to see that happen.

What’s the consequence of this, all of a sudden, Europe and the United States are closer together, not necessarily on China, but they’re closer together on sanctions, they’re closer together on the military. That cannot be good news for him.

The second thing is, as a result of the sanctions and blowback on the sanctions, and what’s likely to happen to European economies as a result of the energy crisis and spike in energy, and all that. There could very well be a global recession, certainly a recession in Europe.

He wants to sell stuff that China makes to Europe. A recession is not helpful in that kind of relationship. A global recession would touch on China very dramatically again, at a time when Xi Jinping is trying to stabilize the Chinese economy deal with some of the challenges that it has in the real estate area and other areas. He’s got to be sitting there.

Then the final thing would he’d be very worried about I would think, is being painted with that Putin pariah brush. For sure, Putin is a pariah in Europe. I don’t see that changing anytime soon, if ever.

The more it looks like Xi Jinping is a little pal as they’re good at doing this together and besties forever, that is not going to be helpful to China, in dealing with Europe and it could, depending on how supportive China is of Russia, economically or particularly, militarily, it could put China in the crosshairs of the sanctions regimen that Europe has already and United States are already imposing on Russia.

If I’m Xi Jinping, I think they’re in treaties about, “Can’t we all get along here and let’s have peace.” That’s more than lip service. It’s not helpful to them to have this go on. By the way, think about the food crisis I mentioned earlier, they want to buy that Ukrainian wheat and barley.

If it ain’t being grown and harvested and shipped, that’s not helpful to them either in terms of their needs in terms of food. It’s a pretty complicated situation. You see China almost twisting itself into a pretzel in terms of its response here.

I would keep an eye on this question of providing military support to Russia. I honestly believe that at the end of the day, that geopolitical relationship with Russia is probably more important to Xi Jinping thing than anything else. He does not want to see Russia fail. He does not want to see Russia economy totally crater. Very interesting period of time to watch in that relationship.

Patti: Wow, very interesting. Let’s bring this back to our shores. We’ve got a lot going on in the United States, even outside of the Russian Ukrainian situation.

For example, we’ve got our own midterm elections coming up. What do you think about that? I’d be curious, because I know you’ve got a lot of experience in that realm as well, working with different presidents, what do you think?

John: I think that the general conventional wisdom, which is that Democrats are going to lose the House and the Senate is partially right, but partially we don’t know yet. I’ll play that out for you. When you think about the House of Representatives, every time the same party has control of the White House, the House, and the Senate, they get whacked in the ensuing midterm.

The only exception to that since the early ’90s when Clinton lost, he had a 50-seat majority in the House and a seven or eight-seat majority in the Senate lost both of them in 1994 after his election in ’92.

The only exception to that was in 2002 when George W. Bush had both the Senate and the House and didn’t lose anything 2002. That was partially because we were in the rally around the flag effect from 9/11. Once he got reelected in 2004, lost both in 2006.

Obama comes in, he’s got everything. In 2008 lose, we got the Tea Party movement loses the House in 2010. He gets reelected in 2012 and loses the Senate in 2014.

Trump comes in and has them both. Gets his big tax bill cut. Almost does away with Obamacare, but for John McCain’s thumbs down and then loses the House badly in 2018. Then loses the Senate and actually loses his own election in 2020.

Now Biden is sitting here with a much smaller majority than either Clinton or Bush, or Obama or Trump had in both bodies. There’s a zero majority in the Senate. It’s a 50 50 Senate. There’s a five or six-seat majority in the House. History huge headwind for the Democrats.

The second thing that’s a headwind is…You asked me earlier about how’s Biden doing with his response to this, he’s doing great. Guess what, folks, as James Carville said during the Clinton campaign, it’s the economy’s stupid, and what people are going to vote for in the midterms is whether they think we’re on a right track or a wrong track in terms of the direction of the country.

Wrong track, you’re very unlikely to continue to give leadership to the party that’s been in power. The right track, wrong track, numbers are upside down, and so far as the Democrats are concerned.

I think there are a couple of reasons for that. One is, obviously, people are sick of COVID. They’re tired of it. They’re just in a bad mood in general. Second thing is…even though unemployment is at record lows, and wages are going up, so is inflation.

There are all these statistics that show that if you look at the increase of wages, and the increase of cost that people are still ahead, but individuals don’t feel that way, families don’t feel that way.

On inflation, you get a report card every time you get in your car and drive four or five blocks and see that big sign in front of a gas station that says what gas prices are. I saw one in California…There are several in California that are over six bucks, I filled up my car, which has about a 17-gallon tank, and it was $97. This was yesterday when I filled that up.

Usually, it used to be 40 bucks to fill that car. In any event, this is not helpful for Biden’s approval ratings, not helpful for the Democrats. I also think that honestly, the Democratic Party made a mistake in terms of the way it handled the election in 2020.

Joe Biden was elected because he wasn’t Donald Trump. He was elected to restore a sense of calmness, decency, and competence of those who voted for him to the government. He wasn’t elected to be Bernie Sanders, and he wasn’t elected to be FDR and a big transformative president.

When particularly the progressive wing of the Democratic Party saw, “Aha, we control the House. We technically control the Senate.” Because if you get all 50 Democratic senators, plus Kamala Harris as the vice president breaks the tie, under those circumstances, you can get anything you want through, well, not really.

Not when you have a couple of those 50 senators who represent Ruby Red States and not when you have a number of House members who represent districts that actually voted for Donald Trump in the presidency, but voted for them, the moderate Democrats in the Congress, it was an unrealistic overreach, if you will, in terms of some of the policies.

Then also that by trying to combine everything into one, it’s lost…It was all about the big number, and it was none about the individual policies, many of which were quite popular in terms of childcare, increase health care, reducing prescription drug prices, and things like that. If you took some of these things separately, probably would have a better time with them.

Then the third thing was you had that disastrous withdrawal from Afghanistan, which I think that the way the Russia Ukraine situation is being handled has mitigated some of the perception coming from that, but that still stuck with it.

You have a situation where history is against the Democrats and the Biden approval numbers have been hurt as a consequence of those things that I just mentioned, making it very, very tough to see them holding the House.

The only thing that I think could change would be is if you have some external galvanizing incident or event that changes the political dynamic in the next few months and that you could say Black Swan event.

The Black Swan you don’t know about it. The only thing I could think of that could potentially do that, that’s not just out of the blue would be if the Supreme Court were to somehow completely gut or overturn Roe v. Wade.

I think that in swing congressional districts, you might have voters who would be inclined to vote Republican, but they sometimes vote Democrat, say, “I wanna send a message that this is not OK.”

There’ll be other districts where this will be a hugely positive thing. Those are probably districts that are going to go Republican anyway. In any event, that would be maybe something, I think 90 percent, maybe 95 percent Democrats lose the House.

On the Senate, it’s much more of a close call. It’s almost a flip of the coin. Why? Because you have four to five vulnerable Republican seats, three of which are vulnerable simply because of retirements and you have three or four vulnerable Democratic seats.

Honestly, if you break it down, I would say you probably have three vulnerable Republican seats and two vulnerable Democratic seats in any event. It’s entirely possible that you get a pickup here, a loss there.

Patti: And they offset.

John: You stay with 50 50. Or one way or the other, it’s like 51 49. Could be very, very close.

I don’t see this being a red wave election vis a vis the Senate. There’s a possibility the Democrats could control that. Of course, your home state of Pennsylvania is one of those retirements that you’ve got highly packed, intense primaries in both parties for who’s going to be the nominee.

That one will probably be a very, very close election in Pennsylvania, and a critical one for control of the Senate. But if everybody holds, if Republicans hold all their seats and the Democrats hold all their seats, we’re still at 50 50 situation.

You might say, “Well, why is that important if Biden’s not going to be able to get any legislative agenda through anyway with the Republicans controlling the House for appointments, we have a Supreme Court nomination that’s the hearings are happening this week, next week.”

If the Republicans control the Senate, it creates a very different dynamic in terms of what happens on the Supreme Court. Remember in the last year of Obama, one of the early parts of the year, all of a sudden, Justice Scalia dies suddenly and shockingly.

Mitch McConnell who controls the Senate said, “We’re not even going to hold a hearing on a successor.” Notwithstanding the fact that numerous times in history where in the final year of a presidency, the Supreme Court Justice was appointed and confirmed by the Senate. He has the control to do that.

If you had an opening the next time, you could easily see that happening again. That’s very important for appointments and particularly thinking about judges and future people in an administration. There’s always a lot of turnover in administration after the midterms. These jobs are 24/7 jobs. Many of them are quite exhausting. People often don’t even stay for the full four years. Those people have to be confirmed, as well.

That would be, I think, a consequence and why it would be important from a Democratic standpoint to keep control of the Senate and, of course, equally important for the Republicans to pick up, flip that one seat that they would need to take control. That’s how I see the midterms at this point in time.

Patti: OK. Let’s fast forward since I have you. I am curious, raise the curtain on 2024. Do you think that Biden runs, do you think that Trump runs? What do you think that election is going to look like?

John: I think, on present facts, if I were to be making a prediction, I think we have a rerun at 2020. I think if Trump runs again, he gets the Republican Party nomination, even though there are some candidates that are looking at running against him.

I think he is flirtation with Vladimir Putin over the years and even calling him a genius a week before this invasion started. There are some in the Republican Party are going to use that against him if they decide to run against him, but he still has such control over the Republican Party base, or what the Republican Party base has evolved into, in the age of Trump.

He created a lot of new voters. If you think about it, in 2020, Biden got the most votes of any presidential candidate in history. Trump got the second most votes of any presidential candidate in history, 74 million votes. A lot of those were new voters. They were people who had been turned off to the process, never paid attention, whatever, who came out and voted, particularly in rural America.

This is a new Republican Party and, I think, it’s no longer the Reagan Bush party. It’s the Trump party. To the party of Trump. You can see that in the reluctance of so many current Republican officeholders, including many who are cowering under their desks on January 6 to even want to proceed with the investigations on January 6.

That’s just an indication of the control that he has over his party. I think if he runs again…He loves the spotlight. He probably wants to prove that he could win, or in his view, he did win, and he’s going to win a good for the third time. It would be the way he characterized it. Honestly, I don’t know. I don’t have any insight into his thinking on that.

Looking at public statements, you have to guess that he runs and gets the nomination. Go ahead.

Patti: I guess, the other way to ask the question is, why wouldn’t he run?

John: I think he wouldn’t run, number one, if he’s enjoying his life now. He’d be the big kingmaker. He’s traveling around as much as he wants to travel, he’s playing golf, he’s making money again, and he doesn’t want to lose. Let me just tell you something.

Patti: That’s a good point.

John: Historically, a president loses one or both seats of Congress in their second year in office, and they get reelected. Happened to Clinton, happened to Obama, and so didn’t happen to Trump. Trump’s presidency was a rather unique presidency from that standpoint.

The reason is the public likes a balance. I don’t know if people go into the polling booth and think, “Well, I’m doing this, so I’m going to do that.” It just ends up playing out this way.

Patti: It does work out that way.

John: In a strange way, if you have the Republicans controlling the House and the Senate, moderate swing voters who independence which is a third of the country, those are the ones that determine presidential elections in states like Pennsylvania, they may say, “I’m not sure we want to go back to what we had with Trump and to rebut.”

Maybe it helps Biden a little bit to get reelected, which of course, answers your second question, which is despite and run for reelection, and I must say people look at me cross-eyed sometimes when I say this, but I think that absent some catastrophic health situation, which obviously none of us would hope it would happen.

For sure Biden runs again, he’s been saying he’s going to run. He doesn’t want to be, what do you call it? A lame duck. He runs even if the Democrats lose the House, or the House and the Senate, in the midterm elections.

In many ways, particularly if it looks like Trump’s going to be the nominee for the Republican Party, Biden might well be the strongest candidate that Democrats would have against him.

Then you’d have a rerun, which would mean a big popular vote when for Biden, and a razor-thin electoral college vote in the general election to see who in fact, will be the president. Five out of our last six presidential elections from an electoral college standpoint have been razor-thin.

In two of them the loser the popular vote, won the presidency almost in a third because if 45,000 votes changed in Wisconsin, Georgia, and Arizona, collectively, Trump would have been president and not Biden. We’re looking at another nail-biter in terms of the presidential. That’s my curtain-raiser on 2024.

Patti: Fantastic. Well, folks, you heard it here first. John, thank you so much. Great intel on China, Russia, the United States, our political situation, the midterm elections, and as you put it, raising the curtain on the presidential election in 2024.

Thank you, thank you, thank you. What a privilege it has been to have you here with us today. Thank you so much for everything that you do, for those financial advisors in the United States who rely on Capital Group, as we do for independent thinking.

Folks, I would like to tell you something about John that happened between the two podcasts today. I said, John, in the second episode I usually like to ask people what’s OK to ask you what’s not OK to ask you? Can we talk about China yet? And he said, “Sure, ask me anything”.

What about the economy? He said, “You know Patti, I don’t know that I’m going to be the best person to answer your questions on the economy. I’m not an economist. We have great people internally here who are experts on the economy. I can give you an overview, a top-level, opinion if you will, but that’s not my area of expertise.”

I have to tell you guys, that is the reason why Capital Group is so trusted by people in our industry because they give it to you straight. They’re not fluffing things up. It’s just good old-fashioned advice. They don’t make excuses. They just give it to your real.

John Emerson is a perfect example of that culture. Thank you so much for joining us today. It was great to have you.

John: Well, thank you, Patti, and thank you for the work that you and your team do, to help your clients navigate through these challenging and difficult times. We appreciate that. I know, they appreciate that. You guys are terrific. I just want to thank you for what you do as well.

Patti: You bet, absolutely, it takes a village. Right, John? It takes a village.

John: Yes, it does.

Patti: Thanks to all of you for tuning in today. If you have any questions, you want to hear more about this topic or other topics, go to our website, at keyfinancialinc.com. Let us know what you think. Feel free to put in a comment.

Let us know if there’s something else that you want to learn about because we do this for you. It’s wonderful for us because, in preparation for these podcasts, we have great conversations with people like John in advance, and I learned so much. It’s fantastic. We’re learning together. Thank you for giving all of us that opportunity to do so.

I hope you stay healthy. I hope you stay safe. Thank goodness, we live in the United States of America, and have wonderful people leading us in both Republican and Democratic government. There’s a lot to be grateful for. Most of all, I’m grateful for you. Thanks again. Have a great day.

Ep94: Former U.S. Ambassador John Emerson Dissects the Russian Invasion on Ukraine

About This Episode

In the first of a two-part series, Patti welcomes John Emerson, currently the Vice-Chair of Capital Group International. John previously served as the US Ambassador to the Federal Republic of Germany during the Russian Invasion of Crimea in 2014. Patti invites John to give his unique perspective on the Russian invasion of Ukraine and how it is affecting economies around the world. Delving into the geography and history of these countries and their political motivations over the centuries helps the listener to understand the actions of NATO and Ukraine today. Are the sanctions making a difference? John’s insight into this war is based on decades, if not centuries of conflict – this episode is not to be missed!

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Folks, I have to tell you that I need to pinch myself right now because I can’t believe that I am going to be talking one‑on‑one with John Emerson. I will introduce John in a moment, but it’s actually not even one‑on‑one John, because there’s probably going to be thousands of people watching us and listening to us right now.

This is how busy John Emerson is. He can’t take a phone call. He can’t do a podcast without somebody trying to reach him.

To give you guys a feel for why I feel so privileged to be able to bring John to all of you, John is vice‑chair of Capital Group International. He’s got 21 years of industry experience. He knows so much about so many things.

We had a prep call and I was taking notes like a crazy lady. It was unbelievable. By the way, to give you an idea what got us to that point, I was invited to a special conference with Barron’s, and John was one of the keynote speakers. Everyone in the audience was basically saying, “Keep talking, John. Keep talking.”

We were all spellbound, and his insights were so far‑reaching. Whether it had to do with the international conflict that we are watching and experiencing or Biden’s plans and his tax law, etc. He’s just amazing.

I’m really honored and proud to welcome you to the Key Financial podcast, The Patti Brennan Podcast. Which by the way, I fought against the name, because I don’t want these things to be about me.

John, if you don’t mind, let me give everybody a little bit of background in terms of what you have done in your short life.

John was the Ambassador to Germany from 2013 to 2017. For those of you who just listened to the podcast that I did with Kristopher Thompson, you will have learned the history of this Russian aggression, starting in the 17th century and what has led them to this point.

John happened to be the Ambassador to Germany when Russia invaded Crimea. He’s got incredible insight into what was going on then and maybe what Putin is thinking now. In addition, while he was serving as the Ambassador in 2017, he was awarded the CIA Medal and the US Navy’s Distinguished Public Service Award.

He was deputy assistant to President Clinton, where he coordinated economic conferences and served as the President’s liaison to the nation’s governors, etc. I could go on and on.

John, you are an inspiration to me. Anybody that is listening today is going to understand why many of us feel the way we do about the service that you have done for our country, for our industry, for Capital Group. We are all better people because you’re in it.

Thank you so much for joining us today.

John Emerson: Well, thank you so much, Patti, for that lovely introduction. I wish my mom were around so that she could have heard it.

Patti: Well, you know me. Actually, you may not know me that well, John. I mean every word of it. It’s really a privilege to have you on the show today.

John: It’s an honor to be here.

Patti: As I was thinking about what part of that brain of yours I wanted to tap today, I was thinking about the quarterly letter that I had sent out to our clients. I started it out with several things that many people might be worried about right now.

I’ll list them for you. Number one is Russia’s invasion of Ukraine. Inflation is at its highest levels. The Fed is tightening its monetary policy. Growth stocks and stocks, in general, are plummeting. Interest rates are going up. The housing market has been on a tear, and a lot of people don’t know what’s going to happen from here.

By the way, we’ve had a pandemic for the last two years, and along with that, supply chain issues, labor market issues.

I think the real thing is no matter where we look, I will say, as an advisor, I want to keep my clients safe. I want to protect their money. Yet, what do you do today? If we put it in the bank, FDIC insured, etc., but then we have a 7.9 percent inflation rate, one year later, the value of that money – let’s say, it’s a $10,000 – it’s going down by about 7 percent.

That’s a permanent loss. It’s not volatility, because inflation is very sticky. We’re not going to talk about all those issues at least in this first podcast. I may hit you on some of these other ones in the second one, so everybody, stay tuned.

I’d really like to learn from you, your perspective on the Russia‑Ukrainian situation. What do you think Putin’s thinking?

John: First of all, Patti, again, thanks so much for having me. I do want to address your opening there.

If you’re an investor and you sit out there and you’re like, “We got this issue and this issue and this issue and this issue. My goodness, there’s so much uncertainty out there in the world. What should I do? How should I deal with it?” tonight, I just want to remind people that if you have spent time with your advisor, and developed a good long‑term plan for your investments, this is the time to stick with that plan.

When I was in the Clinton White House, Bob Rubin always used to say when the markets go up, markets go down. The key thing is to have a strategic plan that’s going to help you meet your needs 5 years, 10 years, 15 years from now.

Now, if all of a sudden there’s been a change, you have a life change going on whether it’s an illness or a death in the family or a divorce or something like that, and you need to change, or all of a sudden, money you thought was going to be there to send your kids to college, you don’t have that, then maybe you do need to make some short‑term shifts.

I think that particularly during these periods of volatility, stick with the plan that you’ve developed with your advisor.

That’s what we tell everyone at Capital Group. If you think about it, we’ve been through a global financial crisis. We’ve been through the COVID pandemic. We’ve been through the dot‑com bust. We’ve been through the recession in the early‑’90s, a recession in the early‑’80s, the terrible bear market at ’73, ’74.

At the end of the day, things always tend to improve once we go through those. At the end of the day in every circumstance like that, there are investment opportunities that we can take advantage of. As a message of reassurance to your clients who are listening, I just wanted to say that.

Patti: John, I didn’t mean to interrupt you, but that means a lot coming from you and Capital Group because what a lot of people may not realize is Capital Group has been doing this since 1934 with the launch of their first mutual fund. My goodness, you guys have seen it all. Boy, there’s a lot to be said for experience.

To your point, we talk about a financial plan. Everybody has a financial plan. It is not to say that your advisor is doing nothing, and I mean this generally speaking. It’s not a noun. It’s a verb.

We’re always doing something, even if that means doing nothing because sometimes that’s the best thing to do. We do want to keep that in mind that there’s a strategy that we are going to stay with no matter what’s happening in the world around us, and that strategy will change if your life changes. Thank you for that.

John: Your managers are also making changes within the portfolio there. Maybe they’re harvesting losses that will help from a tax standpoint. There are always good companies that get whacked during times like this, which creates other opportunities. Enough about that.

Patti: Fantastic. Thank you so much.

John: Let’s get on to the issue at hand, which is, of course, the tragedy that’s unfolding in Ukraine. It sounds like you had a great podcast previously, learning a lot about the history of Ukraine and, more importantly, the history of Russia’s perspective on Ukraine. Unfortunately, with Vladimir Putin, we have a couple of things going on.

One is there’s a little bit of a Mars‑Venus situation. We see NATO as a defensive, collaborative alliance, an alliance that actually was hoping that Russia might be a part of it in the early and mid‑90s after the dissolution of the Soviet Union. He sees it as an offensive force.

We see Ukraine as a potentially thriving democracy, market economy, potentially a member of the European Union over time. He sees it as a threat to his survival as the leader of Russia. It’s always important in these things to try to put yourself in the other guy’s shoes. There are three issues here, as it pertains to the way Vladimir Putin looks at the world and looks at this conflict.

Number one, he honestly believes that, and he said this on multiple occasions, the greatest tragedy of the 20th century was the dissolution of the USSR. Not two World Wars, not the Holocaust, not the dropping of the atomic bomb, on and on and on. What he saw as the greatest tragedy was the Soviet Union falling apart.

He wants to, as his legacy, effectively make Russia great again. He wants to restore the greatness of Russia, which he saw as exemplified in the strength of the Soviet Union. That’s point number one.

Point number two, he believes that Ukraine has always been part of Russia, is a made‑up country. There’s some historical accuracy to the fact that big parts of Ukraine originally began in the area around Kyiv and all that. He sees that as a huge mistake that was made by even Lenin. It’s unusual to hear a Russian President criticizing Lenin, but he does, in creating this separate entity, Ukraine.

Of course, Ukraine does have its own culture. It does have its own language. It does have its own political and economic structure. In any event, it’s like, “We owned it, we should have it, we can take it back if we want to, and you, the West, should not interfere in that.” The same way China looks at Taiwan, by the way, which I’m sure we’ll get to a little bit later.

The third thing is that Vladimir Putin sees a thriving democracy that’s Westward‑leaning on his border as a threat. It’s not so much a threat because he thinks, “Oh, we’re going to invade Russia.” It’s a threat because of what that represents to the Russian people. His economy’s a one‑trick pony. John McCain used to call it a gas station, which is a little cryptic.

In any event, it’s a one‑trick pony. It’s oil and gas. Something like 80, 85 percent of the Russian economy is driven by that. The lives of Russians, they’ve been getting better, actually, over the last few years as they’ve become more in tune with the West.

Historically, you can never underestimate the capacity of the Russian people to endure suffering. Tragically, they’ve endured a lot of it over the years. It’s not a great situation.

For the Russian citizens to see a thriving democracy with free speech, with the kinds of opportunities that we in the West have, right on the border, particularly in a country like Ukraine where there has historically been such a connection to Russia.

There are a lot of intermarriages. There are a lot of Russian families that have friends and relatives in Ukraine. There are a lot of Russians who live in Ukraine and write home about it. That is a threat to him.

Anytime he sees a popular uprising against an authoritarian regime, which is what happened in Ukraine during the time I was ambassador to Germany that you mentioned back in 2014 with those protests on the Maidan against the kleptocratic ruler of Ukraine, Yanukovych, who then fled, that’s the time when Putin stepped in, grabbed Crimea, moved into the Donbass to set Ukraine back on its heels.

What was the issue that prompted the uprising against Yanukovych? He was actually flirting with the West and talking with the EU about how Ukraine could become an EU member. Putin leaned on him and said, “Don’t you dare do that?”

Yanukovych changed his mind and said, “Oh, well, we’re not going to join the EU. We’re going to join the EEC,” Eastern European Commission, or whatever, that Russia established, made up out of whole cloth as a way to counter the EU. That’s when the public came out to the streets and rose up against him, and also rising up against corruption. Vladimir Putin…

Patti: Wasn’t he impeached? Wasn’t Yanukovych actually impeached?

John: He was and then he fled the country and fled to Moscow. That’s where Putin was terrified that there would be a more democratic setup in Ukraine. He does not like to see, what they call, color revolutions – the Orange Revolution, the Green Revolution, the Yellow Revolution. He does not like to see these on his borders.

Don’t forget, Vladimir Putin was the KGB guy who was in Dresden during the protests that ultimately led to the fall of the Berlin Wall. He sees what can happen. He sees that as being a disaster and a disastrous situation. You have those three dynamics.

When Zelenskyy came in, they thought, “Oh, we can manage this guy. I mean, come on. He’s an actor. He played a president on TV.” Who knew that Zelenskyy was going to turn into Winston Churchill? Zelenskyy started much more affirmatively, creating a free press environment, rooting out corruption, creating an economic environment where maybe they could become a member of the EU.

Putin says, “Well, I don’t want them be members of NATO.” He knew darn well, from Biden, from all Olaf Scholz of Germany, from Emmanuel Macron of France, he knew darn well there was not a chance on God’s green earth that Ukraine was going to become a member of NATO. Why?

Patti: Why is that?

John: Because NATO has Article 5, which says, “An attack on one of us is an attack on all of us.” Putin already was attacking Ukraine in the Donbass, even though everybody says, “Oh, this war has started.” The war actually started in 2014. It got pretty quiet for a while, but it’s still been ongoing.

Immediately, if Ukraine were to come into NATO, NATO would basically be buying a military conflict with Russia. This sounds a little snarky, I suppose, but think of NATO like fire insurance. You can buy it before the fire starts, but you’re not going to be able to buy it once the fire starts. The fire started in Ukraine back in 2014.

Patti: Got it.

John: Also, NATO’s a political alliance. The level of corruption that still existed in NATO, even after Yanukovych fled, was quite high. It would have taken a while for Ukraine to even get to that point.

The final question is why is he doing this now? He wants to restore Russia. He wants Ukraine to be part of the greatness of Russia. He wants Ukraine to be back. He wants to shut down Zelenskyy because he’s not being cooperative. He’s very nervous about the direction that Ukraine is taking as a Western‑leaning democracy.

Why now. If I’m Vladimir Putin, I’m looking at a brand new government in Germany. Angela Merkel, who could speak my language with nuance and pretty much could call him on his stuff, she’s out.

Olaf Scholz, who’s a member of the Social Democratic Party, which historically in Germany has been a much friendlier party to Russia than Merkel’s CDU, as the party of Politic. It’s the party where the previous chancellor, Gerhard Schroder, actually sits on the board of Gazprom.…

Patti: Wow.

John: …and was chairman of the board of the entity that built Nord Stream 2, that gas pipeline coming from Russia that became so controversial. He’s sitting there, going, “Hey, maybe I’ve got friendlies in this chancellor in Germany. At a minimum, I have a less experienced person.

Then he has Emmanuel Macron. He looks at him, he goes this guy is up for reelection in April. He’s going to be busy. Then he looks at Boris Johnson, who’s hanging on by his fingernails because he was partying a little too much at Number 10 during COVID.

John: He looks at Joe Biden, who’s down in the polls, dealing with inflation, dealing with many of those issues you talked about. Had a pretty disastrous pullout from Afghanistan. He knows darn well that the appetite in the United States for another military foreign invasion is quite low, to say the least.

Finally, he looks at Europe, which depends for almost half of its oil, gas, and coal on Russia ‑‑ and Germany in particular, 53 percent of its gas from Russia – and he goes, “There’s no way these guys are going to all come together and push back against me if I go in, in Ukraine.”

By the way, didn’t get a whole lot of response when he went into Georgia. The Chechen situation didn’t get a whole lot of response from the West. There are some sanctions.

Even the initial incursion into Ukraine resulted in sanctions, but mostly on a personal level. Nothing that seriously impacted or hurt the Russian economy, if you sit back and look at it.

He’s sitting there, banking on a very limited Western response. His geopolitical objective has always been to divide the United States from Europe and to divide and conquer in and among EU member states.

That’s part of the election interference strategy, all those things. The cyberattacks, all those things that he’s been doing over the years. He figured this is a good time to go. Two fundamental miscalculations. Number one, the West came together.

I was part of the Munich Security Conference three weeks ago. Jens Stoltenburg, the head of NATO said that the NATO member states are together in a way we have not seen since the immediate aftermath of 9/11. The West came together, notwithstanding that Europe will be hurt by having less Russian oil and gas. If Putin decides to weaponize energy and cut them off, they will be severely hurt.

They’ve come together with these unprecedented sanctions, every one of which Joe Biden, Emmanuel Macron, and Olaf Scholz laid out to Putin before the invasion commenced. He said, “This is what’s going to happen if you do that.”

His miscalculation was that the West wouldn’t deliver on that. In fact, they did. They have held together. In fact, they are tighter together, particularly in Europe, than any time in recent memory, particularly even dating back to before Brexit.

The second miscalculation was on Ukraine. When he came in, in 2014 to the Donbass and to Crimea, those were areas that had a substantial Russian population. It wasn’t exactly that the little green men that he sent in there were met with flowers, bouquets, and candy.

It was a much easier situation. They did have a lot of support on the ground. In fact, there were a number of generals in the Ukrainian Military who had grown up during the Soviet times and during the period of Yanukovych who are Russia friendlies.

It was actually quite easy for him to come in and immediately establish those strongholds and seize Crimea.

The second miscalculation was that there was going to be more of that in Ukraine. What Vladimir Putin has managed to do is take a country that was largely pro‑Russia, and turn it into a country that hates Russia and hates Vladimir Putin as a consequence of the way he’s been conducting this war.

No, he did not have that kind of response. In fact, he had both from the standpoint of the military – which was much better trained than it was back in 2014, and much better equipped than it was back in 2014 – from the military and from the people of Ukraine a much bigger response, and a much more robust response.

He had, as I mentioned earlier, Zelenskyy turning into Winston Churchill, and becoming the iconic figure that, certainly, everybody in the West wants to help. Then, the third thing, a part of this second miscalculation about how easy the war would be is the Russian troops have turned out not to be quite what we thought the vaunted Russian military was going to be.

Part of that is you have most of these troops are conscripts. That basically means there’s a draft. From what we’ve heard, they all thought they were going in on a training mission. “We’re going to keep Ukraine in line,” or, “You’re going on a training mission in the western part of Russia, in the border of Eastern Ukraine.”

They had no idea they were going to be coming in and basically bombing civilians, and in this war. What was interesting is their supply chains and the logistical challenges have been disastrous. They’ve had vehicles running out of gas. They’ve had soldiers not having food.

What we’re seeing is that they take over civilian areas. They’re actually robbing houses of food, which is creating, by the way, a major food crisis in Ukraine as well in these areas that they’ve taken in, taken over, and they’re literally losing. I’ve seen all sorts of numbers on this, but losing as many as a thousand troops a day in terms of killed or wounded.

Estimates are that the Russians have suffered somewhere between 5 and 10 thousand fatalities in the three weeks this war began. To put that in context, that is well more than all the fatalities that the United States suffered in both 20 years of both the Afghan War and the Iraq War. It’s just they’ve been whacked from that standpoint.

There’s a line in the military that before the war, it’s all about planning. After the war begins, it’s all about logistics. By the way, you’ve seen Putin reacting against his military, and having some very emotional outbursts against the leadership in the military as well.

It’s not necessarily a good thing where we are today, but that’s a very long‑winded answer to your question about what do we think Putin is thinking. I guess I would say the final thing about what he is thinking is this very chilling speech that he gave a couple of days ago about cleansing Russian society.

Patti: Oh, yeah.

John: It seems like Putin has turned into Stalin, cleansing Russian society of traitors. What that tells me, that’s not about the 500 people in a number of different communities who come out and protest. Very courageously, by the way, because they’re going to end up in jail for a long time for doing that. They usually get rounded up.

That tells me that he’s getting pressure from within the government. Whether it’s the military establishment, the economy, these ‑‑ what do you call them? ‑‑ the rich guys, oligarchs, whatever, he’s starting to get pressure. He’s basically saying, “You are dead to me, and you’ll be dead if you…”

Patti: Right.

John: Very, very dangerous, but I don’t think you give a speech like that three weeks into a war. When you would normally expect a rally‑around‑the‑flag effect from your populace and your team, I don’t think you give a speech like that unless you’re very nervous about what’s happening internally as well.

Patti: Kris and I were talking the prior podcast. Kris was an Army Ranger, and he worked a lot in logistics and planning, and that sort. We were talking about the fact that Putin is crazy like a fox.

Your observations in terms of the timing of this, and strategically looking all around the world, and all those countries are, from his perspective, vulnerable. When you talked about the apathy with prior invasions, and that sort, and hoping that that will happen again.
Kris mentioned the 40‑mile convoy and said, “You know, 40 miles is a lot of equipment. It’s a lot of tanks. There is no general in the world that would allow that convoy to run out of gas. That just is crazy.”

Again, hate to say it, but is he crazy like a fox? Is it a decoy? Is it something that he’s just pausing, hoping that everybody will think that that’s over and then really attack? It’s just so interesting to think about the strategy and, to your point, the logistics, and what was thought about and what wasn’t thought about.

The fact that now he’s having to get more firepower with his own Air Force and going in and really destroying a lot of important buildings and killing civilians. I just think he is crazy like a fox. Is he losing it? If that’s the case, how do you approach somebody like that? What do we do?

John: This is a concern because you talk to every expert, and they go, “Putin’s getting backed into a corner.” We actually don’t want him to be backed into a corner. We want some sensible diplomatic solutions. By the way, the answer to the question on whether this is a faint or a real thing about running out of gas is, did they really run out of gas?

If they really did run out of gas, maybe that explains why three of the generals have already been killed and another one has just got fired in Moscow. Three killed infield, in a theater. The other one that got fired was the principal guy in Moscow. If they didn’t run out of gas, and they’re just waiting, then you really do wonder.

Of course, the interesting thing about this is NATO absolutely does not want to, and the United States, engage Russia militarily. That would unquestionably lead to a much wider war and could potentially lead to World War III or maybe even a nuclear conflict.

NATO is not going to do that. You know that the NATO forces if they decided to engage in this, that convoy would be destroyed within 24 hours. They’d just be strafing that thing. You almost wonder, is he begging for that? I would think it actually was just a fundamental screw-up on the logistics if, in fact, they really did run out of gas.

In terms of how you deal with somebody like that, I don’t think you necessarily capitulate, but you try to develop some sort of an off‑ramp that will allow him to save some face. Honestly, I’m not sure what that would be. There are these negotiations going on between the Zelenskyy government and Russia.

Every time there appears to be a ceasefire, Russia violates it by bombing civilians. The ceasefire is for humanitarian evacuation, starts bombing the evacuation routes. Clearly, this is the strategy of just trying to break the soul and heart of Ukraine by killing so many civilians. That’s the strategy he’s engaged in.

There seem to be three elements to these negotiations. Honestly, I don’t know if this is something that Vladimir Putin actually believes or if he just wants to look good to the world. We’re willing to, in effect, sue for peace here. I’d say there were three. Actually, there’d be four elements to a negotiation.

The first element is this whole idea of neutrality and Ukraine not engaging in NATO. That’s an easy one. That’s a gimme. Zelenskyy has pretty much already said that. The second, though, is this comes from the Zelenskyy side, is he’s willing to do that if he gets some assurance of security from the West, and I suppose from Russia, although that I’m not sure it’s worth the paper it’s printed on.

The assurance of security from the West is a little odd because, of course, you would have that if you were a member of NATO. The West, clearly, is not inclined to go in. From Russia’s standpoint, obviously, the stronger the assurance of security, then they…because they want to see a demilitarization of Ukraine.

You have a military that can deal with local uprisings and that kind of thing but is not going to, at all, be anything that could be a threat to the Russian military. That’s the second point that has to be resolved.

The third point, which is a lot tougher, is territorial peace. Putin’s saying, “You got to acknowledge that Crimea is part of Russia, and you’ve got to recognize the independence of the two states in the Donbass region.” That’s like Zelenskyy agreeing to give up a third of his country.

Of course, the reality, if you want to be realistic about it, is he ain’t getting those back anyway. There’s no conceivable scenario that Ukraine expels Russia from its territory. That’s just not going to happen. The more likely scenario is a long stalemate that results in some a partition and a frozen conflict in Ukraine.

That, to me, is the most likely scenario. There’s no scenario that they expel. They’re not going to get Crimea back. They’re not going to get the Donbass back. It’s really more of a political challenge for Zelenskyy.

The other piece is if Russia wants to negotiate that, they’re making strides in terms of taking over Mariupol, which has not yet surrendered but, obviously, is being bombarded. People are being starved out. Ironically, it’s what the Nazis did to Leningrad back in the Second World War. They’re taking that approach.

Number one, he wants to land a bridge to Crimea through the Ukraine and also, of course, would love to control the seaport, which is the seaport including to the Black Sea, so Ukraine doesn’t have any ports. Clearly, if Russia controls a certain area, it’s a little hard to see them giving it back during this context. It’s not an easy negotiation at all.

The dance that’s going on, of course, the concern everybody has is nuclear. Putin put his forces on nuclear alert at the beginning of this thing. By the way, this has happened before it happened several times during the Cold War. With the exception of the Cuban Missile Crisis, we did not respond in kind and we did not respond in kind here.

We have not put our forces on nuclear alert. NATO has not put its forces on nuclear alert. It’s sort of, “Let’s not exacerbate the situation.”

The dance that NATO and the United States is doing, how much can we do in terms of providing Ukraine with the weaponry that it needs and the defense and capabilities that it needs without further inciting Russia to get to a point where Putin does decide to either use chemical weapons or thermobaric bombs, which are those vacuum bombs that basically suck the oxygen out of an area?

They basically kill people indiscriminately, or, God forbid, a tactical nuclear weapon. That’s very, very tricky in terms of the way things are going here. I do think the most likely scenario is we’re in this for a long time.

I also would say from an investment standpoint…By the way, the fourth piece of a settlement negotiation is you know Putin’s going to want a relief from the sanctions that have been imposed. I was going to say from an investment standpoint, our assumption needs to be, “These sanctions are going to be in place for a very long time.”

Even if Putin does pull back somewhat, they agree to some sort of partition, and the conflict is reduced for a while, even if that happens, war crimes have been committed here. They’re horrific. They have used cluster bombs. Cluster munitions, that’s another indiscriminate…

Think about it as a mortar shred that sends shrapnel but it’s huge, shrapnel everywhere. It kills anybody – children, in particular – very indiscriminately. There have been war crimes that have been committed here, and that’s been subject to investigations and sanctions, and so on and so forth.

It’s going to be very tough to have a reduction of sanctions. We need to be making assumptions that we’re going to be in this place vis‑a‑vis Russia for quite some time. Unless and until there’s a replacement of the Putin government with a government that’s more responsive to the West, and honestly, it could be worse. You just don’t know.

Patti: Don’t know.

John: I’ll only put that at about five percent possibility at this point because Putin still has such control over the successor to the KGB, the internal intelligence services, all that. People who are mounting efforts against him, they’re not going to get very far at this point in time. It would only be if the FSB, the successor to the KGB, their independent leadership decides this guy’s got to go, I suppose, but anyway.

Patti: It’s a…

John: Not a happy story.

Patti: Not a happy story at all, and I think about the sanctions. You and I were talking about the sanctions, and how initially, the sanctions are to deter. The deterrence didn’t occur. Now, it’s to isolate and to make them really suffer. Unfortunately, the Russian people are also going to suffer along with that.

Somebody was talking about this and said, “It’s like because they have been cut off from the rest of the world, visa cards don’t work, and AmEx doesn’t work.” None of those things for the Russian people. They don’t have access to the capital. They’re not allowed to exchange the ruble with other currency.

What’s happened is their currency has fallen in value, and it’s like monopoly money. It’s only good in that country. You need a lot more of it to buy the things you bought a month or two ago. The impact of that is going to take longer probably for that to get to the masses.

There was a great article that…I think it was Christina Wilkie who wrote in, and it was on CNBC’s website. It’s titled, “Putin’s invasion of Ukraine will knock 30 years of progress of the Russian economy.”

I feel bad because, in one sense, the quality of life did improve. We talked about that in the prior podcast. Now, they’re going to go backwards. I found it interesting how you cited, you acknowledged how much the Russian people have suffered. It’s going to continue, and even more so, probably.

I also think that it’s fascinating to hear you speak about NATO, and how it’s galvanized NATO. They are more together now than they have been in years. That was an interesting observation that you made with Germany’s new leader. The fact that he was Russian‑leaning, but now, he’s all about, “We’ve got to stop this.”

John: What’s funny about that is in 72 hours, Vladimir Putin accomplished what we’ve been trying to do in two decades. Getting Germany to step up more in terms of not just NATO spending, but building up their military capabilities, and not to be so restrictive about providing weapons to friendly nations, and things like that.

They reversed all of those things, and then, of course, Nord Stream 2. I always believe that if Putin invaded, Nord Stream 2 would be set aside. A lot of people didn’t. They were surprised to hear that. I wasn’t surprised to hear that, but that’s still a big deal.

Patti: It’s a big deal.

John: It was pretty remarkable to see that, “Bam,” change happen so quickly.

Patti: John, can you explain for our listeners and our people watching us today, what was the big deal about Nord Stream 2? Why was that such an important decision for Germany to make?

John: As I mentioned earlier, Germany gets 53 percent of its gas from Russia, I mean, natural gas.

When Angela Merkel, after the Fukushima disaster in Japan, decided, “We’re going to move away from nuclear,” they called it the energy event, or the energy change ‑‑ or evolution, I guess, you could describe it as – and move towards renewables, and so on and so forth, and they started decommissioning nuclear power plants around Germany.

That immediately put Germany in a position where they needed more gas as a transitional source. Now, they were getting gas. They were getting lots of gas from Russia. They got it through a pipeline that went through Ukraine. That pipeline that went through Ukraine gave Ukraine $2, $3, $4 billion a year in transit fees. That was a good deal for Ukraine.

Our concern when I was an ambassador with Nord Stream 2 is, “Hey, here’s another pipeline that will get gasoline directly to Germany from Russia. Out near Saint Petersburg coming across the Baltic Sea into Northern Germany is the route. That we can get you more gas, and it’ll be cheaper and quicker, and blah, blah, blah.”

Our concern was, geopolitically, this would basically give Russia another their‑hands‑around‑Ukrainians throat in terms of threatening to cut off the supplies. They could still make their sales to Europe, get their gas to Europe through Nord Stream 2, and we could bypass this pipeline in Ukraine. It wasn’t even so much.

Also, we were always saying, “Germany, you guys are pretty dependent thereon Russia for your oil and gas needs.” That was the issue, but I would say it wasn’t about we want to sell you our gas. It was more we’re worried geopolitically in terms of the way that is working.

By shutting down Nord Stream 2, which Russia had a big financial investment in, obviously, or by not even shutting it down, not opening, because it hadn’t been opened up yet, but by saying, “We’re not going to open that,” Germany’s taking a big risk.

Of course, Russia, at some point, decides to weaponize its gas and not supply them anything, then they would not do that until they were confident they had other places to sell that oil and gas because they need the money. By the way, they’re loving the price of oil these days.

The obvious person/entity would be China in buying that but, of course, China’s no dummy that Xi Jinping is going to, “Sure, I’ll take your oil and gas, but for fire‑sale prices. I’m not paying $130 a barrel of oil, or whatever it is.”

Patti: That’s a really good point.

John: Yeah.

Patti: Wow.

John: It’s interesting. In terms of your ruble thing, I know, at the outset, you’ve mentioned something about people being concerned about how’s Russia from an investment standpoint.

How’s Russia going to pay its debt, its dividends on the bonds, or interest on bonds, or whatever with these sanctions? Actually, they just made a payment. What the West did was relieve sanctions to the extent that they could access their money to make these payments.

Patti: Interesting.

John: Access to dollars, or euros, or whatever, and make these payments. Now, Russia could still decide not to do that in the future, but obviously, that is something that the Western nations, the sanctioning nations are also somewhat concerned about.

Patti: Here, let me play devil’s advocate on that part. Why would Russia be concerned about their debt outside? At this point, they’re so isolated. Why should they care?

John: To take your point even further, you can argue the best thing that would happen to them would be to have a default. Everything gets marked to zero. Then they get to, in effect, buy back these assets for nothing. Then they still own the assets, and then they would go and sell them elsewhere. It’s an indication that they don’t want to be completely cut off from global investments in the global…

Patti: Economy…

John: The financial system. Yeah, economy. Right. Clearly, they’re isolated for the West and so on and so forth. There’s always tomorrow’s view. There have to be people in Russia who just recognize what a disaster that would be to default in terms of accessing capital markets in the future. They’re hoping, obviously, there will be some kind of a future.

If Putin decides to completely go nuclear and a non‑nuclear, if not technically, nuclear sense, that would be one way to do it and plus weaponizing the energy shutting off the oil and gas exports to Europe to sanctioning nations, that kind of thing.

Patti: They would need access to capital, to rebuild what they’ve ruined in Ukraine. Right?

John: Right, if they care about that. They may not care about that. Our assumption is you break it, you bought it. It will be like, “OK, tough. We’ve got our part of Ukraine. We’re going to keep that. The West, you guys go in and spend all the money to rebuild the rest. Particularly if you end up with a partition situation or a frozen conflict there, you could well have that.

Patti: Interesting. I was going to ask you a question about China and Russia and this newfound love affair that they seem to be having, although it’s not really.

What do you say you and I reconvene in another podcast and the next podcast and let’s boil this down to the impact on Americans, impact on markets, that China‑Russian collaboration, what that could mean, is it something we should be worried about? How does that sound to you, John?

John: Sounds great. Love to be back.

Patti: Terrific. Thank you so much. Thank you for joining me today.

By the way, for those of you who are listening, because it’s such a fast‑moving topic, today is March 21st, if you’re listening to this on March 25th, it could be a whole different ballgame. I’ve got newspapers from the weekend, and things have moved and changed strategically over there.

John, thank you so much for joining me today. Thanks to all of you who are listening in and who are watching. Again, it’s such a privilege to have someone like John Emerson from Capital Group, who has just incredible international experience to give us his perspective. Thank you so much for joining us today.

For those of you who might have any questions go onto our website at keyfinancialinc.com. Let us know what you think about this podcast if there’s anything else that you’d like us to discuss. In the meantime, stay safe, stay healthy, and have a great day.

Ep93: Russian Invasion of Ukraine Through the Lens of a Former US Army Officer

About This Episode

Freedom-loving citizens around the world have been tearfully watching the news as Russia invokes war against Ukraine. What is propaganda and what is fact? Human suffering has been unimaginable and unforgivable. So much has happened, so quickly, that we are left to wonder – how did this happen? In this episode, Patti invites former United States Army Officer, Kristopher Thompson, to give a historical and geographical perspective to the Russian Federation and its obsession with Ukraine. Captain Thompson breaks down the information war and the military strategies being utilized so that the listener may better understand what is happening halfway around the world. Thompson’s unique experience offers insight into Putin, his motivation for this invasion, and whether NATO’s economic sanctions will prove to be effective measures in ending this invasion.

Patti Brennan: Hi, everybody. Welcome to the Patti Brennan show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.
As we record this episode today, it is March 21st. In today’s show, we’re going to be discussing military strategies and the history of the Russian Federation.

Joining me today is Kristopher Thompson. Kris is a Planning and Portfolio consultant with us at Key Financial, but, boy, do we have a unique privilege in having Kristopher with us. Because of his background as a former Army Ranger.

Is it former, Kris or you’re always an Army Ranger?

Kristopher Thompson: Kind of once always situation, but in the past life, I was a little bit more active.

Patti: Why don’t you tell the folks watching and listening a little bit about your background, what you did for the Army, and for all of us, as you fulfilled your role as a Ranger?

Kristopher: Sure. While I was in the military, I went through, as you said, Ranger training. I did Airborne school among a few other schools. I served as a platoon leader, and I was in charge of about 45 soldiers in a light infantry unit.

Then I moved up to be an executive officer of a company. I was second‑in‑command of a company of 140 soldiers, in charge of the logistics, supply, armament, and basically, facilitating whatever the commander needed.

Patti: Kris, you have a unique background in military strategy and operations. It’s so interesting. In our conversations, as I was preparing for my quarterly letter, you brought up a few points that I didn’t realize were really, really important as we were thinking about the Russian invasion of Ukraine.

For our listeners today, can you please explain what rope‑a‑dope was all about?

Kristopher: Yes, so boxing fans might be a fan of this analogy. Made famous by Muhammad Ali in a fight against George Foreman, the rope‑a‑dope was Ali putting his back against the ropes and taking a lot of shots from George Foreman. Really what he was doing was wearing down his opponent.

He was well-rested. He was in the defense the whole time. Then, when George Foreman was a little tired, he came out striking and famously won the fight, so the rope‑a‑dope was born.

In terms of military strategy, you and I were talking about it with regard to that 40‑mile convoy. How we look at this 40‑mile convoy from the perspective of watching it through CNN or Fox or MSNBC or all those, it’s a little difficult to understand the full scope of what’s going on. We’re seeing it through a keyhole, a 40‑mile convoy of supply and logistics, weapons.

Patti: That’s a big convoy. That’s long, 40 miles.

Kristopher: hat could be the backbone of the Russian offensive, for all we know, but it’s hard to say. I posed the idea that maybe it’s not what it seems in terms of it being stalled the way it is.

For example, if you’re a Ukrainian military strategist, that’s your goal. That could make or break the Russian advance. If you’re a Russian general, that could make or break your advance as well.

Patti: Absolutely.

Kristopher: You would want to dedicate every resource possible to either try to stall that convoy further or destroy it if you’re Ukrainian. On the other hand, a Russian general, I don’t see how they’re allowing a 40‑mile convoy to remain stagnant for so long.
I just pose the idea that maybe it’s a tactical pause. Maybe, it is more intentional than we may know.

Patti: It’s interesting because you made the comparison of what the Americans did in World War II prior to the D‑Day. Apparently – correct me if I’m wrong – we literally had inflatable tanks and fake soldiers, and we moved them into the North. Am I getting that right?

Kristopher: Yeah. We posted basically an entire fake army in Scotland of tents full of nobody fake soldiers, just wood figures out there.

Patti: They didn’t have the equipment we have today – their radar and all of that. The cameras were not nearly as precise as they are today. Hitler freaked out and moved a portion of his army to the North of France to prepare for that invasion, which allowed us to go to the south.

Kristopher: He actually pushed entire divisions north. Obviously, they didn’t have an easy road by any means on D‑Day, but it definitely lightened some of the defenses up of the Germans.

Patti: Wow, sweet. Fake them out.

Kristopher: Exactly had faked them.

Patti: It was also interesting because when you and I were talking, you basically said, “Patti, there is no way any general in the entire world would allow a 40‑mile convoy to run out of gas, especially if it’s Russia. They’ve got plenty of gas, right?

Kristopher: Yeah.

Patti: 40 miles, I was thinking about that. That’s a long way. That’s further than West Chester, Pennsylvania to Philadelphia. Think about how long 40 miles is – that’s a lot of tanks, equipment, etc. I can certainly understand why they would want to hyper-focus and invade in that way, but it’s clearly either not working, which is the information that we’re getting, or they are faking people out.

Kristopher: Trying to do a little bit of a head fake. It’s nearly impossible to say it’s hard to get into the mind of a foreign military, especially one that’s so centralized on really one man.

When the United States typically does something, there’s a little bit of a process to it, and you would hope that it’s a little bit more transparent, whereas whatever Putin decides is the way that we’re going to go.

For that specific 40‑mile convoy, it’s just hard to believe that it’s there on accident, either it is there on accident, and they have problems like you wouldn’t believe, or they’re paused for some specific reason, impossible to say which, but it’s food for thought. Really, I think that the scope we see things through in this event is very small. It’s worth second-guessing some of that information that seems obvious to us.

Patti: It’s interesting, I will never forget seeing Condoleezza Rice in person. She was describing Putin because she worked in Russia, in Moscow for 16 years and got to know him quite well. Apparently, he really liked her a lot, but she said he is crazy like a fox. I’ll never forget she said, “We are never ever, ever to trust that man.”

Kristopher: Actually, I saw a quote today this morning, Colin Powell said, during the Crimea invasion when things were a little bit heated, he said he knew Putin very well. He said, “Basically, he is KGB through and through.” That’s why I look at that convoy and take pause to think that maybe it’s not what it seems because he’s a master of asymmetric warfare.

Patti: Kris, can you give us some longer‑term perspective regarding the Russian Federation? What has made them so aggressive? What makes them think they could just walk into another nation and take it over?

Kristopher: There’s a long history of entanglement between these two nations going back to the 17th century. Prior to that, prior to the 17th century, Ukraine had its own autonomy. They were not necessarily a unified nation, but they were a Ukrainian nation in and of themselves.

In the 17th century, the Russian Empire abolished its autonomy. Nice way of saying, they took them over, they divided Ukraine up into a bunch of Russian provinces.

Over time, in particular the 18th century, in that Donbas Region that’s been talked about so much over the last few weeks, essentially, it was uninhabited. They called it the wild forest. In the 18th century, you had a bunch of Russian migrants moving in the area and actually named it New Russia. These people are very much of similar background and have a long history together.

If you look at the post‑World War I Bolshevik Revolution, the communist revolution led by Lenin, then you had these nations, these ethnic groups, bidding for independence again. Ukraine is one of the bigger nations and saying, “We’re off the Russian Empire. We want our own autonomy.”

Between 1917 and 1922, after all this, they developed the USSR, and the Ukrainian Soviet Republic was born. Really what that meant was Moscow was in charge of the Ukrainian Soviet Republic, being the head of the Soviet Union.

Patti: You think about the Soviet Union, the USSR, we haven’t heard that term in so long. I remember growing up, that was something to be feared, as a result of the Cold War. You think about what the USSR represented and how big it was.

In doing the research for this letter, I didn’t realize it was actually 100 different nations, under this umbrella called the USSR. It was the second-largest economy as well in the entire world. The problem is, it wasn’t a well‑functioning economy. There was a ton of hoarding. Stagflation was rampant. The value of the ruble was always in jeopardy.

I remember the fourth quarter of 1998. It’s interesting because a lot of people think that the ’90s were fantastic and the markets were going nuts, and they did. That fourth quarter, Russia was so very close to defaulting on their currency. It was our Federal Reserve that actually came to the rescue.

There were a couple of other things that were going on at the time, but Russia’s economy has always been teetering. Gorbachev came in as President and very shortly after Gorbachev came in, Chernobyl happened.

A lot of people look back and he himself looks back at Chernobyl because, initially, he was doing the USSR‑Russian thing. He was not necessarily telling the whole truth about the impact of Chernobyl.

Kristopher: Absolutely.

Patti: That Chernobyl accident was a really big deal. Gorbachev was doing the Russian thing with the information and really tried to keep it on the DL, because he didn’t want his people to be freaking out. What I didn’t realize was the amount of radioactive material that was released was 400 times the amount of material released in Hiroshima. That is huge. It’s amazing.

Gorbachev himself, actually in hindsight, says that it undermined his own credibility with his own people and led to the breakup of the USSR. He is blamed for that, by the way, but he’s also received the Nobel Prize for the reunification of Germany and things of that nature. They’ve been through a lot, that’s for sure.

Kristopher: I think that the breakup of the USSR, it’s pretty well known these days that Putin blames Gorbachev for all of that and that he wants to reunify the USSR. He actually cites communism, the Bolshevik Revolution, with the creation of the state of Ukraine well prior to the USSR breakup.

He basically said that if we’re going to do away with everything communist and that includes the state of Ukraine, which brings us back further than the USSR – it brings us back to the Russian Empire in the 17th century.

Patti: This storyline keeps on changing, doesn’t it? He keeps on moving the goalposts there.

Kristopher: Absolutely.

Patti: It is very, very interesting. He’s accused the Ukrainian people of genocide. He seems to be doing whatever he needs to do to influence his own people, so they don’t turn against them, because that’s right now probably going to be his biggest risk. Until the sanctions really take hold with the Russian people, they are 100 percent behind him.

It’s interesting, and I didn’t write about this, but I was really wondering what is it about this guy? Why do these Russians trust him so much?

He’s basically going to be their president, their leader for the rest of his life. How did he get away with that? I think ultimately, it comes down to the fact that when he took office in 2000, 38 percent of their population lived on the equivalent of $5.50 a day.

Today, prior to all of this, that number has plummeted by 90 percent. It’s just under 4 percent are living in that kind of poverty with access to goods from all over the world. There was a very interesting article that talked about the fact that this invasion is probably going to take their economy back 30 years easily.

Kristopher: The most are probably along with it, it seems.

Patti: It is quite interesting. When you think about fast-forwarding to today and you think about the history, this seems to be a kleptocracy. He’s a kleptomaniac, and he wants to do this land grab and take back what was really theirs, to begin with. It is going to be fascinating to see how long the Ukrainian people can withstand the pummeling that they’ve experienced.

What do you think about that part? I know that everybody – when I say everybody, people in the United States – are surprised at the level of defense and the fact that the Russians haven’t advanced as quickly as even the Russian leadership thought.

What do you think about the information that we’re getting? Is it credible? Is it something that we can rely on? I’m just playing devil’s advocate.

Kristopher: I totally agree with you. I think I take everything with a grain of salt until there’s a little bit more verification. I’ll give you one example, the Ghost of Kyiv.

We heard about this awesome Ukrainian fighter pilot who was taking down all these Russian aircraft very, very early on in the war. There’s a video of it. It’s a tremendous video of this airplane flying over. It takes down an enemy fighter jet and flies off. It turned out, after about a week or two of that video being out, turned out that that was from a video game.

Not the best look, whether the Ukrainians posted that. I’m not sure where the source was, but a lot of Americans really believed in those catching news headlines all across the world. Then it’s obviously fizzled out. That type of information being disproven undermines the credibility of the Ukrainian efforts.

Patti: It’s interesting because I do agree that stuff like that can really supercharge people, “Yes, we’ve got a chance here. We can do this. Look at this. We are a great nation, and we are great people. We’re going to get those Russians,” right?

Kristopher: Yeah.

Patti: Just to spur some momentum, and at the same point to your point, it undermines the credibility of, what is really happening. Are we going to be able to defend ourselves and can we trust the information that we’re getting?

Kristopher: I would say, if it’s coming out of Russian sources right now, it’s a lot until proven otherwise. Then if it’s coming from United States Intelligence Community or the Ukrainian Intelligence Community, that information…

Let’s take the United States Intelligence Community, for example. Any information that we receive, let’s assume it’s true every time. Not safe to do that, but you should assume it’s true until proven otherwise.

At the same time, what are they not sharing? There’s, obviously, information out there. There’s just so much to be absorbed. I think it’s very difficult.

A friend of my brothers who works in the Special Operations Community, basically said that Javelin and Stinger’s missiles are the equivalent of giving Ukrainians snacks and gas money for the ride that they’re on. I believe there’s some truth to that. I believe what we have provided is maybe a force multiplier.

At the end of the day, the fight is not going to end anytime soon. In fact, the more that Ukrainians do well, the more aggressive and sporadic Russia will become. Desperation does a lot of things, especially when you’re in a war zone, and I think the more desperate, not only the military will become, but Putin himself.

To say that they’re winning the war, is a long stretch, a dangerous thing to say. I hope and pray that they’re winning, and I think they’re doing very well. I just think that it’s not going to be as short as we would all love it to be. It’s very interesting when you see that information, I just recommend highly we take a second look, consider the source.

Patti: In a way, yes, we want it to be over quickly, but isn’t it true that the longer it lasts, the more the Russian military is going to be depleted making them weaker?

I worry not just about the Ukrainian invasion, but then what’s next? He’s not going to stop here. He didn’t stop with Crimea. He didn’t stop with Donbas. He’s going to take over this country, and then what? Go into Poland. Go into Slovakia.

I just worry about the longer‑term, bigger plan. I also worry – this is not necessarily something that you and I were going to talk about – this whole Russian‑China hookup, is really scary to me.

Ukraine, as we have learned, has a special kind of oil. Their special kind of oil is essential in making computer chips. Taiwan happens to be the world’s dominant maker of computer chips.

This whole new relationship between the two really makes me nervous, because Ukraine has the oil that is necessary to make those chips. Taiwan makes the chips. Russia does this. China does that. Oh, my goodness, it is a new world for all of us.

Kristopher: In terms of the length of time and depleting the Russian military, you also have the factor of we look at NATO, we look at the United States. Right now, NATO has galvanized not necessarily never before, but not since the early ’90s at the very least.

In fact, the French President just said that this is providing electroshock to the NATO organization. Whereas three years ago, he said that NATO was brain dead. It was obsolete effectively. Now, he’s changing his tune. You see all these nations coming together under one goal. The more that this drags on, then the more oil is, obviously, a huge concern.

Germany is close to splintering off in some parts there but, right now, still very galvanized. As more time goes on, the more likely that those connections get splintered and potentially broken. You hope that doesn’t happen and you hope that it’s over before anything even like that happens. It’s just as dangerous for NATO, obviously, Ukraine and Russia across the board for it to go on much longer.

With the Russia‑China relations, China’s watching very closely. This is only time will tell the type of situation. They’ve seen the sanctions that we came down very hard, very quick. They realized that maybe they backed the wrong horse.

They’re going to continue to sit on the sideline until either Russia makes a strong enough advance to prove worthy of Chinese backing, or NATO European nations, all 146 nations that have condemned this invasion, if they make greater headway and Russia gets pulled back, then China’s decision is going to be made for them there, I would hope.

Patti: It is very interesting, to me also, how heartless Putin seems to be. He’s heartless. As one person said over the weekend, he’s literally feeding his own soldiers into the equivalent of wood chippers. These poor guys are going in there defending something based on information that is not accurate. Whether it be Nazism or the threat of anthrax and biological weapons, it’s just not true.

It’s just a shame that these poor young men are going to be sacrificed for a cause that really isn’t legitimate, from what we’re getting.

Kristopher, thank you so much for this history. Is there anything else that you want to add?

Kristopher: Just keep an eye out. Obviously, this is going to change every single day. Tomorrow, this conversation could be obsolete. Frankly, I hope it’s over and it is obsolete. There are plenty of different things.

I would keep an eye out for the conscriptions to come due in April, Russian conscriptions. A lot of their military is a conscript army drafted. They turn over every April and every October. Very soon, there are a lot of Russian soldiers in Ukraine that are supposed to go home. They’re either going to be staying put. They’re going to be upset about it.

I’ve been in the military. I’ve been in the field before. You’re never happy to stay out longer than you intended to. Or, the Russians are going to have a very difficult logistical issue on their hands. Something to keep in mind.

Patti: This is a question I should probably know. Are the Russian soldiers drafted?

Kristopher: Not all of them. They do have active and reserve components just like the United States, but there is a fair portion of their services that are conscripted mostly for support roles. That’s, here, a volunteer army, whether you’re reserve or active duty there, it’s piecemealed into active and reserve, volunteers, and then conscripts.

Patti: Very interesting. Time will tell.

Kristopher: Yes, absolutely.

Patti: Time will tell. Kristopher, thank you so much for your perspective. Thank you for your research. Thanks also for giving us a little bit of the history of this. It’s easy to say, “What is this person thinking?” Then you get into the history of this and say, “Well, he’s just going back to the old patriotic…,” I wouldn’t say it, but it’s a four‑letter word.

The patriotic BS and trying to appeal to the masses that way. A lot of people are dying. There’s so much destruction. It’s just so unnecessary. I will tell you that the unintended consequences of all this are unbelievable.

Here’s a sidebar piece of information that I didn’t realize. Ukraine also has some of the most fertile soil in the world. They talk about our Great Plains being the breadbasket of the world. Guess what? So is Ukraine’s. It’s not just bread. It is feed for cattle and livestock. They’re talking about famine and hunger being a likely outcome from all of this all over the world.

Kristopher: True. As nations get developed, they want more cows, and cows need grass and wheat just as much as we do. Ukraine used to be known as the breadbasket of Eastern Europe. It fed the Russian Empire for a couple of hundred years. Something that’s tragic.

Patti: Very tragic. That’s it for today’s show. Thank you so much for spending some time with us.

If you’d like to learn more, please go onto our website at keyfinancialinc.com. There’s going to be a transcript from this podcast. In addition, we’re going to be doing a follow‑up podcast with John Emerson, former Ambassador to Germany when Russia invaded Crimea. Stay tuned.

Between the background and the history that we’ve talked about with Kristopher and then the podcast with John Emerson, you’re going to get a much more insightful overview of the impact of all of this, not only from an international tragedy perspective but also from an economic one as well.

Please join us for that podcast. Thank you so much for tuning in. Again, keyfinancialinc.com. All the transcripts will be there, as well as other podcasts. Take care. Bye‑bye.

Ep92: Issues To Consider at the Start of the Year

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this episode, Patti addresses multiple issues that listeners should consider at the beginning of a new year. Patti explains why each of these issues is important and how the science of compounding can provide results faster than anticipated. She also cautions listeners to know the risks of not considering these issues and the effects they can have on your taxes and your portfolio.

Patti Brennan: Hi there. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today is part of the ongoing “Ask Patti Brennan” series, those frequently asked questions that we get all the time, and sometimes those rarely asked but really important questions that people don’t know to ask.

Today, we’re going to start off with those things that you should be considering at the beginning of every year. I think it’s important to recognize that we, as human beings, have this innate need to feel like we’re making progress.

Think back to when we were young. We were just first starting out with our first jobs. It was slow. It was hard. Most of us couldn’t save any money at all. If we did, it was $25, $50 at most. It’s slow.

It’s what Jim Collins talks about in The Flywheel. In the beginning, it’s just such a grind day after day. We get married and we have kids, and it’s pure chaos. This stuff tends to be put off to the wayside. You stick with those habits that you’ve developed.

Little by little, the wheel begins to turn, and then it turns again. Two turns become four, and four become eight. Then you really start making progress. You’ll really begin to see that compounding effect over time.

First and foremost, remember, it’s a process, not an event. Let’s first look back at last year and see what you did, what worked, and by the way, what didn’t work. What are we going to change? You get to make those decisions proactively.

Now, when we think about this year coming up, I think the first thing that you want to consider are those things, those life events, that might be occurring.

For example, you might have a child that’s going to college. How are you going to come up with that first tuition payment? You might need a car, or you might have an age milestone, such as age 50 when you’re allowed to start contributing more into your 401(k). Can you afford to make that catch‑up contribution? Because, boy, that could make that wheel go even faster.

Those milestones, if you are approaching age 62 or 66, and Social Security now becomes an option, should you take it? You have all year to decide, and make sure that you’re running the numbers and understanding all of the things that might influence the ultimate decision.
The next thing to take a look at is your cash flow. Again, you guys know me by now. I’m not a big fan of budgets. However, I do think it’s important for you to define what your cash flow needs might be this year.

Look at what happened last year. We all set goals for ourselves. Let’s say that you set a goal to save $500 a month.

The question is, are you able to do it? If not, what happened? Was it a cash flow issue? Was there leakage? Did you end up spending that money on something else? Let’s just evaluate and make a decision. Is that a realistic goal for you? If it is, what steps are you going to take to make sure that that happens? These are cash flow issues.

Also, as we approach April, you might be preparing your taxes. If you want to reduce your tax liability, the next question is, are you eligible for a pre‑tax IRA? Even if you have access to a 401(k), you might be able to do a pre‑tax IRA contribution as late as April 15th. If you are not eligible for that, that’s OK. Make an after‑tax IRA contribution.

By the way, you could also convert it into a Roth almost immediately. Now, you have that money growing tax-free for the rest of your retirement life. For those of you who have a stay‑at‑home spouse, consider doing a spousal IRA as well, because they need to save for retirement also.

Cash flow issues are very important. That’s the first thing that I would look at, as we go into the beginning of this year and the rest of this year.

Other things might come up if you own a business. Are you looking at buying a business or selling a business? What are the tax implications if you do so? The same thing goes with a home or a vacation home. We’ve seen real estate go nuts over the past couple of years. What are the implications if that’s something that you wanted to consider?

In addition to that, let’s look at your investment portfolio. What’s interesting about this is a lot of times people will hyper-focus on their portfolio without attention to some of these other areas that have a much greater impact.

Now, I don’t want to take away from your portfolio. That’s important as well. Review your investment performance and just take your own pulse in terms of what you’re willing to tolerate in terms of volatility.

I think even more important than volatility is your risk capacity, and that’s something that is measured. You measure your risk capacity. Think about it in terms of, “OK, not just if, but when the next bear market happens, are you going to be OK? If you just ride through it, will you be able to recover?”

That’s important for those of you who might be retired because those bear markets impact you even more than it impacts the people who are still working. Review your investment performance, understand what happened, how you participated, and whatever happened last year, and make changes to rebalance accordingly.

Then we get into loans and debt. Are you a co‑signer on someone else’s loan? We often forget about that. We understand you might have a mortgage and car payments. You might be a co‑signer on a child’s car loan. It’s important for you to double-check your own FICO score, your credit rating, because that comes in a lot more these days, and is very, very important.

Also, cybersecurity is really important. I will tell you that we have exercised a lot of productive paranoia when it comes to cybersecurity. I think that’s important for you to do as well. If it doesn’t look like you’re going to need to borrow any money this year, consider freezing your credit. That way, nobody can get a loan in your name without you knowing about it.

Now, we also want to review your tax issues. This is something that you do all year long. It’s not just something you do as you’re gathering your tax forms and meeting with your accountant. As you do so, think about gifts to children or others, charitable contributions, and the opportunities that result accordingly.

Also, as we get into the year, you might want to consider doing a Roth conversion of existing IRA money or retirement plan money, or you may want to take gains on some of your portfolio if you’re in a 12 percent tax bracket. This is something that you want to evaluate throughout the year.

There is also an insurance perspective – something that we don’t always like to pay attention to. It’s important, especially with climate change and what’s been happening with a lot of these beach towns.

It’s unfortunate and scary to think about the impact that flooding can have on a person’s home or a second property. Review your property and casualty insurance with your agent to make sure that you have the best coverage for the least amount of money.

That goes also for your life insurance and your disability insurance. As we get older, most disability insurance only goes till the age of 65.

If you’re in your 60s and you’re paying out disability insurance premiums, you might want to ask yourself if it’s worth it to pay for disability coverage when it’s unlikely that you’re going to be working. Hopefully, you’re not going to be working, but even if you are, it’s only going to pay for the next five years or so.

Review your insurance coverages at some point. It’s great to put it on that checklist and mark it off.

Last, but not least, would be your estate plan. This is another important area. We’ve had several podcasts about the changes in the estate tax law. I will tell you that that’s probably not going to end.

This is the year to review your estate plan and understand the impact of tax law changes on what you’ve worked so hard to accumulate during your lifetime. Also, check your titling and your beneficiary designations.

We’ve had several meetings over the last month, where people’s 401(k)s didn’t have a beneficiary. That is an ugly situation. The tax impact of not having a beneficiary on a retirement plan is confiscatory. Don’t let that happen. It’s an easy thing to check. Make sure everything has a beneficiary.

When it comes to your will, just review it. You may not understand it. A lot of it is Greek, but spend the time, look at it. If you don’t remember what the provisions meant or what you’ve decided, set up a meeting with your estate planning attorney and your advisor, and make sure that what you want to have happen for the people that you love actually does.

Those are some things to consider. We’ve got a whole list you can print out. If you’d like to have the list, please go to our website at keyfinancialinc.com. The list is what issues you should consider at the beginning of the year. It’s a nice list, a checklist type format so that you can do these things on your own to continue to maintain your own financial security.

Remember, the goal of this is to help you protect, grow, and use your assets to live your very best life.

Thank you so much for joining me today. Thank you for this partnership as we work together to achieve that objective. Take care. Have a great day.

Ep91: Special Re-Broadcast of Michael Kitces Podcast – Financial Advisor Success Featuring Patti Brennan

About This Episode

Patti was recently asked to be a guest on Michael Kitces’ Podcast “Financial Advisor Success”. Michael is a brilliant thought leader in the financial advisory industry and has devoted his career to improving best practices among advisors through his blog, his newsletters and his podcast. Today’s episode of The Patti Brennan Show is a special re-broadcast of the Kitces’ episode in which Patti shares the story of Key Financial – the struggles and the successes through the years. She describes how she has scaled the firm by centralizing her departments into a team structure, while at the same time creating systems that are unique in the industry. She also shares her fears and vulnerabilities during crucial times, that ultimately resulted in the firm’s explosive growth.

Michael Kitces: Welcome, Patti Brennan to the “Financial Advisor Success” podcast.

Patti Brennan: Thank you so much, Michael. I’m so excited to be here with you today.

Michael: Patti, I really appreciate you joining us, and looking forward to the conversation today about, to me, this theme of scaling up the advisory business. So I feel like there’s a couple of different stages of what happens when we’re scaling an advisory business.

Like first it’s just, “I do everything and I got to start scaling.” Which essentially means I got to hire another person, another human being, and start giving things to the other human being so that I can do more of the client stuff. Then there’s usually a second stage of scaling where we hit personal client capacity. And, “I got to hire another advisor, and then we got to start building a little bit of a team.” And there’s a bunch of transitions that go on there. But then there’s a third stage of scaling that starts to come up as you start moving past 10 team members and past 20 team members. And there are changes that start happening in a business at that size. You start forming departments, you start hiring managers. You have people who manage people who do things. And that doesn’t exist until a certain size.

And so there’s this additional layer of complexity about what it takes when you really start scaling up the advisory firm past 10 and 20 team members. And I know, you have been living a lot of that over the past few years for the growth of your firm. And so, just thinking about what that scaling journey is like as we go through all the different stages from us to a team member to 2 to 3 to 5 to 10 to 15 to 20 to 30. And so I’m looking forward to talking about that scaling journey.

Patti: Yeah. You know what? You have articulated it brilliantly. To me, in my kind of simple language, we go through the phases of having a practice, then having a business, and then running a company. And there are different challenges that are inherent in each one of those stages. I certainly experienced all of the challenges that a lot of your listeners probably have as well.

This is stuff that I have learned over the years of listening to podcasts and going to conferences, and I liked this idea, began to apply it. It didn’t quite work as well, we tweaked it, and then voila, here we are.

So it’s challenging, but it’s exciting, especially when you get on the other side. And that’s really what it’s all about. I think that complexity is the enemy of effective execution. There’s a great book out there. There have been a lot of epiphanies that I’ve experienced in my career. One of the greatest ones happened ironically, at a conference. This was probably about eight years ago. And I was having one of those sidebar conversations with another colleague, and we were talking, and I was doing okay, we were doing fine. I think about 10 years ago, we had $211 million that we took care of. I had seven employees. And we were having the conversation and this person said…I was doing the typical conversation. “How was your year?” Yada, yada. And this person said, “I had a great year. I brought in $50 million.” And I got to tell you something, I’m thinking to myself, “$50 million dollars in one year? You got to be kidding me.” And so I began asking questions.

And at the time, I was reading a book called “The 4 Disciplines of Execution.” I will tell you this book changed my life. It’s written by Sean Covey. I can’t remember the other two authors, but it is just a great book. And it basically says, “Okay, we all have goals, and we have these things. But without proper execution, they’re just wishes,” right? So it gave me some guidance in terms of how to effectively apply some of the things that we were learning.

Anyway, long story short, I go back to my team. I have a meeting, I kind of relayed the conversation to my team and basically said, “We are averaging about $20 million to $30 million of new money. Now, listen very carefully, because we’re measuring new money, it is not net new money. I don’t care about the money that we are sending to our clients. That’s what we’re supposed to do. I don’t want anybody second-guessing or wondering, ‘Oh, do you really need this money for the car? Do you really…’ that’s what we’re supposed to do. When people give us money. The goal is when we give it back, we give them more. Period. End of discussion. So it’s just new money.”

And you might wonder, “Well, why are you measuring new money?” The reason I do that is because we can’t control the markets, we can’t control AUM or any of that. But we can control how we take care of our existing clients. And because of that, the referrals and everything that comes as a result. So every year, as a result of that conversation, I have two metrics that we measure. New money and retention. Retention is the most important thing. We always have 98% retention or better. That is our number one priority. It is so much easier to grow when you keep what you have.

And by the way, that’s our job. We’re fiduciaries. We’re supposed to take care of our clients. And if we’re not doing that, something’s wrong.

So, we’re in this meeting. And I said, “Wouldn’t it be cool if we set a goal today, and to see what we could do?” Because I had never really been measuring it. So the team got together, and they all kind of talked amongst each other. I said “I’m not going to set this goal. I’m going to let you guys decide.” And then one person said, “If she can do $50 million, so can we.” And my response back was, “Whoa, whoa, whoa, whoa, that would be like doubling what we normally do. That’s huge. Are you guys sure?” And I will tell you that my team, it’s not like they were going to get a bonus. I said, “That’s going to be a lot of work. I don’t even know how we’re going to do it. It’s already the beginning of February, yada, yada, yada.” And they said, “Let’s just try.”

That first year, we brought in $64,173,025.10. And I tell you the exact number because they didn’t realize it. But at the end of the year, when we knew that number, everyone got a bonus for a derivative of that exact number. They got $6,425 and so many cents. So they immediately saw the result of their efforts. And of course, we had 98% retention.

And so what’s happened since then, and I tell you this long story because it’s really worked so well for us, every year now, together, we set a goal. So the next year, I said, “How did you guys like this?” Because everybody is compensated very well. They get their own personal bonuses. But this time, everybody got the same check. It doesn’t matter whether you answer the phone, or you’re responsible for filing or scanning, or if you have a CFA, MBA, CFP behind your name. So we’re all in this together. And we all recognize that every person’s role is so important to the bigger goal.

Michael: I just I’m curious about that quickly because there’s always a lot of discussion around things like bonus philosophies. So, I think, by and large, most firms tend to do bonuses that are tied to more like percentages of income. So higher-income folks end out with more dollars because it’s a percentage of a higher number. Just I’m struck that you have this framing of No, no, like everybody gets the same bonus, down to the dollar, no matter where you are, and I’m presuming that no matter what your underlying base compensation is. So why they, or do you worry that your team members at the upper end are like, are like, “I mean, thank you, but this isn’t as huge of a number for me as it is for the person in the front office who maybe doesn’t make as much and that’s a bigger check for them”?

Patti: It’s a really good point. Of course, there’s always unintended consequences with anything that we do. And what I’ve tried to do is I make it up in other ways to those people, there are definitely people in every firm that are going to contribute more than others. But again, the spirit of this is to send the message that every team member is here for a reason and they serve an important purpose. And I don’t know why it works. And yes, the checks are getting bigger and bigger. Every year, we set the goal. So it started at 50, then it went to 55. And then it went to, and this year, 120 million was our goal. And we ended the year with $207 million of new money, which is wild. So everybody’s going to get a check of almost $21,000.

And what’s interesting about that, and I don’t know, again, this is not communism here. It’s just sending the message that everybody is important. And what’s interesting about that is, as we have done this over the last 7 years, just to kind of give you an idea, we have tripled twice in 10 years. Think about that. Ten years ago, we had $211 million under management. Five years ago, we had 644 million. Right now, we are approaching $2 billion. Now, there’s lots of things that we’ve done. What’s wild is, whatever we’re doing, can I definitely point to that? This is all kept on a scoreboard. So everybody gets to see the new money as it changes every week, everybody sees the retention number. Our retention this year was 99.73%. Like, that’s pretty cool. I’m really proud of my team. And I think that that helps morale, I think that it just works for me.

Michael: So, how do you implement the scoreboard?

Patti: The scoreboard is fun because, in our kitchens, we have two kitchens, in the different departments we have the whiteboards, every whiteboard in the office we just have two numbers. The new money number and retention. And everybody gets to see it. It’s just this subconscious reminder.

Michael: How often do you update it then?

Patti: Well, as you probably know, our industry doesn’t have great systems for monitoring things.

Michael: No, unfortunately, indeed.

Patti: And so, and I’m happy to share this, we’ve got Redtail, every client has eMoney… Multiple Scenarios in eMoney. Right now we have AssetBook for our portfolio management system and AdvisorPeak. And so basically, one of the things that I did choose probably two years ago, out of the blue, I hired an engineer. Now, this guy was a mechanical engineer. And long story short, he kind of liked computers. And my chief operating officer saw the issue that we had with data. We have a ton of data, but none of it was kind of working with each other. And this guy is a data guy.

So Vince and Drew have written a program, several programs, in fact, and so one of the programs is a scorecard. So we have a scorecard for every client, and that comes from all the different systems and it bubbles up their cash flow, their performance, how much they added, where they are on withdrawals. I always want to make sure that the financial plan we have for them is congruent with what’s actually happening. And it was really clunky before it was hard to pull it together. It took like an hour to look for all the different systems. Now we have a scorecard.

Michael: So you had a nerdy computer and client data person who just made their own scorecard system, made their own integrations to pull out the data that you need and put it in one place?

Patti: Exactly. And so the portfolio management system knows the deposits and withdrawals. So we pull from that just the deposits. And that is posted every week. I mean, it’s old-fashioned. Somebody writes it on a whiteboard, it’s nothing fancy. So…

Michael: I was going to say, so someone’s got a job, on Monday morning, like, hit the refresh button in the scorecard software to get the new numbers and just walk the hallways and write the number on everyone’s board?

Patti: Yeah, it literally is walking the hallways because all that other stuff is automated now. And I will tell you that that person really has fun doing that job. They’ll sometimes write something funny on the whiteboards. And just like I said, we’re just a bunch of people working together towards the same end goal. Most importantly, take care of our clients, though. That is really important.

Michael: So, help me understand more, though of just what changed at the end of the day? Like you were growing along well, you had this advisor who says, “I brought in 50 million.” And next year, you went and told the team, and they said, “Wow.” And they said, “Okay, we think we can do it too.” So like, okay, but then what changed? That magic that they actually did. And as you keep ratcheting up the goal, or they keep ratcheting up their goal, you’re getting there. Like what actually changed that it’s happening?

Patti: I think it’s probably more of an internal change, versus marketing, and things of that nature. Certainly, we’re doing all of that. But I think it took me so many years to realize that in order to really connect with my clients, I really needed to connect with my team. That the way to get real leverage is really to optimize their talents.

I think, also, probably a real pivot point was when I changed my title. It might sound weird, but I changed my title from President to CEO. And I think that changed something in me. And I think it changed something for the team and our clients. So instead of it always being “meetings with Patti,” and I still conduct a lot of meetings, but as I do so, I tell our clients, “It’s not fair for me to hog all of the relationships.”

And really, it’s gotten to the point where…I use the Colonel Sanders metaphor. “My face is on the side of the bucket, but I stopped making the chicken a long time ago.” And as I mature in my role, and literally my age, I owe it to my clients to make sure that if something ever happened to me, that they know, things will continue seamlessly. That as they have trusted my judgment in their financial affairs, they also trust my judgment in terms of the people that will take care of theirs on an ongoing basis.

And so I kind of stepped back a little bit and let other people do the meetings. And it was hard for me at first I’m not going to lie. I was like a dog on a bone at first. But it’s interesting. Again, I learned so much from everybody else. Mark Tibergien, he was speaking at one of our conferences, and he said something I will never ever forget. He said, “The greatest injustice we commit against another human being is to underestimate them.” And by holding on to all that stuff myself, I was underestimating my team. And, yeah, I got to throw them in the pool, they’ve got to kind of do the doggy paddle and swim a little bit. But eventually, as everybody started to do it more and more, they got really good at it. And clients don’t even ask for me anymore. Number one, they see, “We understand, you’re running a company now. We don’t expect you to have to meet with us all the time. We just need to know that you’re there looking over things and making sure that everything is continuing as they always have.”

Michael: So, what got you the point of getting comfortable with that change? As you said, that was hard initially for letting go or making that transition. So what got it there?

Patti: I think it got to the point where it was not sustainable. As we grew, I just couldn’t continue to do it all. I was working from 7 in the morning until, leaving the office at 9 and 10 at night. It just wasn’t sustainable. And it was actually hindering our growth. I was getting fried. And so I wasn’t really me anymore. Something needed to change. And that something happened to be me. I just had to be realistic and give other people the opportunity to grow into the roles and to create what we have today. It’s interesting because I think, for me, the thing that has worked is that as other people started to take over the meetings, doing the plans, I don’t audit the plans anymore. I just know that they’re going to be done well, that they’re up to the standards. We have systemized so much also. So we’ve removed a lot of possibility for errors or gaps. Things get missed. Again, that’s where the systems really come in. And I just had to do it. There wasn’t really that much of a choice.

Michael: And just take me back once more. Just what made it all of a sudden double the growth rate in the process? I feel like having everyone say, “Hey, let’s grow it twice as much,” and then having it happen. There has to be something else that goes along with this.

Patti: Yeah, no question about it. It was a lot of things. Okay, so number one, in order to get the kind of growth to be able to take the volume of new clients, because our clients are not those $50 million clients. Our clients are like a lot of advisors. Yes, they are growing in size, but I don’t measure clients by how much money they have. I basically take on a client based on, can we make a difference? And can we justify our presence in their lives? So in order to deal with the volume, we had to get smarter about the systems, we had to get better at doing what we do.

So my firm, I’m the CEO, and then we have departments. We have the financial planning department, we have portfolio management, key client services, and then we have operations, and IT. So doing the departments has helped because as we have grown, we’ve been able to scale by adding bodies to each one of those departments.

Michael: I just want to make sure I capture this. That sounds like four core departments. Financial planning, investments, client services, and sort of Ops/IT.

Patti: Right. You got it. Okay. And honestly, and truly, I mean, our firm, we’re in 10,000 square feet. I mean, it’s not a big firm. Planning is with portfolio management, so they work together. And it’s great because they can basically say, “Hey, Eric, what’s going on with so and so? And so and so needs some money, can you take a look and see if they have any losses to harvest because they’re going to need $100,000?” So it’s just kind of things happen through that kind of communication. And of course, we document everything through Redtail and that sort. But I think that having the departments has helped.

And then as we’ve grown, we scale by adding people to those departments. And what’s happened is, so I’m mentoring the next layer of 40-year-olds. And they are running their departments. I have a chief planning officer, chief investment officer, director of client services, and then chief operating officer.

I will tell you that, in my opinion, our secret sauce is client services. We refer to it as key client services, because I want every client to feel like they are key. And it’s really a concierge approach. It is that intensive care nurse who’s sitting by this bedside, looking at the monitor, who knows everything about that patient. It’s that approach. And so, that person knows everything and knows what’s going on. And they develop that warm and fuzzy relationship. Like, I don’t want them having too many clients that they can’t spend a half an hour on the phone with a client just finding out what’s going on with the kids or how they did on the surgery. So that’s that warm and fuzzy relationship arm.

Now, I will tell you that they are not considered relationship managers. I think that’s almost insulting to their role because they’re so important. They are that key person that every client knows they can call for anything. Most of the time, they’re going to be able to get their answer. But if they can’t, they’re going to get an answer. It’ll get elevated to Eric, or me, or Brett, somebody, and they’ll get their answer within 24 hours. Clients are not clicked around, they’re not calling an 800 number. If you call my office, you’re getting a live voice. And I will tell you, it is my philosophy. I want that client to get an answer on the first call. So you run the ship and you send the message. And does it work all the time? No. But clients appreciate that we’re doing the best that we can in terms of making sure that they feel really important.

Michael: So how does your client services team tie back to the planning team? I mean, are there still advisors also assigned to every clients? How do clients know who to call? How does that work?

Patti: So, every key client services person has a planner, if you will, that they work together on their clients. So they know how each other work, they know what’s coming up, etc.

Michael: Is that always a one-to-one relationship? Like one advisor and one key client services person and then a set of clients that’s associated with them?

Patti: I would say no, right now. Like, for example, Chris has two key client services people, Michelle has three. It’s two to three people. Because the questions that come up, a lot of times, the concierge person, the key client services person already knows the answer. They know eMoney, etc. Think of them almost as paraplanners. And again, we don’t set the expectation that they are going to be their advisor. It’s just their concierge person. And they’re really smart. They’re very well educated. And most of the time, they can take care of the questions.

And we have our projects, like year-end, I think, like a lot of people, planning is doing the year-end tax planning. So we’re doing Roth conversions and taking gains for anybody that’s in the 12% tax bracket. Anybody that’s on the ACA. We’re making sure that anything that we’re doing, that we’re not doing anything to put their subsidies in jeopardy, figuring out who’s going to be turning 65 next year, RMDs, all that kind of stuff. So we have periods during the year where, “Okay, it’s time to do A, B, or C,” and we do it.

Michael: So, I got to come back to this once more. Like, where did the growth start coming from? Or like, what changed that having the team set their goal of let’s go from 20 million of growth to 50 million of growth actually made 50 million of growth show up?

Patti: I would say that it’s a combination of systems and marketing. On the system side, in order to take care and be able to handle the volume without it affecting quality, we basically adopted kind of the Starbucks model. We want to customize every order but we’re using the same ingredients. And by that I mean, we have templates. So when we’re writing up the assumptions for a new client, right, we’re doing assumptions for their financial plan. We’re not writing that every single time.

So now, through our program, Eric and I have developed a list, and it’s probably 10 pages long of every possible assumption we possibly could with drop-down menus. And so whoever is writing the case, looks at those 10 pages, and just clicks on the dropdown. And the sentence structure can be adapted. And we can fill in the names and customize it, but it just makes it easier to write the plan. The same thing goes with recommendations. I don’t want to miss the fact that a client doesn’t have an umbrella liability policy. I don’t want to miss the opportunity for tax-loss harvesting. So again, we have templates for the recommendations. Unfortunately, again, our industry doesn’t have something like this. So we wrote it. And we got…

Michael: So you just build all this in Word or Excel or something?

Patti: Exactly. The goal here for me was to be able to train new advisors to bring in new blood and to teach them the business behind the scenes while maintaining the quality. Sometimes you don’t learn stuff until you have to do it. And so, again, we do go through an audit process where we’ll have…we have two new employees who are doing financial plans. They are learning by doing this stuff, and by doing it, and Eric will sit down with them and say, “Here’s why this is important. Here’s why that is important.” It takes a little bit more time, but six months from now, he’s not going to have to do that. And we have that quality control for the templates.

So I would say that has helped a lot because number one, it’s streamlined things from an operational perspective. And it’s helped me with my paranoia because I’m really a paranoid person. Like, I always feel like we’re going to miss something. I’m always worried that did we think about A, B, or C? And it’s really helped me get to the point where I don’t have to be micromanaging. So that’s done a lot.

Michael: And it sounds like that came about because once you set the much higher growth target, the realization was, essentially, “Oh, well, we’re going to do this or we’re going to squash ourselves so we might as well figure out how to do this.”

Patti: Yeah. And really, as with any firm, we have people who are more seasoned than others. And again, I keep bringing up Eric. Eric is an unbelievable financial planner. I mean, he would be the person I would want. Some people who are newer aren’t up to that speed, up to that caliber. So how do we take that brain of his and systematize his process so that other people can get up to that level? The same thing with portfolio management. We got AdvisorPeak that allows us to rebalance tax-loss harvest. We set alerts and alarms. So that again, that helps me with my paranoia, in terms of we’ve got a client with a holding that they never want to sell. So we have a hard hold on that. So to have the software and the systems that can talk to each other, it’s really, really important.

So I would say hiring a chief operating officer to help me coordinate all of this and systematizing our processes has gone a long way for us being able to scale up the way that we have.

Michael: And then what changed on the marketing end? Because you said there were some marketing changes as well as these systems changes.

Patti: Yeah. I think, on the marketing end, basically, I’ve done a couple of things. First of all, I’ve kind of taken that concept of Colonel Sanders, right? And I use that because I will often ask people, and I don’t know, Michael, do have any idea when Colonel Sanders died?

Michael: No, no idea. He’s been on the bucket forever.

Patti: Right. He’s been on the bucket forever. I will tell you that, I think he was 65 when he opened his first franchise in Kentucky. So he was older. He continued to work until he was 90. But what’s really wild is he died in 1960. And his face is still on every sign. Isn’t that wild? And I thought, “Okay, if an old guy with a goatee can do it, maybe we can, too.” And so, from a branding perspective, we began to use that concept and say, “Okay, I’m Patti Brennan, Key Financial, this is what we do. If you’re interested, give us a call.” There’s two sides in marketing. It’s either push or pull. I don’t know about you, but I would much rather pull. So that’s the way we do it. We do it through the branding.

And so that comes in the form of everything from magazine advertisements, believe it or not, they still work, to social media, which I don’t believe does work. I have a podcast program as well. I’m still on the fence as to whether or not that’s effective. I’m thinking that maybe webinars would be more effective because it allows for more exchange. People can enter questions. To this day, I mean, I think the podcast program, I understand has gotten more viral, but I don’t know what that means. I don’t think we have a good way of measuring that ourselves. And we put a lot of work into that. I have a sidebar commentary on that whole thing.

And more recently, I decided to try some commercials.

Michael: Like local TV commercials?

Patti: Yeah, literally, just commercials. And I figured, during the pandemic, I was watching TV, and I was watching one night, and sure enough, Ric Edelman got on the TV. And I thought, “You know, he’s a really smart guy. And maybe if he’s doing it, maybe there is something to that.” It’s really super expensive. I’m a believer that if you’re going to try something you got to give it a good year to three years before you say it doesn’t work. I am at that point, by the way, with social media. I think it’s great, it’s nice, but I don’t know that it’s effective in terms of attracting new clients.

Michael: I’m just wondering. Is TV working? Or till too early stages to really tell?

Patti: It’s still too early to tell. We just started realistically, probably eight months ago. I am hearing people who say, “Hey, I see your commercials all the time. They’re really good.” Or “I see you on TV.” Or better yet, what I usually hear is, “I see you everywhere.” And that’s not bad. I don’t think it’s bad because people, when they come in, they will often say, “I see you everywhere. I’ve been meaning to call you for years now. And I just decided, if not now, when?” And that’s the whole goal. I mean, people will do things in their own time. I just want them to know that we’re here.

So I would say it’s a combination approach.

Michael: And just out of curiosity. What does TV cost to do television ads these days?

Patti: Yeah. Great question. You’re in the six figures.

Michael: Okay.

Patti: So it wasn’t something that I could ever look at five years ago. In fact, they did come in five years ago, and it was just way too expensive. And there are ways to manage that cost. But it’s a commitment of not only expense, but time, and how you want your messaging to come across, what you want to say, etc. But yeah, it’s definitely a commitment.

Michael: So, just going back to the earlier discussion, what was it about 4 Disciplines of Execution that it sounded like was part of the turning point of this moment where you said, “We’re going to do things differently,” and growth started to take off?

Patti: Everything in that book just made so much sense to me. It’s one thing to have a goal, and even how we frame our goals. It’s one thing to say, “I want to lose 20 pounds,” right? When we say stuff like that, in that way, we instantly create the image of ourselves 20 pounds overweight. But if we say instead, “I want to weigh 120.” We’re sending a completely different message to ourselves. And you might think I’m kind of weird with all this brain stuff, I will tell you, there’s a lot to it. Our subconscious minds are powerful. I don’t know if you ever get this feeling of you don’t know why you know, but you just know. That’s because as we age, we have years and years of data that’s locked up into our brains, into our subconscious. And that data forms patterns. And we’re able to use those patterns to create instinct. I think goals give us a sense of direction and clarity. But systems are really important. That we rise to the level of our goals, but we also fall to the level of our systems.

And that’s what I learned. I learned how important having really effective execution of processes, in terms of what we do on a daily basis, and really having that focus. Not too much focus, right? I mean, I used to have all these things that I wanted to do, etc. We just have two. It’s like a laser beam. And so that was what I learned. I learned that you have the things that you want to accomplish, but you’ve got to be very real. You got to have the substance. “Fake until you make it” just works up to a point. You’ve got to have concrete action behind it. Otherwise, it’s just a delusion.

So what are the action items? What are the things that we’re going to do differently this year? I’m having a meeting with everybody at the beginning of the year. And what I’m really curious about, when I look at last year, and I look at what we were able to accomplish last year, with the same number of people. I’m curious, how do we do that? And so I want to look back at what did we do specifically last year to grow 72% above goal? That’s kind of a big deal. Like, what do we do differently? So let’s analyze it. Let’s do more of the things that are working and less of the things that aren’t working.

Again, social media is fine. I don’t think it’s working. So let’s not spend time on that. Right? What are some of the other things that we can use that time for? I think the podcast, and again, to get back to that idea, the podcasts are kind of interesting, because I don’t know that it’s really that great for new clients. I think that any of this branding and marketing that we do, I think it’s as important for our existing clients as it is for new because our existing clients send the podcast to other people. And I encourage them to share it. If this person is important to you and you think they would benefit from it, please send it to them. Like, that’s my goal. I want everybody to do better. Whether they call us or not, that’s okay. But you could make a material difference in these people’s lives by giving them this information. I also do that kind of stuff in the PS of my quarterly letters. I still write those quarterly letters, I think that’s important. I slave over these letters, so I’m not going to lie. I spend a lot of time on them. I think they’re really important.

It’s some economic or market commentary, or here’s the new tax law. And then I think it’s important to include the warm and fuzzy stuff too. The, “This is what happened. And these are some of the things that other clients experienced this year.” And every once in a while, not all the time, because you don’t want to lose them into this. But every once in a while, I’ll add a PS, to say, “By the way, if you are having a conversation with friends or family over the holidays, and if there is somebody that you think it would be important for them to meet with us, just let us know.” And I promise you, there will be no filters, we will meet with them. I want that client to be considered that person center of influence so that they get some of that psychic reward of “they got in to see Patti Brennan.” And the PS is really the only part that most people read anyway. That’s the most important part of any letter.

So it’s little things like that little, little stuff like that that I think can make a difference over time.

Michael: So, since you’ve spent so much time focusing on how you’re systematizing as you were growing and scaling up, can you just walk us through what the new client process looks like at this point? If I say, “Patti, this sounds great. I want to be a client of Key Financial.” Get us started. How does this work in your firm? What happens?

Patti: Absolutely. So let me take it even further back. Because I think first impressions are so important. So let’s say that a client calls or someone calls in, and they talk to Susan and they say, “I’d like to set up a meeting with Patti Brennan.” First and foremost, I do every initial meeting. That’s really important. And I’ll go back to that in a second. Susan then we’ll transfer that to Bernadette. And Bernadette has this incredible, buttery voice. And she does a great job of finding out what made them call, where they heard about us. Finding out a little bit about what they might be looking for yada, yada, yada. So that gives me some context. She puts all of that into Redtail and gives them a feel for the process. So we send out a questionnaire. And the questionnaire is really the stuff that we would need to do a financial plan. It’s a list of things to bring to the meeting, or even send an advance. It includes questions like do they feel comfortable, that their spouse would be able to handle their financial affairs if something were to happen to one of you. And there’s a whole list of things that just fill in the blank. Takes 15 minutes to fill in, etc. But it just kind of sets the tone of the conversations.

And the beginning of it really starts out with is there something on your mind that you’d like an answer to right away? Because I want to know that. I want to give them that answer in that first meeting. So it’s very open ended, but we get the stuff.

And we didn’t do this five years ago. And when my team said, “We should send out the questionnaire even before the initial meeting.” And I’m like, “Nobody is going to fill out the questionnaire. Nobody is going to do all that work.” Oh, my goodness, Michael, I was shocked. I can give you on one hand, maybe five people didn’t fill it in and bring their stuff. So that was a nice little epiphany.

So they come in, we have that initial meeting. I basically focus on them. I look at this stuff and I answer their questions. My goal in every initial meeting is to give them three things that they may not have known about before or to make three observations. Three ideas. So they walk out of that meeting feeling like, “Wow, I can’t believe she spent that much time with me and really helped me right on the spot with zero obligation.”

And so that’s the first meeting we go through. Invariably, they say, “How does it work? How can we work with you?” And the way that I explain that is we go through two phases. And this is my business model. It may work for other people, it may not. But basically, phase one is where we build the financial plan, okay? We do a financial plan, 360, run the different scenarios, and determine where they might be vulnerable. And then we come up with specific action steps in all areas, whether it be their estate planning or their portfolio or get the umbrella or get rid of the life insurance, you don’t need it anymore.

So phase one is a flat fee. That is for the process of building the plan. At the end of phase one, I tell everybody, “You can say thank you so much, Patti, this is great. Thank you, Eric, Brad, Michael, all the people that were involved, we’re going to go off and do our own thing.” Or you can go to phase two. And phase two is, “This stuff is wonderful. Will you do all these things that you’re telling me to do? And by the way, will you be my person on an ongoing basis?” And then in that case, then we go to phase two, which is basically the execution and the ongoing management of the plan. So that’s the way it’s articulated. Phase two is the typical AUM. And that’s what we do. So financial plan, and then wealth management. Those are the two phases.

Michael: So how does that planning process work then as you get started? So I’ve gone through the initial meeting with you, I got my three ideas, they sound pretty neat. So I’m like, “Okay, she knows what she’s talking about. This feels good. I think we want to work with her.” So I say, “Let’s get going, Patti, with phase one.” So what happens now as we start down the road of phase one?

Patti: So they send in the agreement. And then the first step is we have a series of emails that they get. Every week, they’re getting an email that is introducing the department. So Eric’s email is first. And it is a wonderful email. We never have to rewrite it. We worked on it. We did it once. And it’s set up in Redtail to go out the first week. And he’s introducing other people on the team, giving their backgrounds. Christopher was an Army Ranger, has his MBA, and Diane was in… So he’s introducing the team and welcoming them and, etc. And he’s got pictures and things of that nature.

Week two, Brad’s email goes out. Now Brad’s writing style is different than Eric’s. Eric is very flowery. Brad is our chief investment officer. He is so funny. So he’s added some humor into his email. Week three, Lori’s email goes in. She’s introducing key client services. All the things that we can do for them, yada, yada, yada. Oh, in between week one and week two, Jennifer writes a handwritten note in blue pen. It’s the same note to the client that is mailed by snail mail. It’s just a process. And I’ve gotten feedback like, “I can’t believe you took the time to write me that note. You’re the CEO.” It’s just making people feel important. Like they’re not falling into a black hole. And by the way, Susan has already sent out, as the person is walking out the door they’re getting a copy of the agreement, CRS, ADV, and what to expect in the first 90 days. So they know what they can expect if they move forward. So they’re getting communications, and I tell them in the initial meeting to keep on the lookout for the various emails.

In the meantime, my elves have been working behind the scenes, putting together the plan, getting the data. They’ve been introduced, they’re calling the clients if we need clarification or additional information. And it’s going through the different stages. Diane takes care of that part of the process for the planning department. She’s fantastic. So she knows exactly where we are in the different stages of doing the plan, what we might need, etc. We do all of that. Susan reaches out, we set up the planning meeting. I always do the introduction. So I’m handing the baton to Eric. The Chief Planning Officer. They already knew that Eric was going to be running that meeting. I talk about how great Eric is because he is. And I talk not only about his intelligence, and how proactive he is, I also talk about what… I refer to him as “our prince.” He’s just the nicest person in the world. And he just goes out of his way in every client situation.

So I make that introduction, and then I leave. I’m not in that meeting anymore. I used to sit in the meeting, I don’t do it anymore, because I don’t want to take away from Eric’s authority. They do that meeting. That was a big change, by the way, just before COVID. Because I always did the planning meetings, because I thought that I had to have that congruence and that consistency. But by communicating it differently, Eric now does it. And it’s fantastic. I don’t have to be in there for two hours. And they now go to him, they go to Diane, they go to the other people. So that I can focus on running the business. And frankly, being the brand.

So at the end of that meeting, usually we say, “Go home, talk about it, we’ll tweak it, we can have another phone call or another meeting.” But usually, by the end, these clients are saying, “Okay, what’s the next step? We want you to be our people.” And then, in that case, the key client services has been in that meeting with Eric, they’ve already known who the concierge person is. We kind of know as we’re going through it. She’s got paperwork ready. We’re ready to go if they’re ready to go. Or they go home, and we set up another meeting. So it’s really hands-off. I want them to want us more than we want them.

Michael: But in the meantime, they’ve been getting a high level of touch because they’re getting the handwritten notes, the ongoing emails every week for the past several weeks. They’re getting all of these ongoing interactions so that by the time they’re getting to a plan and delivery meeting, this is the first plan delivery meeting, but might already be the fifth or eighth or 10th-plus touch so they’re getting an impression of this is what it’s like to work with the firm.

Patti: Exactly, exactly. Yeah, it’s definitely probably eight, if not more touches, because we’re calling them, etc. I don’t like too much time to go on, but sometimes it does between that initial meeting and when we can bring them back in.

Michael: So how much time is typical for you?

Patti: I tell people six to eight weeks on the high side.

Michael: So it allows you enough time to do a series of four emails, one every week, that’s scripted out in Redtails that’s part of the expected process.

Patti: Exactly. I don’t want it to be too short. Because then it seems like we’re not having to do a lot. And you know and I kno…

Michael: …seem awkward like, “Yeah, I took all your information. I’ll have the plan to you tomorrow morning at 9 a.m.”

Patti: Exactly.

Michael: I appreciate the service but feel like that means you didn’t necessarily have to work as hard.

Patti: Exactly. And it’s really interesting when you see the case, and when it’s done. And the other thing that’s, actually… COVID was really interesting for me, and I’m sure for you as well and everybody that’s listening, because, boy, did we have to pivot. I don’t know about you, Michael, but we had our disaster recovery plan. But when that happened, I’m like knocking on my head saying, “Okay, I hope it works.” Because everybody had to be in their homes, and computers in their homes and printers. And for the most part, I was pleasantly surprised at how well it worked. There were some hiccups. Our VPN was not up to speed. And literally, it was not what it needed to be. So I had to upgrade the VPN. And we also had to upgrade our phone system. Our phone system was clunky, and I didn’t want clunky. So we did both of those during COVID.

I was also, and I have continued to be pleasantly surprised, since COVID, how much more comfortable people are with doing the Zoom meetings. I mean, we’ve had new clients, we’ve never even met them face to face. Everything has been by phone and Zoom. And they’ve transitioned over and it’s worked out great. So that continues to be surprising to me. I tend to be a face-to-face person. But it works.

Michael: And so what is the financial planning for you to go through this process and get to their end, financial plan?

Patti: I would say our fees range from, typically, 2,500 to 5,000. Every once in a while I’ll get a complicated case. Like we have somebody who owns shopping strips, and they’ve got multiple family-limited partnerships, and grits, and things of that nature. And it’s complicated. So they’re in the 7 to 10. And I just estimate a fee, and I look them in the eyes and say, “I’m going to cap it for you right here and now.” And I say to them, “I don’t know about you, but I don’t like surprises. So I’m going to give you this fee, and I’m going to…” A lot of times, I will give them a range. “But I’m capping it at $5,000, I don’t want you worried about how much this is going to cost. Sometimes I don’t know how much time is going to be required. And if more time is needed, we’re going to put in the time. I don’t care about it. I want to make sure that we do absolutely everything we need to do to create the outcome that is optimal for you and your family.”

Michael: And so for clients who go through this, and then have a good experience and say, “Yeah, You know what, Patti, I think I do want the firm to help me implement from here as well.” So how does the transition work as they go from phase one to phase two?

Patti: At that point, I’m still out of it. For the most part, the key client services person who has met them, either on Zoom or face to face is contacting them. They’ve given us their statements. We prepare all the paperwork to the extent that the paperwork is necessary. We help them with whatever decisions they’ve agreed to. And we go through that transition process. We give them lots of heads up in terms of it may feel like during this transition period, that your money is kind of going into this black hole. That’s why you have this person. We will make sure that every dividend, every share that is coming from one place to another, because we usually transfer stuff in kind, that it comes over the way it should. And we tell them that sometimes there’s a lag between when something is declared, versus when it’s actually paid. So they may have a residual sweep that is necessary. We may not know that. So just let us know. And it’s easy to re-sweep. So we tell them some of the things that might occur in advance.

That process takes a few weeks. After that, the money is here. And we begin implementing those recommendations that they’ve approved. We always talk to them first before we implement anything, though. Just in case things have changed, etc. And that’s where Brad comes in. He’s the chief investment officer. I want him to manage that conversation so that the client gets to know him as well. So it’s really a very kind of a process. We tell them in advance every step, what they can expect next, we give them kind of a timeline and let them know that we’re going to be in contact with them all along the way.

Michael: So, a couple of questions. First, just so when you get to phase two, and as you had put earlier, sort of more typical AUM, what’s the investment process that you guys go through? Are you managing internally? Are you managing externally? How do you actually implement client portfolios?

Patti: That’s a great question. We do everything internally. So we manage the portfolio ourselves. And the reason for that is that most clients who come to us, a lot of what they already have is probably really good. We don’t want to just sell it and put them into our stuff. So analyzing that in phase one. And we literally put this in writing, “If you were to move forward, we’re going to sell A, B, C, and D, and then we’re going to transfer everything else. And A, B, C, and D adds up to we literally are putting in the dollar amounts and the tax implications, do they have a gain? Do they have a loss? If they have a gain we’re going to reserve money to pay the tax in April. So it’s laid out for them so they know exactly what we would want to do and what we would be keeping.

So every portfolio is really different. Now, just like everybody else, to scale, yeah, we use models, right? We have a goal of 65/35 in terms of their household model. And that’s where AdvisorPeak has been phenomenal because we manage on an account basis as well as the household basis. And it allows us to do that. And we put in the roles in each account as well as the household so that we get those alerts, we get those alarms.

Michael: Meaning, because you’re doing things like, “Okay, we want the portfolio overall to be 65/35. But for this particular account, the client has a long-standing legacy position with a big gain, don’t sell the thing in this account”?

Patti: Exactly. And let’s try to work towards that end. But that’s a hard hold. There’s hard hold. A hard hold is don’t ever sell it. And a soft hold is let’s talk to the client. If we really feel strongly that it should be reduced or sold, talk to the client first. Because most of our clients are on discretion. And by the way, that was also huge in terms of allowing us to scale. Because up until again, about 10 years ago, we didn’t have discretion at all. And so the way that we had to do it was we would do the rebalancing, analyze the portfolio, send out a letter with the recommendations and have them sign off on the letter. Because actually, we realized that that was actually faster than calling everybody. And then we would call people from time to time because you end up on the phone for half an hour. So the letters were actually more efficient. And they were effective in terms of getting the portfolio rebalanced. But what they weren’t great at was we weren’t getting them back in a timely manner. And so what we wanted to do sometimes changed, especially during the financial crisis. Like things were happening so quickly, we weren’t able to do the tax-loss harvesting as quickly as we would have wanted. We were actually hurting our clients by not having discretion so that we could act on their behalf quickly.

Fast forward to COVID. We did two full rounds on every client portfolio. Last year, probably, 1.5 billion. We were able to do two full rounds within four weeks. And for some people, they may not think that’s a big deal, but I will tell you the way that we do it is we’re not doing model rebalancing so that every client in that model gets rebalanced. We are doing it client by client because we’re looking at the financial plan on one monitor and we’ve got the portfolio on the other monitor. And at the end of the day, we’ve got to exercise our best judgment based on that particular client, not based on what’s happening with COVID.

Michael: So, do you still end out with a lot of clients that have mixtures of discretionary and non-discretionary because you tried to carve out some of the holes, or do you still ultimately put the whole dollars under the umbrella because you’re still viewing as part of what you’re managing, even though you may not sell it? Like, how do you…?

Patti: Yeah, that’s exactly right. The whole umbrella is discretion. I would refer to it as a preference. That their preference is that we not sell it or their preference is that we call them before we sell it.

Michael: Okay. But you drive all of it into managed accounts. You’re not necessarily building a big non-discretionary base at this point.

Patti: Oh, not at all. In fact, 97% to 98% of our clients are all under discretion now. It was quite the process. But now we’ve got almost everybody under discretion.

Michael: Okay. And so, the other thing I’m wondering, just as a part of this is you’ve described the planning process. You’re doing the upfront meeting with clients. Eric, your Director of Financial Planning is doing the financial planning and delivery. And then key client services become sort of the initial concierge point of contact. So, are you still in a world where there are individual advisors who do ongoing financial planning advice to clients? Where do they fit into this picture? Or does it all drive through key client services?

Patti: It all drives through key client services. And then, for example, there may be a question, and Christopher can answer it, or Diane can answer it. Because again, they’ve met these people. They know them.

Michael: Through Christopher and Diane, how do they fit into this?

Patti: They’re in the planning department. So Diane has her CFP, Christopher has his MBA. He is transitioning to be more on an advisory basis. Michael is here as well. We’ve got lots of really good people who can answer the questions. I like to have consistency. That’s why each key client services has their person in planning. So that if Susan has called several times with different planning questions, she’s always going to be talking to Chris.

Michael: Okay. But at the end of the day, you don’t actually end out assigning clients to a lead advisor who’s doing advisor-level relationship management, necessarily, because key client services becomes the main point of contact. And if clients contact with a planning issue, you bring in someone from the planning departments to answer their issue and solve their thing. But that person from the planning department isn’t a advisor or a relationship manager necessarily?

Patti: Exactly. For example, let’s fast-forward. Six months have gone by, a year has gone by, it’s time for us to set up a meeting. Key client services knows that, they’re reaching out, they’re asking Susan to set up a meeting. Depending on our schedules, etc. Sometimes Eric is doing that meeting, sometimes I’m doing the meeting, sometimes Sam is doing the meeting. But there is kind of a planner, if you will, who’s running that meeting. Sometimes I have Brad come in if they have portfolio questions, things of that nature. But again, I want them to feel comfortable with the depth of the team. That’s really important. It doesn’t always have to be me and Eric, and the senior people, because I want them to get comfortable with everybody.

Michael: Interesting. But that literally gets the point of even when they’re coming in for annual reviews, it may be you, it may be the chief investment officer, it may be someone else who is on the investment team that’s doing it and delivering that update. But it’s not necessarily “your advisor,” that’s always your individual advisor for whatever it is. It’s all centralized and departmental for you.

Patti: Exactly. You might be surprised to hear this. But it is very effective. Like for example, we had clients today. I was not able to be in that meeting. However, I popped in. So it’s the dental office idea. You’ve got your dental hygienist. The doctor comes in and says, “Hey, I looked at your X-rays, no cavities look great, how’s the family, how are you doing?” Hug, hug, kiss kiss, I’m out of here. That’s basically what I try to do. I don’t always do it. It’s not always necessary. Also, as it relates to who’s running that meeting, sometimes it’s just personalities. We know our clients, and some clients, they’re very portfolio hyper-focused. So I’ll have Brad run that meeting. Or they are tax hyper-focused. It depends on the personality. Some people are like Eric will go in and help bring up the St. Louis Fed and talk about all of the economic indicators. And there are certain clients that just love that stuff. Eric will run that meeting. So we know our clients, we know that what’s appropriate. And I like popping in and doing some of the meetings myself.

Michael: And so, as this gets applied across the whole firm, I guess that’s just part of the scaling dynamics then that key client services, I guess, no pun intended, like really becomes the key because they truly are the central point of contact for clients. They’re the ones that’s routing, “Do we need to bring in someone from the investment team? Do we need to bring in someone from the planning team? Tell me more about whatever your issue or concern is and I’ll make sure we get the right resource within the firm to solve that for you.”

Patti: Exactly. Let me give you a perfect example of what happens, literally, on a weekly basis. I will tell you one of my key client services person, her name is Kelsey. Okay. Kelsey was helping a client with a mortgage situation, and he was needing information and didn’t understand, he’s an older client. And he was literally calling her almost every day. And it was kind of the joke because they’re in one big office and everybody’s like, “Kelsey, it’s for you again,” and everybody knew, and etc, etc. Long story short, the client asked a question that Kelsey didn’t know the answer to. So she said, “Let me have Patti call you back.” Right? So Kelsey came in to me. She said, “This is the question. I didn’t know the answer. So could you give the client a call?” I said, “Absolutely. By the way, let me give you the answer first in case it ever comes up again.”

So I called the client. Talked to the client, gave them the answer that they were looking for. And just as I was about to hang up, the client said to me, “Patti, before we hang up, can I just tell you what an angel Kelsey is? I want you to know that I have probably been driving her crazy this week.” And it was so funny. He said, “I have literally called her every single day. And she was so patient. I was on the phone with her for 45 minutes, half an hour, one day. I mean, literally, and every time, it never felt to me like I was bothering her, that it was too much. She never lost her patience. And I just thought you should know.” And so pretend his name is John. I said, “John thank you so much for telling me that. I wouldn’t have known if you hadn’t told me.”

So with that, we hung up the phone. I did something first. And then I went in to Kelsey and I said, “Come on into my office, I want to tell you something.” And I told her the story. And I said, “Kelsey, I want you to also know that I just called in a pretty juicy bonus. And you’ve also got a permanent raise because you made such a difference in that client’s life today, and by doing so, you made one in mine as well. So I just wanted to thank you.” Well, Michael, she started to cry. She started to cry.

It doesn’t end there. She leaves my office. And I thought, “Wow, what an experience.” So I called John. I said, “John, I want you to know the difference that you just made in a young person’s life.” And I told him the story. And you know what? He started to cry. He said, “Patti, thank you so much. I can’t believe that you did that. And I can’t believe that you told me that you did that. Like that is just fantastic.”

And so that’s the spirit of this. That is what those people are. They are the secret sauce. They go out of their way. I’ve had people who were suicidal. We saved their life. True story. I had another client who had a massive heart attack. Her husband is in a wheelchair, he’s a diabetic, she’s in the ambulance. She’s saying, “Who’s going to give my husband his insulin? He needs it at 5. He’s in a wheelchair. My kids don’t live near me. What are we going to do? ” And she’s having a massive MI. And the guy in the ambulance is like, “Look, lady, we can’t worry about that right now.”

And she told me the story. And so I said to her, “Look, here’s what we’re going to do about that. We are 10 minutes from your home. If this ever happens again, please make sure you put a sign on the refrigerator and tell the ambulance driver, give them our number. I will run over there. And show us where the meds are. I know all the kids. And we’ll take care of him. We’ll make sure that he gets what he needs when he needs it.” And that client literally fell off her chair. She’s like, “Are you kidding me? You would do that?” I said, “of course we would do that.” That’s what we’re here for. This is not just about managing a person’s money. We don’t work with money, we work with people. And that’s what it’s really all about.

Michael: So, I’m struck just from the business ends, that as I’m sure you know, a lot of firms, most advisory firms, it’s pretty common that there’s a main advisor who’s the main person and client services support to the extent they support them are usually more focused around, I’ll just call it, purely administrative tasks, that it feels like you have turned that structure somewhat upside down by putting your client services team, like, truly, at the center of that to the point that you’re planning and investment teams are centralized and you don’t necessarily need to set like lead financial advisors for each and every client.

Patti: Exactly. You got it. And the people in client services, they’re like I am in a way. I mean, they’re very nurturing and huggy, huggy and that kind of stuff. But they’re also really smart. And they really will go out of their way to do whatever is necessary.

Michael: And how many are there? Like how many are in that key client specialist area?

Patti: I think we are approaching 10. And that’s where the scale comes up. That’s where the scale really comes. Because I can always add people to key client services. And by the way, in terms of morale and job satisfaction, they love what they do because they know that they’re making such a difference in these people’s lives.

Michael: And how many clients are there across the firm?

Patti: We are at about 800 clients.

Michael: Okay. Oh, interesting.

So from that perspective, 800 clients, 10 key client services team members. So your key client services may have no more than 80 to 100 clients, each, that they lead on from a relationship perspective.

Patti: Exactly. I want them to be able to have the bandwidth to be able to take care of those clients. And I will tell you that sometimes as we grow, that’s why I’m always trying to hire ahead because I see what’s around the bend. And it takes a while to get people trained. We’re in that process right now, so some of our senior key client services people, sometimes they get a little overworked. And I’ve got to ramp up the training and the hiring process to make sure that that doesn’t happen.

Michael: But from a staffing perspective, you just as you noted, from the scalability perspective, you can likely still hire and train key client specialists at a lower cost point for the business overall than trying to get super-senior experienced financial officers that are harder to find and harder to train into your systems because they learned it somewhere else and you got to train them or retrain them to your style. So you have largely bypassed that challenge by focusing the client connection at the key client specialist level.

Patti: Absolutely. And the coaching that goes on, everybody who works here is a coach. Everybody coaches each other. Several years ago, I had a meeting with everybody and I said, “It’s really important that we all recognize that each one of us are professionals. In fact, I instituted this program where we don’t keep track of sick time anymore. I don’t keep track of vacation time. If you need time off, take time off, we’re not going to keep track of it. We’re all professionals. Recognize that when we take that time off, that means that your colleagues might need to be stepping up a little bit more to cover you because we have teams in terms of coverage and things of that nature. And I think it’s important that everybody…and everybody here knows that you want to be the reason your colleagues love coming to work. I got to tell you, we have a ridiculous amount of fun here.

One of the things that I really look for, I look for a lot of things. I look for humility. I don’t want egos here. That’s really important. I also look for a sense of humor. We have the funniest people here. We laugh all day long, because I think you need that. We got a great kitchen. We got ping pong tables and the games and when people need to let off steam, we’ve got that going on. So but it’s really that atmosphere of colleagues helping colleagues and the entire firm benefits from it.

Michael: So, as you look back over this journey, what surprised you the most about building your own advisory business?

Patti: I think the thing that has surprised me most, not surprised me. I wouldn’t say surprised me. I would say that it took me a while to let go of that bone. And to really just let people take over and implement the plans and do the things that I thought I had to do. That really has been a real positive outcome from this. Like, everybody has got their own style. And as long as clients know that I’ve got their back, I’m not going to let anything really bad happen to them. That’s just really important.

I think the other thing that has surprised me or the thing that I have learned is the importance of how to make a proper apology. I think that’s really important, whether it be our clients or other people. Years ago, I still had that bone in my teeth. And I was going crazy and doing this, and really, at a point where I was getting fried. And we had a day, and somebody, they made a mistake, and I wasn’t really happy with it. And I responded in a way that really isn’t my style. And I did it in front of other people. And I knew that that was wrong. Gosh, I felt…

Michael: It was the moment it happens. Like, oh, that was good what I just did. That was a mistake.

Patti: That was not good. It was awful. It was just awful. And I felt terrible. So I will tell you because Vince was still here. And Vince, I will tell you, is my chief operating officer. And he was senior vice president of a large company. So he has a lot of management experience, operations experience. He’s really amazing. And so he had been with me for a couple of years by then. And when that happened, I just came back to my office and I thought, “Oh, my God, what am I doing?”

And so I asked everybody to come in the conference room. I brought everybody together. And basically, I looked that person in the eyes and I said, “I want you all to know what happened and what I did. I’m sorry, I still feel bad about this. And I looked her in the eyes. And I said, “I just want to say I’m really sorry. I shouldn’t have done that. That was wrong. And I just hope that you will forgive me.” And she was like, “Wow.” And I said, “I’m really sorry.” And I started to cry. And she was like, “Thank you. Thank you so much for doing that.” And everybody was like, “What do we do now?” You could just sort of feel it. And I said, “I just wanted you guys all to know that I am painfully human. And if I ever do anything like that to any one of you, please, call me on it. Like, just call me on it. Because it’s not right. And I would never want anybody to feel any less than the wonderful people that you all are.”

And so everybody went back to their desks. And we went back through the rest of the day. And Vince came into my office, 15, 20 minutes later, closed the doors, and I’m thinking, “Oh, God, he’s going to quit. He’s going to think, Oh, my gosh, this woman’s out of her mind.” And he sat down in front of me. And he said “I have been in business for 25 years.” And he said, “That was probably the greatest act of leadership I’ve ever seen.” And I’m like, “Really? I made a mistake. And I said I’m sorry. Like, that’s not leadership, I’m an idiot.” And he said, “No, Patti, you’re human. And you showed your vulnerability, you showed that you are human, and you made a mistake, and you quickly corrected it as quickly as you could.”

So, to me, and I learned from that, Michael, and I’ve learned from that with clients. Every once in a while, we make a mistake, I make that proper apology. I apologize. I thank them for bringing it to our attention. I tell them what we’re going to do to fix it. And I really thank them because, again, if we don’t know about these things, I can’t fix it. And because of them, another client is never going to have to go through what they went through. And then follow through. Give them that follow-through. “I’m going to touch base with you in a month or two months and make sure that we fixed it.”

Michael: So what was the low point for you on this journey?

Patti: I would say the low point for me was the financial crisis. We were still in my second basement. At the time, I had 9 or 10 people coming into my kitchen, they come in through the side door and they raid my refrigerator and they would go down to the basement and work for the rest of the day. And I didn’t have anybody on phase-two type of thing. We were more of a retail shop. And that was really hard because I didn’t have that recurring revenue stream to help us weather the storm.

And I learned a lot during the process and the importance of having repeatable systems, a repeatable revenue stream, and to manage the business, which was, frankly, more of a practice than it wasn’t even a business, to manage it more like a business because that was the only way we were ever going to become a company that would be an ongoing entity that didn’t need Patti Brennan anymore. That’s the stage that I wanted to get to, but we were still a practice. And I will never forget because Eric and I would usually be working late.

And I didn’t take the time, honestly, to check in with everybody to see how everybody was doing. We had televisions all over the basement, and markets were going up and down, etc. And we were working 24/7 trying to keep clients, talk them off the ledge, and really taking care of our clients. And I asked Eric, I said, “Eric,” I said how, “how are you doing? Like, this is really hard. This compassion, fatigue, we all get it, I got it. It’s hard stuff. How are you doing? And how’s everybody else doing? And he was really honest with me. He said, “You know, Patti,” he said, “We’re doing okay.” He said, “but we’re kind of worried we’re going to lose our jobs.” And I’m like, “Really?” I said, “You’re really worried about your jobs. I didn’t even think about it. Hadn’t even occurred to me.” And I looked him in the eyes, I said, “Eric, I promise you, no one’s going to lose their job.” And that really helped me to define myself as the leader. Like, “I got to really take care of my team and let them know, they’re going to be fine and I’ve got their back.”

So we had that meeting the next day. And the reason it was such a low point for me is I didn’t have the money to continue to pay them. I mean, the business didn’t have the money, it didn’t have a recurring revenue stream. And so I had to dig into our own accounts. And $400,000 or so later, we were beginning to come out of it. But that was a real lesson in terms of running a business. You got to run it like a business and understand that, we’re going to go through difficult times, and you have to have that emergency fund like we tell our clients to have. It was scary. Really scary.

Michael: So, just having been in the business for more than 20 years, what do you know now that you wish you could go back and tell you from 20-plus years ago when you were just getting started?

Patti: I would say that I wish I had known the value of bringing other people into the meetings and elevating the rest of the team. We had a lot of people at that time, but clients didn’t know who they were. They would come into a little townhouse…I had an office where I would have meetings in this townhouse business center. But all of my employees were in my basement. My clients didn’t even know where they were working. They never met them. They never saw them. It was always just me. That was wrong. I wasn’t wrong. Even to this day, I’m kind of surprised how many people still signed on and wanted me to be their advisor. But it was not necessary. So I…

Michael: What was driving it? Because it sounds like it was a conscious decision to do it when you were doing it.

Patti: It was fear. Truly, it was fear. I had PTSD after the financial crisis. And I had to dig into our own funds, which frankly, were not a lot at the time. And to be able to have to sell those investments to keep my payroll and keep things going, I couldn’t even imagine what it would be like to have an office where I’m paying $10,000 a month in rent on top of everything. Because the office that we had was something that I had gotten in the ’90s and it was already paid off. So it was really just fear. I was worried about making sure that I always had the cash flow to pay my people. And so finally, I had to feel the fear and just do it anyway. And that’s what I did. We moved into this office. I ended up buying an office building. And I think that also has helped a lot in terms of sending the message that we’re going to be here for a long time.

Michael: So what advice would you give younger or newer advisors that are just looking to get going today in building their practices?

Patti: I would say the best advice I can give is for them to join a team that is growing. You want to be on a team that’s already growing. You’ll learn everything you possibly can. This is the way that we do things today. It’s working really well. But I don’t know what we’re going to look like three years from now. Every year, I ask the question, I have a leadership team. And we meet, we’re having a meeting next week, it’s going to be an all-dayer. and I’m going to say, “Okay, is what we’re doing still working? Should we rethink this? Should we begin to develop silos where you have a main plan or a portfolio manager and key client services?” We haven’t done that yet. But we now have the staff who was already well-trained. And we could create that in an instant. That would be fairly easy. We might do that in the future.

The way that we do things currently, is I will tell you that the people who work here really seem to like it. They never feel like they’re on their own island. And there’s a lot of camaraderie. And that feels good. But who knows what it’s going to look like four years from now? And by the way, I don’t know that we can’t keep that same great camaraderie if we go into that silo approach. But my only concern with that is I want clients to understand that they are clients of the firm. I want people to feel that ownership that they are the reason that that client stays with us.

So again, I’m an open book. I’m learning just like everybody else is.

Michael: So what else comes next for you?

Patti: I think for me, I’m one of those people. I don’t know that I’m ever going to fully retire. I will rewire. I am making myself less and less relevant, over time. That seems to be working quite well. I’ve had to improve the messaging. Because the one thing, clients, I never wanted them to feel like they were being pawned off to a junior planner. Like, I get clients from other advisors where that’s happened. And I don’t want clients to feel like that.

So what we’re doing right now, this department approach works to alleviate that concern, because, at the end of the day, I tell everybody, “I’m your advisor, I’m accountable, I’m the person that you go to if you really need something that you don’t think anybody else can help with. So just know that.”

Going forward, what does that look like? Does Eric then step into that role? Does Brad step into that role? I don’t know. We’ll see. I’m open to all of it. I think that’s really important. If anything has changed, I have become a lot less resistant to change. I actually am welcoming it. Because with every change that we’ve made, it’s actually things have improved. Has it been perfect? No. We’ve had to tweak here and there. But it’s working.

Michael: So, as we wrap up, this is a podcast about success. And one of the themes that always comes up, it’s just the word success means very different things to different people. And so as someone who’s built what, again, one would objectively call a very successful business as you’re coming up on $2 billion. How do you define success for yourself at this point?

Patti: I guess I always want to be known. I think, for me, success is only relative to the success that other people in my life feel like they have. So it’s not my success. It’s my ability to help others realize their own success. Whether it be financial success, personal success, passing the CFP, whatever it is. To be that catalyst that made the difference in their lives. That to me is ultimate success.

Michael: Oh, I love it. I love that framing of “I want to be the catalyst for it. I want to be the catalyst.”

Patti: Yeah, and there’s a lot of ways that we can do that. Right? It’s clients, it’s employees, it’s the kids of clients. There’s so many different ways that we can make a difference in other people’s lives. To me. That’s really cool.

Michael: Amen. Well, thank you, Patti, so much for joining us on the “Financial Advisor Success” podcast.

Patti: And thank you, Michael.

Ep90: 2022 Economic Outlook

About This Episode

America is two months into a New Year and hopefully COVID concerns are in the rear view as mask mandates begin lifting throughout the nation. Most Americans are more concerned with the rising rate of inflation and supply chain shortages and the impact that both seem to be having on the markets and the economy. Patti and her Chief Investment Officer, Brad Everett, discuss current market conditions and predictions and give meaning to the data to help the listener better understand what is really going on in the world. While some industries are still struggling and mortgage rates are beginning to creep up; there are many bright spots in the economy happening too. From the decrease in the unemployment rate to the increase in small businesses, Patti and Brad discuss the implications that all of these have on financial planning and the success of portfolio performance.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today is Brad Everett. Brad is our Chief Investment Officer. We thought we would kick off the year with a discussion about the economy and markets, and I can’t think of a better person to volley with than Brad Everett.

Brad, thanks for joining me today.

Brad Everett: Thanks for having me, Patti. You recently gave a talk at Chester County Economic Development Council. I saw your slides from the event and although I was unable to attend myself, I heard great things about it. I thought I’d pick your brain about some of the things I saw in the presentation.

Patti: Absolutely! This is an annual event that I do. It really helps to frame the year for me. It’s an opportunity to say, “OK, what happened last year, and what do we think is going to happen this year?”

It’s a great opportunity to pull some of the data together and give it meaning, make it relatable, and help people to understand what might be going on in the world around us. It’s something that I’ve done for 17 years in a row. They keep on asking me to come back, and it gets bigger and bigger every year.

Brad: It’s a great opportunity to learn. So, let’s start at the beginning. You can’t even get to 9:30 in the morning without talking about COVID. We’ll start there and get it out of the way. Where are we? Are we making any progress?

Patti: It’s a really good question. The answer is yes. Many, if not most, industries are back. They’re figuring it out, whether it be this work‑from‑home thing or back in the office. There are some industries that are still negatively affected. They’re still not back – travel being one, although there’s been blips of high activity.

Unfortunately, there’s been some airplane delays and cancellations – that’s put a damper on things. Restaurants are still not back. That also has a little bit to do with the supply chain, getting the food and getting things back to where they were.

Yes, we are coming back from COVID. The economy is roaring ahead. GDP is doing fantastically, so that’s a good thing. Generally speaking, yes, we are coming back. It sure does show the resilience of the US economy, and that’s what all the economists talk about.

Specifically, when we think about how resilient this economy is, let’s take a look at unemployment. It was skyrocketing and then last year, it came down to 3.9 percent. Yes, the federal debt is way up, but what you’re not hearing about is the fact that the annual deficit was actually down.

There are some bright spots in the economy, and many Americans are doing much better. It’s going to take some time, but we definitely are recovering.

Brad: On another note, humans have an incredible ability to adjust to completely abnormal situations. They get used to them and make them seem normal. On a business level, how have businesses adapted to this new reality that’s been around for the last couple of years?

Patti: It’s been amazing to think that whether it’d be a Fortune 500 company or a small business like ours, companies and business leaders have adapted. That, to me, is the theme. We have adapted.

We are a small business. When we couldn’t come into the office, I said, “We have to do plan B. Everybody grab your laptops, we’re working from home.” Was it perfect? No. We had to get a better phone system. It was clunky. Our VPN was slow, so we had to get a new VPN. We got it, and it worked out perfectly.

The job got done, and people were feeling better about what was going on. That is the most important thing with any dynamic economic engine such as the US economy. You have to go, ebb and flow, and that’s what business leaders are supposed to be doing.

Whether it be employment and this great attrition that everybody is talking about. Yes, there are a lot of people who are quitting their jobs. But to be honest with you, if you look at the statistics, people quit their jobs all the time.

By the way, what are they doing? It’s not all bad news. A lot of them are retiring because they can. That’s the wealth effect – they’ve been smarter with their money. They’ve achieved that financial independence. Or, they might decide to work part-time.

What is really interesting to me is a record number of people in America are starting their own businesses. The United States of America is built on small businesses. Last year, we had a record number of Americans starting their own. That’s pretty good news!

Now, we’re not hearing it on “60 Minutes.” On 60 Minutes, they spend almost an entire show talking about the number of people quitting their jobs. Yes, I’m just going to go off on a tangent here. It is important. I think that we have a great opportunity in America whether you are big business, midsize, or small. Instead of calling it the great attrition, how about we call it the great attraction.

Let’s face it. People leave companies. They don’t leave families. Create an environment that people don’t want to leave. I don’t know Brad, what do you think about that idea? You like the ping pong table?

Brad: Yeah, I would have quit a long time ago, but you put a ping pong table back there, and here I am!

Patti: There you go, guys. Whatever it takes, if it’s ping pong, so be it.

Brad: That’s what I’ll take!

Patti: It’s a blast. We literally will go into the ping pong area, and I’ll see Brad. They do teams. I have never seen ping pong played the way you guys play it. They are so far away from that table and are winging it. 15 minutes later, they go back to their workstations, and they’re refreshed.

Brad: Refreshed, and a little sweaty.

Patti: Feeling really good because you are the champion.

Brad: Always.

Patti: Always. It’s little things that can make a big difference. It’s understanding, at least I can speak for myself.

We’ve had many families in our firm this year who have struggled with COVID. Many have small children. We have a young family right now – they’ve all got COVID.

I do not want them thinking about Key Financial one iota. I don’t want him to check in on his computer, even though he can’t seem to keep away from it. This is life. We need to just adjust and be there for each other.

For me, at least one of the things that I’m most proud of is the fact that each one of you are the reason your colleagues love coming to work. It’s almost ridiculous how much fun we have. Now, it doesn’t mean we’re wasting a lot of time. Everybody knows that somebody’s got their back, and most importantly, that I’ve got their back. That’s all people really want.

My point here is we’re hearing about the economic impact, which is the title of this show, the economic impact of things that are happening as a result of COVID. We do have an amazing ability to be resilient and to make different decisions. Everybody’s going to be better off because of it.

Brad: We create narratives around statistics. To say that there’s 3.9 percent unemployment doesn’t really describe it very well. It’s all of us by ourselves and our families making decisions about what’s best for us. If we’re one of the families that doesn’t have a job or if you’re one of the families that is fully employed, your life is totally different. Either of those families are 4 percent unemployed.

Patti: That’s a really good point. Again, for some of those families, that was their choice. They chose to do that. They’re getting unemployment. One of the other statistics that I think is interesting is consumer sentiment. By all of these wonderful statistics, these other measures, wages are up. Housing prices were up 19.1 percent. The economy, GDP is really chugging along beautifully, much better than in any period of time, certainly, in the last 10 to 15 years.

Everything is doing fantastic. Jamie Dimon from JP Morgan predicted that this is going to be the best economy since 1950. From an economic perspective, we’re doing fantastic, and yet consumer sentiment is really low. I think last year, it was at 70. That’s really low.

Brad: Normally, they should be positively correlated. If you don’t feel great about your finances, you’re not going to go buy an extra fishing rod.

Patti: That’s exactly right. Retail sales are going through the roof, and yet consumer sentiment is low. If sentiment is so poor, would people be going and spending all that money? They normally wouldn’t do that. It’s bipolar. The economy is bipolar right now.

Brad: Is it because they’re not spending somewhere else? They’re not spending on travel and services and all those things.

Patti: Absolutely. I do think that it’s a bit of retail therapy, right?

Brad: Yeah.

Patti: Are we saying, “OK, we’re not spending it here. We’re going to go and do these things instead,” and that’s not bad, by the way, because a lot of that money is going into home improvements, for example. We see that in the data as well. That’s also contributing to the increase in value of real estate.

It’s all a domino effect. I think that we have to keep in mind that with any kind of a system, there’s going to be some unintended consequences of actions, whether it be Federal Reserve or fiscal stimulus, and one of those things is inflation.

How many calls are we getting per day, asking about what should we be doing about inflation, and how should we be adjusting the portfolio accordingly?

Brad: “The Wall Street Journal” really did us a disservice when they said how wonderful I bonds are. That’s the calls that we get, about an article that was referenced in the newspaper. We do hear about it a lot. It gets a lot of time on the news.

The base effect will start to wear away. You started from this extremely low base of inflation a year and a half ago, and that’s starting to wear off. We will have to see if inflation is just going to be a blip or if it’s something that’s going to be settling in for a long time.

Patti: Typically, that is what the economists really worry about. That’s why I think Jerome Powell came out and said he believed that inflation was going to be transitory because there were a lot of supply chain issues. Things were just knocked off the factory line, if you will.

I think that the issue is going to be, “Are we going to see wage inflation because that is stickier?” I love you dearly, Brad. That raise that I gave you last year, would it be OK if I took it back?

Brad: Yeah, you had a bad day yesterday. We’re going to cut your pay by five percent.

Patti: Exactly. That’s just not going to happen. Wage inflation is sticky. Once it happens, it stays. Between that and all of this negative press about the great attrition, it’s really interesting as a sidebar.

Think about that. Restaurants are adapting. Instead of being open seven days a week, they’re open five. They looked at their data and said, “Geez, people don’t really go out to dinner that much on Monday nights.”

Brad: They got a busy night, anyway.

Patti: “You know what? We’ll just not even open.” They save on utilities. They save on labor. They save on food costs that gets thrown out, etc.

It’s going to be very interesting to see what happens and how all of this ends up in the long run. The inflation issue is definitely here. It’s running at about seven percent. It’s certainly hot. There’s no question about it. Inflation really is bad, and long‑term inflation bad for an economy.

What I think is important to always keep in mind is that we have been running this great experiment called the American economy now for 200 years. If Professor Fuhrman were in here, he’d be going back to Alexander Hamilton. We love to joke and to kid Eric. He’s our historian. The fact of the matter is that every crisis that has occurred, the federal government has responded and the Federal Reserve has responded and reacted. That’s what they’re there for. Sometimes it works. Sometimes they’re late, and they learn.

Each time they learn, they understand the potential negative consequence. Going into this thing, people pretty much understood that with this fire hose from both entities, the likely impact or the likely effect is going to be inflation.

Brad: It’s just a matter of when.

Patti: It’s just a matter of when, right. You can’t have this kind of money supply sloshing around. People buying Bitcoin – I’m not saying that that’s a bad use of your money. It just goes to show you that it’s got to go somewhere, especially if you’re going to earn one quarter of one percent in the bank.

Inflation is happening. Inflation is only an issue with the Federal Reserve, doesn’t do anything about it, because they know what to do, and they’re already doing it. You’re seeing it in your mortgage rates. Mortgage rates are floating up.

The Federal Reserve hasn’t done a darn thing. They have not increased interest rates as we record this on February 4th, haven’t done a thing, but interest rates are going way up. Mortgage rates have gone way up. That’s what they want. Because when interest rates go up, it’s a form of tightening. They’re pulling some of that money back in. Banks are not lending.

I don’t know about you, Brad. I just got a mortgage. Let me tell you, it was worse than giving birth to a baby. It was a painful process. Banks are not lending money. That’s the kind of stuff that really makes an economy go on fire.

Brad: Historically, I always thought that a sign of inflation was when banks had excess capital to lend. If the money supply is high, their reserve ratios are feeding through allowing them to feed through a different level of money to the economy through loans and things like that.

Patti: I think the money that is feeding through is coming in directly from the federal government with all of the stimulus that occurred through COVID. I think it’s happened that way. I’m not so sure the banks have been lending that much.

Brad: It doesn’t seem like it. That’s what I mean. It seems like the opposite of what you would expect.

Patti: Even so, the Federal Reserve is pulling their money back too. Right?

Brad: Right.

Patti: They have this…What is it? …The operations?

Brad: The open market operations.

Patti: Yes – thank you very much. They have their open market operations, and that’s behind the scenes. It’s not something that’s right in our faces. They’re not increasing interest rates, but they’re doing a lot to pull some of the money back out of the economy. The ideal scene would be what Greenspan was able to navigate which was that soft landing in the ’90s.

Typically, in this part of the cycle, most of the time you end up with a recession. Is it going to happen this year? Probably not. Could it happen next year? Maybe, depends on how fast they go and how correct they are in the process.

Typically, we’ve seen that as with everything, markets overreact. Federal Reserve overreacts. I appreciate how hard it must be though. At every meeting, you hear Jerome Powell saying, “It’s data dependent. It’s data dependent,” because it has to be.

Everybody’s predicting four now, maybe five increases this year. They’re not going to come out and say we’re going to do five, because we could end up right back where we were in 2018.

Brad: You almost feel bad. They go through so much effort to telegraph what they’re going to say. The minutes are 80, 90 pages long, and we latch on to one sentence that he says. He telegraphs it as best he can.

Patti: There’s a lot going on. There’s a lot to be aware of. Is it anything that I think we should be overly concerned with? No. I do believe that it’s going to be more volatile this year because of the uncertainty. There’s always uncertainty, always. It could be rising interest rates or what’s going on with Russia. We’ve got the midterm elections coming up, and the rhetoric from both parties is “Look how bad things are”.

That makes people feel uncomfortable, and they don’t want their money at risk. Volatility is going to spike, I believe, this year.

Brad: It’s already been a pretty wild January.

Patti: It sure has, and you’ve seen it in the areas that have done so well over the last five years. The ones that are really getting hit are large‑cap growth. That’s almost textbook. Interest rates go up. That’s the way those companies are valued. Interest rates are a big part of it in terms of the discount model.

Some of the valuations might have gotten ahead of themselves, so they’re getting slammed. I think Facebook was down 26 percent yesterday because they weren’t growing quite as much.

Brad: Which is wild, because they even hit their revenue number. I think their eventual earnings were low because they were investing more into growth projects than people thought they would. I don’t think that’s necessarily bad news if you’re a Facebook fan that they’re doing that.

Patti: That’s a really good point. Isn’t that what these companies are supposed to be doing, investing in their futures? They’re investing in this thing, the Metaverse, and other technologies. It’s going to take money, and that’s what they’re doing. It’s going to hurt their earnings today, but hopefully, it’s going to multiply many times five years from today.

Yet, on the other side, the areas that have not done as well, dividend‑paying stocks – they’re holding up quite nicely, thank you. These are the funds and these are the investments that people say, “Well, do we really wanna have this investment? It’s not doing nearly as well as this guy.”

I’ll give it to you straight. I always do. Everything is down so far year‑to‑date, but boy, they’re not down nearly as much. Again, it builds in some resilience to the portfolio.

Brad: In your talk at the Development Council meeting, you mentioned something called the wealth effect. It’s an idea that, as your asset levels rise, you feel comfortable enough to spend more. It seems to even apply when the asset that’s growing or the appreciated asset that’s led to your increased net worth is something that you can’t spend anyway.

If your house appreciates in value, you don’t sell off $10,000 bits of your house.

Patti: Wouldn’t that be nice? Somebody’s going to come up with an NFT for that. I swear, they probably will.

Brad: I’m sure SEC’s working on it as we speak. Maybe two questions there. You mentioned that everyone’s getting richer across all wealth percentiles. Why is that? Those brackets don’t tend to own the same things, right?

Patti: It’s almost startling when you look at the numbers. You’ve got the different quartiles. The bottom 50 percent of Americans in terms of overall wealth had an increase in their wealth of 74 percent. Whereas everybody got wealthier, the top 1 percent grew by 29 percent. The source of this is the Federal Reserve.

Everybody in America got wealthier, whether they earned the money, saved the money, or received the money from the Fed.

Brad: If you were owning stocks or real estate.

Patti: And from appreciation, we have to keep perspective of who is America. Who is America? We talk about the wealth effect, and we talk about the differences. The top one percent, they’re just getting wealthier and wealthier. The bottom 50 percent is getting wealthier, but they’re starting from a smaller base.

When you think about the overall wealth in terms of real numbers in the United States, Americans have $136 trillion worth of assets, $136 trillion. The bottom 50 percent owns 3.4 of it. The bottom 50 percent of Americans own about two and a half percent of the wealth. They had an overall a nice bump in there.

Come on, we do have to get better at this. There’s got to be a better system. I don’t know what it is. It’s one of the most difficult problems to solve. You don’t want to take it away from the top even 10 percent or even the top 50 percent. It is an interesting issue. We’re not going to solve it today.

I think that the takeaway from this is we talk about standards of living and the standard of living for Americans in general. It is really good. We are the wealthiest country in the world and not by a little. We’re wealthier by a lot.

There’s a statistic I shared at the Economic Forum. Basically, when you look at the household wealth relative to GDP, we’ve had a big spike, but literally if you look at the graph over the last 50 years, the difference between the two and if you see this on the camera, it’s gotten wider and wider and wider and wider. That’s a big deal. That’s a really big deal.

Americans have gotten wealthier and wealthier to the point where if you listen to Tom Lee from Fundstrat, ‑‑ I’ll tell you he’s really, really smart ‑‑ he said, “It’s gotten to the point where we almost don’t need capitalism.” You think, “What do you mean by that?”

Think about what capitalism is. It’s the ability to generate income. It’s the ability to generate growth. We have so much wealth right now in America already, that we just save and invest that, and that creates the income that we all need to live on.

Brad: We would just be the bankers to the world, and we would just invest in businesses in other continents and sit around and relax by the pool.

Patti: Exactly what he said on that podcast, Brad.

Brad: Oh, really?

Patti: Wild that you just said that. We could just be the bankers for the rest of the world, which is a really interesting thing. Yes, there’s a lot to worry about. There’s a lot to feel good about too. There is a lot to be said for all of that.

Brad: Interesting. I generally shy away from short‑term market recaps or the idea of making projections for the next year because I think the average year is usually very far from average. The experience is not smooth. It’s not anything you would expect based on, “Well, the last 30 years this happened.” In a given year, it’s not like that. Just a few ideas to put that in perspective.

If you go back the last 42 years, the average intra‑year drawdown has been about 14 percent. It’s a pretty big swing and makes a lot of people uncomfortable. Of those 42 years, 76 percent were positive years in the S&P. By the end of the year, you have this peak to trough thing in the middle, but oftentimes it recovers. More often than not, you end up higher than where you started.

The other thing which I think is even wilder, if you go back to 1926, I think the S&P is averaged a higher over 10 percent a year. If you look at the distribution of those rates, only six times has the annual rate of return been between 8 and 12 percent.

Patti: It’s all over the math, right?

Brad: Yeah, completely.

Patti: What’s equally as bizarre about that these statistics is, yes, we have the average. A third of the time, the market gave investors a return of over 20 percent, a third of the time.

Brad: It’s not uncommon at all.

Patti: Right, it’s really not that uncommon. Far more uncommon are the losses. There were only six years since 1926, where you had a loss of more than 20 percent. We should expect it. As you know, and as I’ve shared before on previous podcasts, we could win every day of every year, assuming that the next wicked bear market is happening today.

We’re ready. We’re prepared. I don’t want anybody who is on drawdown. Who’s receiving retirement income. I don’t them to be thinking about this stuff for at least three years and actually six before they even have to think about what’s going on with the stock market.

Brad: Right. We could say the same thing every January. We could say, “All right, to summarize last year, last year was pretty weird. This year we have no idea what’s going to happen.”

Patti: That would be an accurate statement.

Brad: We could say it every year.

Patti: Right. In fact, the last three years, when you think the average rate of return on the S&P 500 has been 26 percent. That’s terrific. Now, does that mean it’s got to go down? No, because markets are a momentum thing. There’s a lot of psychology in this. People look back.

I literally had a phone call today. It was somebody who’s got a lot of money and they’ve had it in a bank account. They were worried and they didn’t want to invest. Then they looked at what we take care of. They said, “Should we be adding this money now? We know we missed out on a lot, but should we be adding it?”

I basically said to them what I’m saying to you, “I don’t know. It could continue to go up, and it could go down. As long as you don’t need this money for the next five years or so, sure, we can put it in a balanced approach, balanced portfolio. Then we’ll watch, monitor, rebalance, and do all the things that make sound decisions, sound portfolio management, work over time.

Brad: Awesome. I’m not sure which is more important, Jack’s birthday or the 25th anniversary of Alan Greenspan asking if the market had become irrationally exuberant. It’s not crazy to ask again – has that happened again? How would you know if it did? What did he see at the time? How would you know if it was…if we’re in the same period of irrational exuberance?

Patti: I’m going to tell you right now, Jack’s birthday is far more important. December 5th was a big day this year, I should say this year in 2021. That was the 25th anniversary of Alan Greenspan’s speech at a dinner where he asked a rhetorical question.

Let me set the scene. It’s a dinner meeting. You’ve got the chairman of the Federal Reserve. He just was any chairman of the Federal Reserve. This guy was Oz. He was the most powerful person in the entire world. You talk about people just dropping everything to listen to what he was saying. Alan Greenspan asked the rhetorical question, “Has irrational exuberance seeped into the markets?” Let me tell you something. I’m dating myself. The next day, bam, the market fell. Everybody’s freaking out, “The markets are overvalued. It’s going to crash,” etc.

Those people who sold everything missed out on the next three and a half years where their investment would have more than doubled in not even three and a half years. It was March 24th of 2000 when he should have been asking that question.

Here we are in February of 2022, and we’re hearing that again, “Has the market gotten ahead of itself? Is it irrational exuberance all over again?” It could be. I will tell you based on the valuation measures if you look strictly at the map, some pockets of the market are overvalued but not nearly as extreme as they got to the end of the ’90s.

1996 was an interesting year because it had just come off of a great year. It was just asking the question. Again, it’s a lesson of be careful what you listen to and to be careful what you read. Let’s not make important financial decisions based on somebody’s opinion.

A good lesson for all of us, is that people who left their money in and didn’t try to react, didn’t try to time the market, and haven’t – have seen their investment grow many times over, a double, a double, a double. That’s a beautiful thing. That’s where you get true financial security.

Brad: That reminds me of Ben Carlson. He did a funny blog post about a guy named Bob. It’s called “The world’s worst market timer.” Bob got out of college. He got a job in 1970. He was able to save two grand a year for his entire career. He is a very nervous guy. Had a hard time pulling the trigger and actually investing.

He didn’t dollar cost average to the market. He waited until the market seemed so exuberant, everyone was so excited, that’s when he decided to take all of his cash out of the savings account and put it in the market. The four times he did that in his career were the worst possible four times he could have done it.

He did it in December of ’72, August ’87, December ’99, October of ’07, which isn’t going to play well on audio, but it’s a 48 percent, a 34, a 49, and a 52 percent drop. Immediately after Bob has made a worst market timer on earth. Decided to take his cash out of the bank and put it in the market.

Patti: I’m curious, Brad, how much over that period of time had he invested of his own money?

Brad: $184,000 total. He retires in 2013 with $1.1 million.

Patti: There you have it right there. The worst timer, the worst time to invest, this guy did it, not just once, not just twice. He did it four times and still ended up with I don’t know how many times the money. People ask all the time, “How do you manage risk? How do balance the portfolio so I don’t lose?”

Here’s the deal. I’m going to give it to you straight. The most important risk management tool you have is time. Understand when you’re going to need the money back. That’s what we do. People give us a dollar, and we hope, “knock on wood,” we’re going to give them more than a dollar back.

The most important thing is when do you want it? When are you going to want it back? I want to know that because I want to make sure it’s going to be there or where we’re going to pull that particular dollar from.

Brad: The idea of just getting the money invested, if you think if you had a lump sum and you’re fighting the decision about dollar cost averaging, if you’re going to invest for 40 years, after you’ve done the period of dollar cost averaging, you and the person that didn’t dollar cost average have the exact same rate of return.

You’re fully exposed to the market once your dollar cost averaging period ends. The only time that you’ve moderated the risk is during that very short period at the beginning of this very long investment horizon. Let’s say, you decide to do it over a year, “I just won the lottery. I don’t know if I should invest today or every month for the next year?”

You’re fully exposed once that last purchase is done. All you’ve done is if the market goes up, you’ve decided to moderate the up, if it goes down, you’ve moderated it down. After the period’s over, you’re fully invested anyway.

At the end of that 40 years, what have you actually accomplished other than in year one you’ve put your rate of return in this narrow range?

Patti: That is a really good point. I have never thought about it that way. That is a brilliant point. If you look at the numbers, the data, the data would suggest if you have a lump sum of money, typically, historically speaking, which is never a guarantee, – which it isn’t, you would’ve been better off investing it as a lump sum.

Brad: Exactly.

Patti: I was surprised, and I’m just quoting off the top of my head. The difference in rate of return was pretty significant. It was about a 2.4 percent difference benefit of the person who just plunked versus in terms of average return.

Brad: I think it depends on how long the investment horizon is. You could make it a little better or worse.

Patti: Exactly. Again, with all of this, we’re talking about, what do we think about the economy? What do we think is going to happen with the economy and therefore the markets? They don’t always correlate. We’re seeing that with consumer sentiment as well. The most important thing is to understand your objectives and what’s important to you about your money and when you’re going to need it.

It’s all about the financial plan. It’s about your taxes. It’s about your family and your wills and your trust and what you want for your family because that’s why you did this in the first place. It is for your own financial security and the people that you love. What else do we want to talk about, Brad?

Brad: Let’s see. We hit stocks. We could talk about bonds. You did talk about bonds for a while there.

Patti: Yeah, blah, blah, blah.

Brad: Most exciting.

Patti: Here we go, bonds. What do we think about fixed income in general?

Brad: Usually, historically, the best predictor of bond returns is the yield in place when you originally make the purchase, that it’s easy to calculate assuming the bond pays to maturity and doesn’t default, that’s what you can expect to get. Yields are not very exciting. CD rates aren’t very exciting. What’s even the point?

In terms of building a portfolio, it’s there for cash flow. It’s a very lucky investor that can live off the yield of a portfolio whether from dividends or bond interest. You’ve just saved so much money relative to your annual expenses that you can live on yield, and it’s not very common.

Most people really have to think about total return. That has a negative connotation sometimes with investors because they think they’re “dipping” into principle.

Patti: It does come up. They say, “Well, if you’re selling this, doesn’t that mean I’m dipping into my principal?”

Brad: There’s principal, and then there’s your original investment. If you start with $100,000 and it grows to a $1,000,000, and you sell $5,000, yes, technically, you took out some of your principal, but you just took out some of the growth of your original investment. You’re not losing money from your original base.

It can just be a segmentation in your brain where you have this money that you started with, and you want it to grow and you want to take the yield off the top, but it’s not usually always feasible.

Patti: I find that people tend not to remember their original investment. They just look at the value as of the end of last year, or the last statement that they got. If it was worth – pick a number – a $1,000,000 in the last statement and now it’s worth $950,000, and now you’re going to sell something, isn’t that really bad?

I’m going to say, yes, it is bad if that continues too long. It depends on how much you’re selling. Something like that wouldn’t be sustainable, but markets tend not to go down and stay down for 10 years. At least they haven’t although I can’t guarantee it.

By the way, I should probably preface that or probably add that there was that last decade between 2000 and 2010, where the S&P actually didn’t go up. It actually lost a little bit. However, it is not to say that people didn’t earn a return. That is the magic of diversification. Because the US stock market didn’t make any money, it doesn’t mean that nothing made money, and in fact, people did just fine.

Brad: International stocks.

Patti: Absolutely, other asset classes, bonds, real estate, things of that nature. Fortunately, we have wonderful ways of investing where you get instant diversification, whether it be mutual funds or ETFs.

The asset classes have just gotten better and better. We don’t have to get 2Q. Let’s not get 2Q by doing crazy stuff – crypto and some of these NFTs that we’re hearing about. Yes, people are making a lot of money in them.

I would just be really careful if you have a question on that. We just did a podcast on cryptocurrency. Please listen to that podcast. We’ll give you the pros and cons. It’s an interesting asset class. I’m not going to lie. It’s a very interesting asset class.

Are we recommending it? Not yet, because I don’t understand it. There could be some pretty significant headwinds to that whole cryptocurrency market.

You probably know this already. Just the sheer number of different kinds of crypto that are now on the market, it’s alarming. Just seven years ago, there were 66 different types of cryptocurrency. Now, there’s 17,000 different types of cryptocurrency. Wow. We don’t know what’s going to be the big winner.

Patti: Then we’ve got the headwind of, “Well, what if the Federal Reserve decides to come up with the digital dollar?” Guess who’s going to win? It’s going to be the Federal Reserve. Fortunately, we’re in a position where I think there’s another a lot of interesting ways that you don’t have to be making those speculative bets.

I think that the interesting thing to pull all of this together is to recognize that we are in a different environment. It is costing more money to heat our homes, feed our families, etc.

Inflation is certainly affecting many people right now. Especially people who are retired, who use more services than goods. We want to build that into our modeling process, the financial planning process, and recognize that and adjust portfolios accordingly. At least, that’s what we are doing.

Is it going to be a permanent adjustment? Who knows? That’s why we always talk about this process being like GPS. Just like the US economy, just like major businesses and small business like ours, we adapt. That’s how you survive.

For all of you who are listening to this, I thank you so much for tuning in. Thank you, Brad. So glad that you enjoy the ping pong table – go out and play a game. You’ve earned it. Most of all, thanks to all of you for tuning in today. It doesn’t happen without you.

Your feedback has been fantastic. That episode that I was referring to on cryptocurrencies, came specifically because so many people wrote in and said, “Can you do an episode on crypto because I don’t understand it?”

For those of you who are listening, you’re not alone. We did a podcast episode on that. If there’s something that you would like to learn about or have us comment on or speak about, let us know and we’ll be happy to do so.

Go to our website at keyfinancialinc.com. That’s where you’ll be able to let us know what you want to hear about and ask any questions that you want to ask. In the meantime, thank you so much for tuning in today. Take care now.

Ep89: Am I At Risk for Having My Identity Stolen?

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. In this episode, Patti reveals specific details to look out for with some of the most common and dangerous cyber hacking scams out there. Learn how to identify the scam and, more importantly, how to implement the steps needed to prevent yourself from ever falling victim to a cybercriminal in the future.

Patti Brennan:Hi, everybody. Welcome to the “Patti Brennan Show”. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Today, we’re going to be talking about how to preserve them.

In other words, preserve them from fraud and keep them away from the clutches of cybercriminals. We were talking about this earlier, and it just seems like it’s happening more and more, and you’re hearing about big companies who are having to pay these huge ransoms.

I think that it’s unfortunate. Is it because of COVID? Is it because these white-collar criminals are thinking up new and different ways of getting us? Maybe, maybe not. Today, what I’d like to do is bring to your attention some of the more popular ones that are out there now, and then talk about what you can do to make sure it doesn’t happen to you.

Number one, what’s unfortunately happening, because of COVID 19, there are people who are getting phone calls from government agencies claiming to be providing relief payments. All they really need is your Social Security Number and your date of birth. You’re going to get this wonderful payment.

Don’t fall for it. They’re not calling people on the phone. If you are eligible for one of those payments, you’re going to get a beautifully written letter from President Biden in the mail, and then the payment will follow. Don’t fall for that.

Number two, the Social Security Administration, same thing. It could be a call saying that your Social Security payments are going to stop, or they’re going to claim something or other, and then try and get that information from you.

Same thing for Medicare. They’re not going to pay your Medicare benefits unless you give them your Social Security Number, your date of birth, your address. Remember, they’re not going to ask for this stuff upfront.

They’re going to say that we understand that you’ve had a recent illness, and they’re getting this information…God only knows how they’re getting it, but they are. Keep in mind, guys, your email address is the easiest thing to hack.

There is no privacy when it comes to your email address anymore and your emails. Just be aware of that before you send somebody an email talking about the surgery that you just had, because a hacker could read that and have that information when they call you on the phone.

Again, you’ve just got to assume the worst when it comes to these tools. Same thing with social media. Everybody knows that at this point, but I always like to bring it up again. Whatever you publish on Facebook or any of the social media sites, these cybercriminals are gathering all that information and gathering that data to, again, get rapport, reach out to you.

Whether it be by phone or by email, they’re just going to do it. Again, the emails are really scary, because for example, we all know that you can get an email. It could be an email from yourself, and you’re like, “What is this all about?” because they have your email address.

It’s just to get your attention and ask you for personal information. There’s a new scam out there. We all know about phishing. Phishing is when you’re on an email, and it tells you that you have a package that they’re trying to deliver.

If you just click on this link, you can see where the package is and why it can’t be delivered. In that case, and in all of these cases, please don’t ever click on a link in an email. I’m just saying, “Don’t ever do.” Never, never, never.

It’s not even right-click on the email address from which it’s coming and see and make sure it’s legit. Even that’s hard to figure out. If you get one of these emails, go out of your Outlook or wherever you do your Gmail, what have you.

Go on the URL. Go on the site itself, and tap in, whatever it is, the information that you give you, and see whether or not there actually even is a package. Another one that I’ve talked to you about before is Amazon.

Amazon, these fraudsters are calling people, pretending they are from Amazon security. They’re saying things like, “We have noticed some activity on your Amazon account. Did you make the following charges? Did you charge $119.36 at Target? Did you do this? Did you do that?”

Of course, they’re bogus. What do they do next? Well, the person who’s on the other line says, “OK, we will remove these charges from your Amazon account. Will you help us catch these people? Will you help us?” making you feel like the hero.

You’re the hero. You’re going to now prevent this from happening to other people, because, “We were lucky. We caught this for you, but we’re not able to catch all of these people, so can you help us catch them?”

We know of a situation where someone was taken by over $100,000. I won’t go into it today because of how they did this scam. The bottom line is, guys, don’t ever – and I mean ever, just like clicking on a link – don’t ever wire money or get gift cards and send them to some random places based on something that somebody told you over the phone.

Not even 9 times out of 10, not even 99 times out of 100. I’m telling you all, it’s probably fraud. Don’t do it, OK? We talked about that. Here’s another one. We know that passwords and usernames are now easily hacked.

In our quarterly letter, I was talking about this issue, and there’s a chart here that I’m holding. It basically tells you the amount of time it takes for a hacker to get your password. If you have 10 numbers in your password, 10 characters, they can instantly hack it.

It’s not a big deal. These people are unbelievable. If you have a lowercase letter and 10 numbers, it takes 58 minutes to figure out what your password is. If you really want to protect…This chart is so cool, I must tell you, because it’s got the what’s instant, versus what’s in the yellow line, versus what’s green.

If you really want to make your passwords hacker-proof, if you have 18 characters, with upper and lowercase letters, it takes 110 years for a hacker to figure it out. The bottom line is, the more characters you have to your passwords…

Don’t forget those exclamation points and those starts, because you can use those as well. It just makes it more and more difficult for them to figure it out and steal your money. This spear-phishing thing – we know about phishing, but – what’s spear phishing?

Spear phishing is where they’ve figure out one of your usernames and passwords. They send you an email, and they say, “Hey, I’ve got your username and your password for Amazon. It is blank and blank,” and sure enough, it’s your username and your password. They’ve figured it out.

What they’re doing is they’re saying, “And, by the way, this is only one of the accounts that we have, so you need to contact us immediately.” It’s basically another ransom thing, “Because we have all of your passwords and your usernames.” That’s spear phishing.

Chances are, they don’t really have all of your usernames and passwords. Hopefully, you’re not using the same password for multiple sites. Again, don’t give in to these people. Just change that Amazon, in this case. Change your username and your password.

By the way, think about putting 18 letters to it, or 18 characters to it, to make it really bulletproof. Speaking of which, we’ve talked about the problems. What are some solutions? Again, get better passwords. Really make it difficult.

A lot of these sites will offer two-factor authentication. Do it. Don’t even think about it. Do it. What is two-factor? Basically, when you put in your username and your password, then they’re going to send a code to your cellphone.

You have to have your cellphone, or the hacker has to have the cellphone, right on them to put the code in to get into that. Two-factor authentication is also a great way to defend your personal information and prevent identity theft.

Think about also these password managers, LastPass, and a number of them, because a lot of us have a lot of sites that we go into. I can’t remember all of these passwords. These password managers will remember them for you, so you only have to remember one.

Again, for that password manager, make it really long and really difficult to figure out. Somehow, someway, again, because you don’t know if something’s going to happen to you, you’ve got to give that to somebody who you can trust who will also know what that username and password is to the password manager.

Last, but not least, to protect yourself, and protect what you’ve worked for, think about freezing your credit. It sounds like a drastic step. It’s not as bad or difficult to unfreeze it as it used to be. Remember, we had the Experian hack many years ago.

325 million Americans – myself included – our Social Security Numbers are now in the dark web. If you recall that, hopefully, you went online and figure out whether or not your Social Security Number was one of them.

You need to be really careful. Be extra diligent. I would say, if yours was one of them, and even if it wasn’t, just literally think about freezing your credit with the three credit agencies. Again, there are programs out there, LifeLock being one of them, Experian being another.

There are different programs out there that will help you monitor your credit, help you to freeze your credit, even provide insurance, in the event that you are a victim of identity theft. I hope you found that helpful.

I’m going to continue to do these quick broadcasts to answer questions that you might have, and this probably won’t be the last time we talk about this subject, because we’re always hearing about the latest and greatest scheme where people’s money and they were taken.

I just want to keep you aware of what’s out there, and again, feel free. Go to my website at staging.keyfinancialinc.com. Ask those questions, because that’s what makes these vignettes powerful. These are questions that you all have asked us.

Whether it be through the website, in person, or even calling us on the phone, that’s what we’re here for. Thank you so much for giving us these ideas and this content, and thank you so much for tuning in today. I hope you have a great day. I’m Patti Brennan, Key Financial.

Ep88: Issues to Consider Before Updating an Estate Plan

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked but should be asked) question. As Americans are getting their financial and legal houses in order for the beginning of the New Year, many are wondering what ramifications Biden’s tax proposal may have on their estate plan. Patti guides the listener through a checklist of important items to keep in mind before updating or changing certain parts of your estate plan. She also reveals what the best legal tools are to protect yourself and those you love from expensive tax implications.

Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan Show,” whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

As you all know, at the end of every podcast, I usually end by saying, if you have any questions, please feel free to reach out to us. Send us an email, go to our website, staging.keyfinancialinc.com, and ask us your questions.

We’ve been gathering these questions and I’ve started this series called “Ask Patti Brennan.”

Today, I’m going to spend about 10 minutes answering one of the questions that I get a lot, especially now given Biden’s tax proposal. That is, “What things should I consider when I’m thinking about updating my estate plan?”

First and foremost, let me say to all of you, as I record this in May of 2021, that Biden’s tax proposal does not have anything relating to estate taxes in it. At the very last minute, they removed all of it.

Biden’s proposal, or should we say Bernie Sanders proposal, is that they want to reduce the amount that you can leave to the next generation from $11.7 million to $3.5 million.

However, at the last minute, they left it out because due to something called the sunset provision, they already know that it’s going to go to $5.5 million in 2026. When it was all said and done, they said, “Why are we going to fight that battle? It’s already going to go down because of the Sunset. Let’s add something else in there that’ll give us a lot of revenue right away.”

For those of you who are interested, listen to my podcast with Bill Cass. That’s where we really dig into a lot of the provisions that are in the Biden plan, and what you need to be worried about and what you don’t need to be worried about.

Today, I’m going to focus on your estate plan. What do I need to consider?

Now that that’s off the table, at least temporarily, I would encourage you to at least understand where you are today and have a conversation with your estate planning attorney to say, “When this thing goes through in 2026, should we be concerned? Is there anything that we need to be thinking about today?” Because there are some things that you can do to avoid that tax for your children or the people that you love. That’s number one.

Number two, as you think about your estate plan, understand what it covers. It covers anything that is in your names, even in joint names. Joint titling on property or investments.

It doesn’t get controlled by your will. It goes by operation of law, which means the titling is more important than what you put in your will. I could say, “Gee, I want my such and such account to go to my four children.” It doesn’t matter. If I have it jointly held with my husband, he’s getting all of it.

The titling is more important as are the beneficiary designations. Make sure that that is congruent with the wishes as you have them in your will.

Also, look at who you’ve named as executor, who you’ve named as perhaps a trustee. Have there been any marriages or divorces?

The other thing to think about is, is there anybody in your life that has special needs? Are special needs trust something that you might want to be thinking about?

Also speaking of trust, trusts are not only for wealthy people. Trusts could be wonderful tools to protect your family or the people that you love against predators or somebody that might sue them for some unknown reason. If that happens to let’s say one of your children, the assets that are held in trust for their benefit cannot be attached.

If they go through a divorce, and this, by the way, is one of the things that I hear more than anything. What if my son were to get divorced? Those assets, if he were to inherit this money outright, certainly the growth of the assets would be included as part of the discussion in the divorce. If the assets are owned by a trust, it is not. A Trust could be a very wonderful tool and you don’t have to be wealthy to have one.

Do you have a second home or a vacation home? If so, that might be subject to something called ancillary probate.

In English, all that means is if you have a property in New Jersey or Florida, that needs to be probated in those states. It gets a little glitchy. That’s an easy thing to avoid using something called the revocable living trust.

You don’t need a revocable living trust in every state because probate is not a big deal in a lot of states. Pennsylvania is one of them. If you have property in several states, or even just another state, that might make sense to add that extra paragraph or two, that will allow that to be titled in the name of your revocable trust.

How does that work? A revocable trust is literally exactly that. It’s completely revocable and changeable. It doesn’t even have a separate tax ID. It uses your social security number. Whatever you own, personally, your revocable trust can own. You’re the trustee. It’s not that much different.

What makes it powerful in certain states is that the trust has a beneficiary, so it goes according to whatever that trust says. If you own it personally, it must go through your will based on what your will says. That is a probateable asset. Is probate a big deal? Is it a hassle? By the way, who’s the executor that’s going to have to do it?

There are also other things to think about. We all know that you need a power of attorney, a financial power of attorney and a healthcare power of attorney. If you have a child 18 years or older, in most states, that is the age of majority. If they are in an accident, guess what? They’re an adult.

The hospital, subject to HIPAA, cannot give you any information. Only if you have a power of attorney, can you authorize treatment for that child. The same thing goes for financial power of attorney. Wills and financial powers of attorney are probably not as important as the healthcare power of attorney.

Again, it’s not that big of a deal, if you’re doing yours, get it for them as well. I think that the only other thing that I would add is, and this is something that a lot of people don’t realize, are your digital assets.

We are hearing more and more stories about people who became disabled. Someone may have had a stroke or died unexpectedly, and they’ve got a computer, they’ve got accounts, and they’re paperless. Nobody knows what they have or don’t have, and it’s not coming in the mail anymore.

How’s anybody going to settle the estate? How are they even going to know what’s involved? Your digital assets, your passwords, your usernames, where are they located? Where are your accounts? Please do someone a favor, make a list of them.

I know, people like me. We always tell you don’t write down your usernames and your passwords. We all say it and you probably shouldn’t do that, right? At the very least, get one of these password protector programs like a LastPass or something like that. That’s really nice.

I’ve got probably 60 different websites that I have usernames and passwords. There’s no way I would ever remember them all. I just log on, go to the website and LastPass remembers everything for me. I only have to remember one username and one password.

Really think about that and make a list of where everything is – where accounts might be, where you bank etc. Try to make it a little bit easier for the people that you’re leaving behind.

Those are just a few of the things that I wanted to go over with you. Again, a lot of people are already thinking about their estate plan because of a potential change in tax law. I would not necessarily feel the urgency to do that because in Biden’s proposal it’s not included.

Now, there’s talk about Sanders, Van Hollen, and Gillibrand, and everybody’s got their ideas of what they want to change, but it hasn’t been proposed. They’re not even talking about it yet. There are unintended consequences for pretty much everything that we do in the estate planning area.

Just be aware of them, run the numbers, and make sure this is a problem that needs solving.

Thank you so much for tuning in. I hope that was helpful. I am Patti Brennan. Thank you so much for joining me today.

If you have any questions, again, send us an email. Go onto our website at staging.keyfinancialinc.com. Take care and have a great day.

Ep87: Teaching Children About Money

About This Episode

What age is the best age to start teaching children about money? Every parent may give a different answer to that question and, at times, may regret not teaching their children about the value of money earlier. In this episode, Patti sits down with Key Financial Planning and Portfolio Consultant, Sam Baez, to learn the secrets to his success in educating his own small children about the value of money. Patti also shares her successes (as well as her failures) in teaching her four children about saving and spending their hard-earned money.

Patti Brennan: Hi everybody. I’m Patti Brennan. Welcome to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

I want to say to all of you listening today, that introduction is intended, not just for you, but also your children. Today, we’re going to be talking about when is the best time to introduce your kids or your grandchildren to money? How are you go about doing that? Are allowances still the thing to do, or is that out of vogue?

Joining me today is Sam Baez. Sam is a member of our portfolio department. He has two young children, ages four and seven. What I’d like you to listen for are some of the unique things that Sam is doing with his children.

I’ll share with you a few of the things that I did with my four children as they were growing up and kind of give you the before, during, and after. I’m going to give it to you real as I always try to do.

Sam, thank you so much for joining me today.

Sam Baez: Of course. Thank you, Patti. Thanks for having me on the show.

Patti: Absolutely. What do you think about the idea of an allowance? Do you give your kids an allowance?

Sam: You know, Patti, that’s a great question. Speaking of being upfront and honest, I’m still kind of toying with it. I’ve experimented with a few different ways – that is to say, Sasha and I, have experimented with a few different ways of kind of rewarding them for chores and getting them funds so that they can learn about saving and putting money away.

Again, I mean, my kids are four and seven years old. They don’t really have that many chores. They help organize the laundry every now and then, but there’s not a whole lot of things that they can help with around the house quite yet.

Patti: You know, that’s what I found as well. Allowance, the concept sounds good. Teaches them about money. They begin to develop their own savings. At the same point. I never wanted it to be an entitlement, like, “Mom, where’s my allowance this week? You haven’t given me an allowance.”

At what point do you tie it to the chores? I think it is important to kind of show that that reward for effort. It is an interesting dilemma. I found, for whatever it’s worth, and I hope it’s worth something, that when there were chores to be done I would basically introduce the task at hand.

“I need your help. If you can help me to get this done, then there is a benefit for you. I’m going to give you a certain amount of money, 10 bucks.” What was really interesting about it, Sam is as this kind of developed over time when they did a really good job. Believe me, Sam, it does happen!

When the kids actually exceed expectations, I would take a look at the laundry or the floor they swept and I would really make an effort to point out that they did a great job. It was really funny because what I would say is, “OK. You are going to earn $10, but let me tell you, you did such a good job. You are totally in bonus territory!”

Sam: Oh, oh my goodness, Patti, I love that idea and I feel like you’ve kind of solved my issue with the allowance. I didn’t want to tie it to contributing to the family. At the same time, I wanted to make sure that they were rewarded for working, maybe doing a task that they’re not used to doing or necessarily expected to do.

That idea of recognizing good work and rewarding them for it, that’s how we get paid as adults. I think it’s a great way to introduce it, especially, since I think my biggest fear was having them do kind of a lackluster job and just having the handout. “All right. The dishes are kind of done. Can I have my $10?”

Patti: That’s a really good point. Hey, if they’re not doing what you asked them to do the way that you are expecting them to do well, you know what, welcome to America. You’re not going to get full payment for it. That’s important for them to understand. Ultimately, it’s not just the task, it’s the quality of the task.

I will tell you a funny story. Again, I always put it in the perspective of mom and dad are really busy. We both are working during the day. We don’t have time to do a lot of the things that we really need to get done.

One fall we had a leaf project. We had to rake all the leaves. I remember so vividly my two daughters kind of huddling up together as they were kind of pulling the rakes together and said, “You know, if we do a really good job, maybe we’ll be in bonus territory.”

It was hilarious. Let me tell you something, they did a great job, and guess what? They also got a bonus. They immediately saw that if they did a good job, they knew the pattern, and they were rewarded for those extra efforts. It was fun – and the leaves were raked!

They were probably 12, 13 years old. They weren’t little kids at the time, but they were young enough to really appreciate the bonus territory.

Sam: I think it’s great that they got to communicate. It got to the point where it’s not only you talking to your kids about working and making money. They were talking to each other about it and how they could do an even better job.

They’re almost teaching each other, having conversations with each other which is what I’m starting to see that with my oldest, Zander, who’s seven. He’s having conversations with my youngest, Zoe, who is four. It is really neat to see them kind of have those conversations and experiences and exchanges together.

Patti: As you were talking, I was reminded of when Kmart was still open. Our big night out was going to Kmart. I’d let the four kids walk up and down the aisles.

We had two rules. The two rules were number one, stick like glue. The reason for that rule was because my third child, dear Carolyn Brennan would randomly wander off.

I can’t tell you, Sam, how many times we lost Carrie. It is unbelievable. The gray hair I have is because of my third child. Stick like glue was number one and then number two was no begging.

Sam: No. Yeah.

Patti: The reason for that second one was because kids are kids, they’re going to push the envelope. They’re going to ask for things. As we were going down the different aisles, they’d say, “Mommy, can I have this?” Or “Daddy, can I have that?”

That was the rule, no begging because if they continued to do that. We weren’t going to go to Kmart anymore, and they really liked going to Kmart.

No begging. The message to them at the time was not we can’t afford something. Very important. I did not want them to feel insecure. I wanted them to understand that we just don’t choose to spend our money on that toy.

I would remind them that they have a lot of toys that they don’t use. Why would I want to put more money into something like that? It’s wasteful and I don’t want to waste their future. Because ultimately when they grow up, if we can save this money, they’re going to be the beneficiaries of that discipline. Stick like glue, no begging.

Sam: I like those rules. I’m going to have to implement the stick like glue. I tend to lead with no begging. [laughs]

Patti: You also do something kind of interesting – really interesting. Tell me about the wallet.

Sam: Absolutely. It’s interesting. Your family trip was Kmart. Ours is Target. The kids love Target. They want to go to the red store with a little doggy. How’s that for marketing?

Patti: Fantastic.

Sam: It’s from a young age, and to your point, as far as getting them ready for going to a store. They’re going to want to ask for toys. I’m preparing them ahead of time, I gave Zander a wallet at a very young age. Two – three years old.

Not that he knew what it was and not that he knew what it was about. He very quickly learned anytime we’d go to Target or the Dollar General, wherever we went, I’d say, “Zander, grab your wallet, we’re going to the store”. He very quickly started to make that connection.

Patti: Can I just interject something as a sidebar? There is a person in our office. Her name is Diane. She ribs Sam all the time about this wallet thing. It’s hilarious – she doesn’t understand that it works.

It really works.

Sam: She did not think it was a great idea. I gave a three‑year‑old a wallet, but she loves it now. She respects it now. He pulls it out. He talks about it. He counts the money. I think she saw that, at least for now, it’s working.

Patti: Now here’s a question. Does Zoe have a purse?

Sam: Zoe has a purse.

Patti: Wow.

Sam: Zoe has a purse, and she is stingy with that purse. We will go to Target. She’ll want to make deals about, “OK. Well, if I let you play with it, can you help me buy it?”

Patti: No kidding.

Sam: At four years old. Four years old Patti. It’s amazing, again, just to be able to have these conversations. I think being able to have the conversations is everything. I may be alone in this, but when we go to places like Target, we often go Dutch, I’ll pay for my stuff, the kids pay for their stuff.

The people behind us in line, they may not love it. Some of them think it’s very cute, some think like, “I’m going to have to wait longer.” I will check out, and then Zander or Zoe will check out. They each want something; those are three different checkouts.
I want them to experience that exchange that I’m giving them my money. I may get some change back. That whole transaction, I want them to get used to that because very few things in this world are free.

Patti: It’s interesting when you say that. It sort of reminds me going back to the allowance concept. The allowance is fine and tying money to chores and activities is fine. I think that we want to also be conscious of tying money too much to activities because sometimes we’re going to do things just for the sake of doing them.

I think that’s also a kind of a fine balance in all of this. Yes, we’re going to go to church and we’re going to work in the church store, and we’re not going to be compensated for that, but they need help.

That’s also part of, I think, our role as a community, as part of a family, to also talk about contributing as a family.

Sam: Without a doubt.

Patti: I think that there’s pros and cons to all of this.

Let’s talk about some of the strategies, whether they be games or anything else that can be used to teach the kids about money.

Sam: Sure. I can go into one of my personal favorites. These are two, one when they were very young, and one that I’m kind of implementing more with Zander now, not so much with Zoe yet, but eventually she’ll get there.

The first one is for their first birthday, they get four piggy banks. One piggy bank is for pennies. One piggy bank is for nickels. One piggy bank is for dimes. One is piggy bank is for quarters. Just so they could recognize the difference between the four different types of coins. The ones that have value more than the other.

Patti: I’m just thinking, I sure hope when they grow up, we still have coins.

Sam: Yeah, right.

Patti: You got to get them crypto, Ethereum.

All the different types of currency. Oh my goodness. What is this world coming to? But I digress. Let’s go back to your piggy banks. I love this.

Sam: I’m glad you interjected with that because now that they’ve been introduced to dollar bills, and $5 bills, and $20 bills they don’t care about coins.

Patti: They really are smart kids.

Sam: Yeah. That was at a young age, I think, a great way for them to start differentiating between them, and just kind of seeing how their mind works the way that they would approach it. I remember my most recent memory with Zoe is I remember she had a bunch of pennies, some quarters, and some nickels, and we went to the dollar store to get some candy.

I want them to be able to look at it and see what the price is and pay for it. It was a 25 cent piece of gum, and she did not want to give 25 pennies because it’s a lot of pennies. They’re thinking out of it as quantity, and Zander was the one who explained to her it’s the same thing.

Better you get rid of those 25 pennies so you don’t have to put them all back in your purse, that big coin and those 25 pennies are the same value.

Patti: Wow.

Sam: It was a great lesson. She didn’t care. She didn’t want to give 25 pennies away. She used a quarter.

Patti: Wow. That is so cool. Tell me about your percentage game.

Sam: The percentage game.

Patti: This one blows me away. I’ve got to tell you, I am so impressed with you, Sam. The way you’re doing this with your kids. By the way, I probably should have pointed out to you because there’s so many great resources out there, but “The Four Money Bears” is a great book. We did a podcast last year with the author, Mac Gardner.

It teaches kids about money, the purpose of money, etc. I’m going to tell all of you today and I’m just going to say to Sam, that he should write a book! This guy is just unbelievable. The things that he’s done with his kids. This is one of those things that will evolve over time.

Tell us about the percentage game.

Sam: Percentage game, my favorite game, and that thankfully, one of Zander’s favorite games. We used to have a nice long commute, about an hour to work. We would find ways to pass the time. One of them was me asking him math questions.

The percentage game is I would tell him, “Hey Zander there’s going to be 10 questions. If you get all 10 of these right, there’s going to be a monetary reward for you.” The questions are always, it’s a round number, a couple hundred, let’s say ‑‑ I always use speaking money terms.

I’ll say, “Zander, what is three percent of 200?” Then he has…

Patti: He would take $200?

Sam: $200. What’s three percent of $200.

Patti: How old was he?

Sam: We started playing the game when he was about five. He was not that good at five. He is scary good now.

Patti: How old is he now?

Sam: He’s seven.

Patti: Wow.

Sam: Yeah, it even surprises me. It’s almost like a party trick. Sasha would be like, whenever a family member comes in, “Show them the money thing. Show them the money thing.”

Patti: Wow. That’s fantastic.

Sam: It’s fun. He loves it. Even after we get through the 10, he’d be like, “Dad hit me with another one.”

Patti: Hit me with another one, dad.

Oh, that is outstanding.

Sam: It’s so much fun. We do it in the car. It’s downtime right before bedtime. I love the idea of kind of going through this and getting his math brain working before bed. He goes to sleep and hopefully he’s having wonderful math dreams.

Patti: He certainly is. Oh boy. Key Financial, here you come.

Wow. That’s fantastic. I know that you do another thing that we also did and it’s called the matching game.

Sam: Oh yeah.

Patti: The matching game, at least the Brennan way, was we would match our kids’ savings. If they saved $50. We would match a certain percentage of it. Now $50 is a lot of money for a young kid to save.

If they did it when they got their first job, we would match it. Kind of like the way a 401k gets matched. We wanted to give them that incentive to put away the money. How do you guys do it?

Sam: It’s very similar Patti, it’s a matching game. Again, at their age, they’re not working. They don’t really necessarily have an allowance yet. They do get money for their birthdays. They get money for Christmas. That tends to be larger amounts of money, money that they typically don’t see.

Right away, we try to instill the concept with “All right, we encourage you to save a portion of this. I’m not saying you have to, it’s your money, but if you save a portion of this, whatever you save, we will match you dollar for dollar. If you get $50, you put away $25, we’ll give you $25. Now you still have $25 and you say 50 exactly what you brought in.”

Patti: Wow. That’s fantastic.

Sam: They get that. I think waiting for them to bring up these questions or these curiosities maybe too late. I think we certainly underestimate how much they’re willing to talk about and learn where money is concerned. Kids love learning new things and money included.

Patti: You know, Sam, you’ve brought up a really important point. I’m going to share with you, and everybody watching and listening, something that’s kind of personal. I think it’s also an important kind of story in terms of how these things can be approached.

As many of you know, I’m one of seven kids. I was fifth of seven. When we were growing up, my mom was a stay-at-home mom. She had to stay at home with seven kids, right? My dad was working. When we were growing up, money was really tight.

If they had an argument, when they fought, it was always about money. As a young child, and even as we all grew up, we didn’t know why they were fighting. We didn’t know what the issues were with money. We also didn’t know how to fix it.

We just knew that mom and dad were really mad, and it was really uncomfortable, chaotic at times. I can just speak for myself, but I grew up feeling financially insecure. Go figure, right? I’m a financial planner.

Now, that’s the way that I grew up. I was not taught money skills. I just had this kind of intangible, anxious feeling about money and how to make ends meet. Sam, did you grow up differently?

Sam: Yeah.

Patti: Tell us about that.

Sam: I was very blessed to have two parents who were really, really focused on making sure that we were financially educated. We didn’t have a lot of money growing up. I don’t think my dad, even as I went all the way through high school – I don’t think he ever made over $24,000 a year.

You really have to budget to make that work if you don’t want to take on debt. What we would do is once a month we would get together as a family and…

Patti: If I may ask, how many kids were in your family?

Sam: Two. My sister and I. My father was the holder of the calculator. He never opened the statements because my mom was the math mind. He was there for moral support, and mom kind of ran the budget. Mom would say, “All right, we have $2,000 this month.”

To this day, and it never really stuck out to me when I was a kid, but I’ll still remember. She would make a big deal about it. She would pound on the table and say $500 goes to savings first. That leaves $1,500 to pay bills, and then we’d go through it.

She would make this big announcement about we’re saving this. Now let’s move on and pay bills. She would give me a pile of bills. She’d give my sister a pile of bills.

Patti: How old were you at this point, Sam?

Sam: I want to say I was in fourth or fifth grade when we started with the statements, and my sister was even younger than that. She was in third or fourth grade. We would go through and find the amount due. That was always tough. Until you learn how to do it… then all of a sudden it sticks out to you.

When you’re a kid and you’re looking at all these numbers and all these words, you’re trying to find how much your bill actually is. I said we would find it on each bill. We’d add up our portion. My sister would add up her portion and we’d add it all together.

How much is it? We have $1,500 to pay bills. Let’s say bills were $1,400 when you added it all together. Good. We have a little excess. Then as a family, we would split whatever was left after the savings was met, the bills were paid. This is what’s leftover. Let’s call it $100, $25 each, and then we’d all go somewhere.

We’d do something nice. For me, what I remember the most is learning, in hindsight, it was learning because every statement is different.

Patti: Yes, absolutely.

Sam: Just learning how to read those, where to find those, where to find the information, looking at APRs on credit cards. My mom’s walking through this stuff in grade school with us.

Patti: It’s interesting because I often say when it comes to your financial affairs, automate your savings and pay your bills the old-fashioned way. I think that what has happened for a lot of people is you just kind of have automatic deductions out of the bank account.

I’m not sure that people have a really good grasp of where their cash flow is actually going. I think that sometimes there is a lot of, I hate to say it, waste. Venmo, you’ve got a Venmo, but what was that for? Was it all that important?

Sam, what your mom was teaching you was the importance of paying yourselves first. Before you pay the bank for the mortgage, before you pay the clothing store and the utility company, pay yourself first. My goodness, you’re working your tail off, set that money aside – maybe not for who you are today, but for the person that you’re going to become.

Because if you spend that money today, you’re taking it away from that person. That’s the beauty of what your mom and dad were teaching you.

Sam: Yeah, forever grateful for that. I think, in hindsight, I am convinced that she would do it all ahead of time. I used to think that I was actually helping her with the bills.

I know she had it all figured out to make sure the math was right.

Patti: Wow.

Sam: When we were young, it really stuck with us and that stuck with us to this day.

Patti: That is amazing. Now I just have to ask the question because I’m curious, and I don’t know the answer. What does your sister do for a living?

Sam: My sister travels around the world, that’s what she does now. She has done a lot of work for missions. She went to school to be a teacher. She’s been to Cambodia, Vietnam, Switzerland, Germany, Poland, all over the place.

Patti: Do you mind if I tell our viewers and our listeners, your family came from the Dominican Republic?

Sam: Dominican Republican. Anna and I are first-generation here in the states, and my wife Sasha was actually born in Trinidad and Tobago. Our kids are technically half-generation, first‑generation here.

Patti: Wow. Isn’t that wonderful? Those principles that you’ve learned growing up from your mom and dad. I know you, Sam, and I know you’re a Teddy bear. You are love. I know that you grew up in a family with so much love.

It doesn’t surprise me, that your sister goes on mission trips and helps those who are underprivileged all over the world. You’ll write your book and then have your mom and dad write their book.

Because I can’t imagine a more wonderful way to grow up. It just goes to show you, folks, money doesn’t buy everything.

Sam: Sure does not.

Patti: It’s the security, and the love, and the problem‑solving that you grew up with, and the ability to work together as a family is just incredible. That’s what we want in America today, families who solve the problems together.

Thank you so much for joining us today. I hope this has been helpful. Sam Baez, thank you for joining us. I just love you. I love everything about you. You’re so smart. You care so much about not just your family, but our Key Financial family and the amazing things that you’ve brought up today.

For those of you who are listening, if you have any questions, please feel free to go to our website at staging.keyfinancialinc.com. Ask us your questions, let us know. Does this resonate? Do you want to hear more? Do you want to hear from different people?

Because we’ve got lots of families here at Key Financial, and each one of us is dealing with this issue quite a bit differently. It’s quite the topic here internally. In the meantime, I really appreciate you tuning in today. I hope you have a terrific week.

Join us again for our next podcast. If by the way, you have any other questions, go on the website because there’s over 80 episodes on all kinds of topics. In the meantime, I hope you have a terrific day. Thanks so much for joining us.

Ep86: VAL (Virtual Assisted Living) with MIT AgeLab

About This Episode

In the second of a two-part series, Patti welcomes back Dr. Joseph Coughlin Ph.D., Director of the MIT AgeLab. Together they discuss VAL – Virtual Assisted Living in retirement. This new concept depends heavily on the awareness that technological advancements have the capability to greatly improve the quality of life in retirement. In Dr. Coughlin’s book, “The Longevity Economy”, he explains why longevity planning should be an integral part of retirement planning. With so many retirees choosing, and hoping, to stay in their homes as long as possible – VAL is a program that offers solutions to help make that happen.

Patti Brennan: Hi, everybody. Welcome back to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me again today is Dr. Joseph Coughlin, the Director of the MIT AgeLab. If you didn’t listen to the first podcast we did, go back and listen, because we teed it up in terms of talking about some of the issues that Dr. Joe and the researchers at MIT AgeLab discovered over the last year or so.

In this podcast, what we’re going to be talking about are some of the solutions that MIT AgeLab and many others are coming up with to make quality of life better for every American. Joe, thanks so much for joining us again.

The Longevity Economy

Dr. Joe Coughlin: Patti, it’s always a delight to be here with you and a lot of fun too.

Patti: Absolutely. For those of you who did watch the prior podcast, you will remember that I made a note that I am wearing sneakers in honor of Dr. Joe Coughlin. In between shows, he sent me a picture of himself. He’s got the bow tie on. He’s got the jacket. He’s got the bright blue pants. What color are your sneakers?

Dr. Coughlin: They’re red, white, and blue Vans.

Patti: Unbelievable.

That is Dr. Joe. He is brilliant. He is kind. I told the story of something that he did for me a couple months ago. More importantly, he’s real.

That’s the most important thing that I want you to get out of this. We’re here to hopefully make a difference in the lives of everybody watching and listening. I can’t think of anybody better to do that than Joe Coughlin.

Dr. Coughlin: Thank you, Patti.

Patti: I’ve got to tell you that I have ordered a hundred or more books that you wrote. “The Longevity Economy,” I love that book. In fact, I just gave it to the CEO of a Fortune 500 company about a month ago. He read it in two days. He loved it.

What I loved about the book is it gave us some history, in terms of evolution and this narrative of the aging process and where it came from, and what your goal is. The goal is to change that narrative and to say, “Hey, look. It’s just a different season of life. It can be as good or even better than prior seasons.” For many people, it really is.

For me, what I’ve learned, thanks to you, is how to build some structure around making sure that you’ve got that quality of life. It’s not just about money. It’s about you people. Really, at the end of the day, that really is what makes a rich life.

Dr. Coughlin: I don’t want to get folks depressed, Patti, but just to reinforce your thinking, think about every other stage of life from your young age to middle school age to high school to college to working for 30, 40, whatever years. Believe it or not, there’s all kinds of stories and rituals and celebrations that punctuate your life as you go along.

You reach about 60 or 65, the punctuation points are other people’s celebrations that you are invited to. As part of our retirement planning, we need to prepare. What are the celebrations we want? What are the finish lines that we’re looking for, the goals and expectations, not just the general values?

We need the structure that one‑third of adult life that we currently call retirement. Society is still writing that book, but we have to write our individual ones today.

Patti: If there is nothing else that I’ve learned over the years of working with you, you have solidified one thing for me, Joe. You want to know what it is?

Dr. Coughlin: OK. Sneakers.

Patti: I am never going to retire; it ain’t happening! For me – I can just speak for me – this gives me such a purpose. It makes me feel great to meet with people, to do the “befores and the afters”, and to know that because we’re in their lives, they have peace of mind.

I love the fact that we’re always growing. We’re always learning. We’re always changing. We’re always trying to figure out what else can we do. For me that’s fun.

I do think about it because many of our clients are approaching retirement or have retired. It has helped me and my entire team to really make that process easier, that transition much richer, without the ambiguity and the worries and the fears that they may have had if we weren’t sharing some of the information with them in advance. It’s an interesting thing. Go ahead, Joe.

Dr. Coughlin: I was going to say retiring – a lot of people should think about – does not necessarily mean stopping work. It means a change. Even the very definition of vacation is a change in routine. Living on the beach for the rest of your life actually becomes work because it becomes routine if you will.

When people retire, quite often what we find is “No, I retired from the gig I’ve been doing for 30 or 40 years, but I’m still working,” or “I’m volunteering with verve,” or “I’ve got so many other things to do that change that routine to keep me engaged, productive, and excited in older age.”

No, simply retiring with the old brochure thinking of “It’s all about beaches, golf courses, and bike rides,” that may be good for a few weeks, but one‑third of adult life, I’m not sure how many people are going to be happy with that.

Patti: It’s so true. I love it when someone comes in, and they invariably say the same thing, maybe a little different way. That is, “I don’t know when I ever had time to go to work. I’m so busy. I’m doing this and that.” That, to me, is where the real joy comes from. It’s just a different form. It’s a lot of variety. It’s a lot of fun being around people they really enjoy.

Let’s talk now a little bit about how do we build some structure. What are some of the things that you are all working on at MIT? I’m going to tee this up for you, Joe, this concept of virtual assisted living. Folks, for those of you who are listening and watching, just remember three letters, VAL. That is the future. Actually, it’s not the future. It is here now. Joe, let’s talk about VAL.

Dr. Coughlin: Let’s start from the top as something we saw during the pandemic. Then we can certainly talk about some real projects that we’re doing in the lab, that are essentially underpinning virtual assisted living.

I want all your listeners to the ask themselves or to admit, maybe to their friends, what were they doing March of 2020. We know what they were doing. They were going out, and they were buying toilet paper by the pallet load.

Some people may say that’s silly but think about it. When you are feeling a little out of control, you buy the one thing that you know that, with any luck, you’re going to be needing and using. That was rationally irrational if you will.

We also found that people were out there buying something else. They were buying technology by the boatload. They were buying tablets and smart speakers and smart doorknobs and cameras and sensors alike. What they were starting to do is they were starting to Nest or create a whole home, if you will, that was much more focused on being connected, in a time when we weren’t connected.

Here’s the fun part. This is to make a few of your listeners that are on the younger side, maybe make them smile because it’s going to sound like I’m taking a pop shot. How many of us remember, our adult children or many of our own, that we didn’t own a car? We only used a ride-hailing system.

We didn’t want to make a meal. We called it to be delivered. We couldn’t fix a cabinet counter, so we called somebody in by app, essentially like by app.

Patti, what we found during COVID and certainly now as it’s starting to ebb, that all those technologies combined with all those on‑demand services, whether it’s Uber or Grubhub or DoorDash – the names are endless – TaskRabbit, whatever it might be.

All of those things started to come together to provide convenience for those that were starved for convenience, connectivity in middle age because you were managing parents and children and your own life, but ultimately provided care, actually, for those that we loved at a distance.

Essentially, it was the long arm, typically the caregiver, of the adult daughter reaching into the lives of older adults using many of the systems and many of the services that only a short few years ago were like, “Wow, you’re really either lazy or really convenience‑hungry.”

What we found here at the lab is that that created an entirely new virtual assisted living, in the words we like to use at MIT, that we’re being hacked by families and that when they couldn’t do high‑touch, they used high‑tech instead.

Patti: That is so interesting. Joe, I am one of those people. In March of last year, my grandson was born. I had an Android. I couldn’t go see my new grandson. What did I do? Of course, I got an iPhone. I was able to FaceTime.

What that led to was “Boy, this is pretty cool. Maybe I’ll get that watch too.” I got the watch. This watch is really cool. I never ever kept track of my steps before – and it also keeps my schedule. It does all of that.

The thing that really kills me, that I didn’t realize or wouldn’t have realized if I didn’t have this watch is that I guess I don’t breathe very much. This thing is always yelling at me. It’s saying, “Breathe, Patti. Breathe.” Stand up, that’s the other thing. Stand. I’m not doing my standing thing.

Dr. Coughlin: Or you haven’t closed your rings. In part, this is what we call…It’s for the worried well that are living the quantified life. To use the psychology term, it is those little nudges that can make us healthier and make a difference.

You and I both have the same issues. We look very calm on the outside, but the fact that neither one of us is breathing enough tells us that we’re like a duck, very calm on the surface and paddling like hell underneath. That’s not healthy in the long run.

Patti: I know you, Joe. You’re like me.

But it’s okay – it gets us up in the morning. It keeps us inspired to do our good work. It’s also good to know. It’s good to have those reminders. As you brought up in the prior podcast, if we’re not doing some of these things, it’s really not good.

They say that sitting is the new smoking. If you’re sitting all day long, you might as well be smoking a pack of cigarettes. It’s really not good for us!

Dr. Coughlin: As annoying as some people may feel it to be, that we may want to start thinking about how these technologies might help us structure certain roles and rituals and things we do every day. I know a lot of people are saying, “What, are you kidding? I’m in my 30s, 40s, 50s, 60s, 70s, and beyond. I don’t need a watch pinging me.”

For those who are retired, one of the things that work provided, that children in the home provided was a demanding structure. I know that part of retirement is getting away from that structure and creating your own, but that’s the point. You need to create structure every day, to keep you engaged, to keep you social, to do the things that keep you healthy.

Otherwise, the loss of those institutions of work, family, volunteering, and the like, you start to lose the very physical, social, and emotional health that you used to enjoy because of all those reinforcing things.

Patti: That is such a good point. We see it in our society. Depression, anxiety, it’s just rampant. I can’t help but wonder if that isolation and that lack of being as engaged as we used to be in those institutions is a part of it.

Dr. Coughlin:  We are seeing an epidemic. 3 in 10 Americans said that the pandemic has already had a negative impact on their mental health. Those are August 2021 data. That stress, 39 percent of people say they are under regular stress, or a third of them are saying that they feel like they have bouts of depression because of that loneliness, social isolation, and the like.

That lack of structure, the very thing we want to get rid of in retirement, just make sure that you replace somebody else’s structure with a structure that keeps you healthy and engaged.

Patti: When you think about this concept of the virtual assisted living, it’s exactly what you just said. It’s just a nudge. It’s just a reminder of “Oh, by the way, think about standing up” or “Take a deep breath”.

I can’t help but wonder if that can be used to really enhance a person’s social life, if you will.

We talked in the earlier podcast about the implications of this social security and the lack thereof. We talked about the implications on a person’s physical, emotional, and mental health, their cognitive health. People just slow down when they don’t have to engage with other people.

Dr. Coughlin: Social media, for all its negative effects…Facebook now is being called, if you will, the social media nursing home. Even though I’m on there myself, my students are not. What we’re finding is that some of these technologies, even social media, who has earned great malignment, if you will, is a way of keeping in touch with old friends, family members, and the like.

I know that in my lab – you and I were talking, Patti – when you’ve visited in the past, we have essentially a toy shop of different technologies, the robotics. Certainly, a robot is not going to replace a real person, but some of the robots now are connecting people back and forth.

We have one system we developed years back on tele‑exercise, where you could do exercises that kept you fit so you could safely continue driving for a lifetime but also exercises that you could do with people halfway around the world.

We had one MIT alum that was doing exercise with someone in Taiwan because, frankly, in Taiwan, they were waking up while he was doing his evening exercises here in Boston. Technology is not a replacement for high‑touch, but in lieu of any touch at all, high‑tech fills the gap.

Patti: That’s wonderful. I know that you guys have been working on the camera and sensor technology. That’s really important, without being too invasive. I have this vision of what the home of the future is going to look like. I was visiting a client this weekend in an assisted living facility, one of those continuing care communities. It’s fine, but it’s not their home. If given the choice, I think they’d rather be in their own home, but they didn’t have the services.. They didn’t have the support that they felt that they needed.

One spouse is having some cognitive issues. They’re really big issues. It was getting to the point where her husband could no longer care for her. That’s why they needed to make that decision. I can’t help but wonder.

It would be interesting…As you and I brainstorm about this, wouldn’t it be interesting to think about or to survey our clients and ask them, “Gee, have you really ever thought about what it would be like to just stay in your home forever?” Like we were talking before, if you can’t take out the trash by yourself anymore, do you have somebody who could do it for you?

Dr. Coughlin: You and I were talking about the difference between planning and preparation. As I like to say, you can plan to have dinner. You can even make a shopping list. Till it’s in the plate or at least in your grocery store cart, you’re not really prepared.

You’re right. It would be great to hear whether or not your listeners and folks you work with…Are they prepared? Do they have someone that they would trust to come into their mother’s home?

Let’s make a story line up. Your mom is frail. She lives by herself. Or you’re frail and live by yourself. Do you have the name of someone that you would let cross that threshold to do all those big and little things we call life?

Patti: That’s a really good point. If nothing else, it just bubbles up the awareness. Even the routine things that we all take for granted that we can do, changing a light bulb or fixing a railing.

Dr. Coughlin: Taking out the trash, cleaning, little things. Those are the things that they start to pile up on us or we get tired or don’t feel like doing. Also, that’s a new cost in retirement because quite often, those things were either done or helped out by adult children. Now that we have the lowest birth rate in history or that we’ve encouraged our kids to move away…

Patti, one of the links you and I have is I’m a Philadelphia boy. I no longer live in Philadelphia. Family down there, God love them, I’m 350 miles up the coast now. Do we have that long arm of tech and services that we can rely on when family has either never been born, has moved away, or, frankly, is busy with their own life?

Patti: Hey, Joe. I’ve got an idea. How about MIT and Key Financial team up together? How about if we just put together a survey? It would be really cool! We can come up with just 5, 10 questions.

Maybe some of the questions are “What are the tasks that you’re finding to be more and more difficult to do as you age?” Then asking the questions, “Do you have somebody that could do that for you if you’re no longer able to do it for yourself?” What do you think about that idea?

Dr. Coughlin: That’s a fantastic idea, Patti. Count the AgeLab and MIT in. That would be great. One of the things we want to do at AgeLab is not just to write papers and develop new technologies and new ideas. With partners like you, we want to invent life tomorrow.

I want life tomorrow not just to be longer. I want it better. Maybe we can get folks to start thinking about how they can make that happen in their own lives.

Patti: I love that idea, Joe. I love that about you and your mission. We have an amazing group of people that we can reach out to, who I know would be happy to answer a survey and to give you at the AgeLab, and us, additional insight into those things that maybe we haven’t crossed yet.

Folks, those of you who are listening and watching, be on the lookout. We’re going to be sending an email survey. It’ll probably come in the next few weeks. We’d love to hear from you. We’d love to hear your experiences, the things that you worry about. Help us to develop what Joe just referred to – that future life. Help us to improve quality of life, your life, and the lives of others.

Dr. Coughlin: Just to prep that up, Patti, to give people insight that they are not alone. 87 percent of us, at least as of two years ago, said that we want to age in place. That is where our marriage, our mortgage, and our memories are, we want to stay in that house. Sadly, unfortunately, 47 percent of us believe we will not be able to do so.

This is a great thought experiment to figure out are you ready, are you prepared.

Patti: They don’t have the solutions yet. They don’t know how they would do it. This will be the beginning of this new stage, this new idea bank, if you will, in terms of what are the issues, why do people move out in the first place, and what can you do now to make sure you’re prepared.

Joe, thank you so much. This has been, as always, a phenomenal podcast. It’s a brainstorming opportunity, guys. What you see is what you get. We don’t practice this stuff. We sometimes don’t even talk about it before we come on air.

This is the relationship that we have with the lab and specifically with Dr. Joe. He has become such a good friend of mine. I’m so grateful. I’m honored that he even spends the time with us. I’m so happy that we can do something for them to really help them to create that new future for everybody.

Dr. Coughlin: Patti, I have to say this. My mother used to say this. It may sound like the mutual admiration society to your listeners. As you know, I work with financial advisors in many different countries. We manage one of the largest panels of financial advisors in the world. You’re not just a great person. You’re one of the best. Thank you for having me.

Patti: You betcha. Thank you all. Really, since we’re doing this mutual admiration, we wouldn’t do this if it wasn’t for all of you who are listening and watching this podcast. You are the reason we exist. You’re the reason why we do it.

We are so grateful for the feedback that you’ve given us. You guys are sharing this left and right. It’s been amazing. Thanks to you for tuning in. I hope you have a wonderful year-end with your family and the people that you love. Thank you so much for joining us today. Take care.

Ep85: “Social Security” in Retirement

About This Episode

In the first of a two-part series, Patti welcomes back Dr. Joseph Coughlin PhD, Director of the MIT AgeLab. Together they explain what the new “social security” is in retirement. This new concept of social security may be more important than the actual social security checks retirees receive every month because it affects quality of life in retirement. In Dr. Coughlin’s book, “The Longevity Economy”, he explains why longevity planning should be part of retirement planning. Just because someone has money and financial security, that doesn’t necessarily mean you have a life. Patti reveals how she, as a trusted advisor, collaborates with her clients to successfully plan their retirement through longevity planning.


 
Patti: Hi, everybody. Welcome to “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Joining me today, once again, is Dr. Joseph Coughlin, the Director of the MIT AgeLab. Before we go into the actual podcast, I want to tell you a story about Dr. Joe. He’s the author of the book “The Longevity Economy.” This book is a must‑read for government leaders all over the world, and CEOs of businesses who want to take advantage of where the puck is going.

The Longevity Economy

Let’s face it, we’re all living longer lives. Dr. Coughlin oversees the MIT Longevity Council. As a member of this advisory board, he has encouraged me to think differently about the aging process and this thing called retirement.
I want to tell you a story of something that happened about two months ago. Forbes contacted me to be one of the keynote speakers at their conference. This is kind of a big deal. There were 1,000 people in the audience. There were another 2,000 people or so virtually. Basically, it is the who’s who of the industry, people you see on TV, on Wall Street, etc.

As I thought about what I wanted to share that day, I contacted Joe. I asked his permission if I could share some of the data that he shared with us on the advisory board. Dr. Joe being Dr. Joe, he said, “Of course, have at it! Share this information. It’s important information for everybody in your community as well as people outside.”

During the conversation, I said, “Joe, I’m nervous about this. I really don’t want to mess this up.” I will tell you all, he was amazing. From that moment on, he was texting me, sharing additional data, information that I might want to use.

Literally, up to five minutes before I walked on that stage, he was wishing me good luck, telling me I was going to hit it out of the ballpark. He has become such a good friend of mine.

Those of you who are watching right now, you may see me live. You may not be able to see Dr. Joe. If you did, you would see that he typically wears a jacket and a bow tie, maybe some khakis, and colorful sneakers, always sneakers.

Joe, in your honor, I want you to know I got my sneaks on.

Dr. Coughlin: There you go, Patti. You’re such a sweetheart. You’re very kind with your words. Just so I don’t let you down, I do have red, white, and blue Vans on with red socks, electric blue pants, and a pink and blue bow tie.

Patti: Oh my goodness!

Joe, after the show, you must text me a picture of yourself. You have got to do a selfie; this is awesome!

Dr. Coughlin: OK.

Patti: Oh my gosh. That’s great!

Dr. Coughlin: Sounds good.

Patti: That’s what I love about you. We all get in our mindsets. What you have helped me to do is to think outside the box – to really look at everything that we do from a different perspective. It’s helped me so much in what we do on a day‑to‑day basis.

Our goal is to help our clients live a rich and prosperous life. What you’ve helped me to think about is to include quality of life as well. Before I go any further, thank you so much for joining us once again, Joe.

Dr. Coughlin: You’re always a joy to work with. Patti, you can always look outside the box. As an academic, I get paid to watch. It’s only through working with people like you that are willing to say, “OK, let me see if that idea works or it makes sense to put it into practice.”

Real innovative thinking is not about thinking what’s different but putting what’s different into practice. It’s a delight to work with you.

Patti: Thank you. Joe, I want you to know that we have actually been doing that. I’m going to report to you today, in front of everybody that’s watching, what I have learned in this process.

Let’s tee it up and talk about what’s on our agenda. I want to talk about this concept of social security. When we think about Social Security, we think about that monthly income we all get when we retire.

What you’ve helped me to think about is to really reframe that and think about social security in a different way… to think about it in terms of the security we get when we’re with people we feel connected to.

Not the Facebook kind of friends, but the people that we really enjoy being around, that we have fun with, and who help us get through difficult times. Frankly, like what you did for me in preparation for that conference.

Dr. Coughlin: We forget the fact that our friends, that true social security, is the very glue that holds what we do every day to give it meaning and purpose. Yes, absolutely, family is a definite part of that, but I hate to do the math with everyone. You generally do spend a far more amount of time, waking time that is, with your friends in various areas.

We also forget that there are different types of friends that we have out there. We can certainly talk about what that portfolio, if you will, of friends ought to look like or what it may be.

Patti: You might think, “What’s a financial planner doing talking about something like this?”

Maybe it’s my nursing background, but this whole concept has significant implications for a person’s cognitive health and physical health. All of that is going to translate into financial implications, so it is really important.

Dr. Coughlin: A book a number of years ago, at the risk of going academic on everyone, a very good book written a number of years ago, 1999, by the sociologist Robert Putnam, was called “Bowling Alone.” As the title leads you to believe is that we still like bowling in the United States, believe it or not.

In the ’50s and ’60s and even part of the ’70s, we used to join bowling leagues. What Putnam’s research found is that we don’t like to join leagues anymore. We do like to bowl, but we bowl alone.

What we’re finding is that those places where we made friends and made connections and relied upon support, whether it’s the VFW or the church or the temple or the mosque or Rotary Club, all of those social institutions that provided us friends and purpose and meaning have been declining dramatically.

I’ll give one example. It’s quite startling. The Methodist Church effectively loses one church per week. Think about all those things that our parents and, frankly, many of us relied on to give us social purpose, meaning, and engagement.

In fact, one last stat that I’ll give you, that I think is a little scary, if you will, is that in 1990, only three percent of the population could say, “I have no friends.” By 2021, more than 12 percent reply to the survey saying, “I have no friends whatsoever.”

Patti: That’s so sad. Yet we see it every single day. It’s interesting because this was happening even before the pandemic. It’s just accelerated that whole process.

Dr. Coughlin: Absolutely. The idea of being in social isolation. In fact, we had an epidemic of anxiety and nervousness, and social isolation to begin with. Anxiety is up 41 percent, according to the American Psychological Association.

That social isolation, as you alluded to, it’s not just about being lonely and having no one to play a game with or bowl or something like that. It has real physical and mental implications. Longevity planning is a part of retirement planning. Even if you have money and financial security, that doesn’t necessarily mean you have a life.

Patti: I love the way that you put it, Joe. For many of us, our closest friends were just by chance. It was those chance collisions. We were standing on the sidelines together watching our kids play soccer, or we might have worked together.

Many of the people that I work with are my friends. What happens when that’s no longer a part of your life? How do you recreate that as we retire and age, etc.?

Dr. Coughlin: I don’t want to get everyone down, as my mother used to say, down in the mouth on this. If you think about it, many of us identify with our professions as part of our very identity. On a Friday if you retire at five o’clock as a professor, on Monday morning when you wake up, not only are the students not there, not only are your colleagues not there but what is your identity?

Sadly, to tell you how isolation and profound change like that impacts you, Harvard Med School did a study a number of years ago that showed, in particular men, that the first six months that they are most likely to have a fatal heart attack is their first six months of retirement. That entire crunch of who am I, what am I doing, where am I connecting, where do I fit in, so to speak.

Patti: I thought it was so interesting to hear that when men were asked what they were going to do in retirement, most of the men answered that they were going to spend more time with their wives.

Yet women did not answer the same way.

Dr. Coughlin: It’s kind of scary.

Patti: Understandably. I don’t know. Is it a gender thing? Maybe what we need to do is focus. What you’ve helped me to think about is how can we help people create more of those chance collisions proactively- on purpose.

Dr. Coughlin: By the way, you’re right. I don’t want to just skip over the gender thing. There is a gender thing going on. Men, and women working as well, will put so much time and effort into their identity, their work. Their work life is their social life, quite often, and whatnot.

Men, across the generations, will report they want to spend more time with their significant other or their wife, whatever. Here’s the gender difference. Women do a far better job, in general, aging. They find new things to do. They make new friends, girlfriends, book clubs. They work longer or work part‑time and the like.

The reason why women need to even amp it up beyond their male colleagues, women are much more likely…In fact, 40 percent of women over 75 live solo. That is, they live alone. While women have a head start on that social connection and the like, it’s a good thing because they need to make it even more pronounced in older age.

Patti: It’s so interesting. Joe, what I’ve been doing since you and I talked about this is, in every meeting, I’m bringing up the topic. I’m not asking our clients, “Are you feeling lonely? Do you feel isolated?” I don’t want to go down that path or make them feel awkward.

I’m just curious. What was it like for them during COVID? How did they fill their time? Was it hard for them? I’m also taking a little bit of an informal survey in terms of what were the things that made the difference for them.
It’s been fascinating. I’ve been getting the typical answers like, “I read a lot” or “I did FaceTime with my friends and my family.” My own son, Joe, said that the way that he handled it was basically he and his girlfriend were on FaceTime, and they just never took each other off. They were just on FaceTime all day long. They were just hanging out together on the phone.

The one thing that I thought was fascinating, one woman said, “Patti, I made it a point. It was my goal every day that I had to see people. I had to interact with five people per day. I couldn’t end the day unless I had actually connected with another human being face to face every single day.”

She said, “Once I established that structure, it was a game. It could have been at Wawa or the food store or on a walk around the neighborhood. That’s how I survived.”

Frankly, she’s ahead of the game. Data from just this past year said that only a third – that’s being generous – 31 percent to be exact, said they made a new friend over the last five years. We can’t blame it entirely on the pandemic. That means three years before that, they were, shall we say, coming up empty.

Dr. Coughlin: Patti, if you have a second, maybe we could lay out what a portfolio of friendship or social security might want to look like. There are different friends. There’s a utility friend if you will. Those are the folks we work with and the bartender you know, the security guy that gives you a smile every morning. You share a few words about weather and whatnot.

That’s not, shall we say, the most intimate, but these are the people that make your day, in terms of sharing a glance, acknowledging that we’re there, and maybe even a joke or two. Then I want people to imagine that they have a set of folders in front of them. Who do they have in that utility folder?

The second one is pleasure friends. These are the friends that actually are just…They’re for fun. They go out. You go for travel. They’re the folks that make you smile. They tell you jokes. You go out for a drink with them, whatever it might be. How many of them do you have? Do you have enough in reserve?

As one woman told me in her late 80s – we were interviewing in Chicago – she said, “Son,” which I appreciated, given at my age being called son is a great compliment. The idea is “Son, at my age, there’s a natural attrition to friendship.”

Then there’s the third category. That is called good friends. At the risk of being very academic and geeky, Aristotle called these friends of virtue. What I want to talk about it is these are the friends that they’re there when you need them.

They make you a better person. They are the intimate friends that share your hopes, your fears, your dreams, and the like. They’re the ones that really make things possible, in addition to your family. In fact, when the chips are down with your family, these are the families by choice, not necessarily by default.

Patti, lastly, that last, that fourth folder, might be the most important – you alluded to it perfectly – which is, shall we say, those under development. Have you put yourself in the position for those chance collisions to make new friends?

Going out to what we call in sociology third places, the VFW, the library, cafes, to meet new people. Are you working or volunteering or going to faith‑based organizations more often so that you have those chance collisions?

Frankly, there’s no such thing as poaching friends. Friends of friends are new friends. Those are wells that we should all consider going to, to make sure that our portfolio is robust, resilient, and, frankly, refreshed as often as possible because, as that woman said in Chicago, there is natural attrition to friendship as we age.

Patti: Joe, I love the way that you frame that. It just makes it easier. It’s so easy to be complacent and just, “Oh, I’ll just watch TV”. By using that folder approach, you’re acknowledging that.

I think we’ve talked about this before – I’m not a fan of budgets. I don’t like the word. It sounds like a diet. It sounds like I’ve got to give something up that I really enjoy eating. At the same point, there’s a lot to be said for awareness. Where does the cash go to? Where is the spending?

In this context, what you’re bringing up is the awareness of “this is really how you live a rich life!” It’s not so much about the money, although, yes, there’s a certain amount that’s necessary. What really makes life truly worth living, a rich life, are those four folders that you’ve referred to.

It’s fun. It’s a little bit like me getting on the stage in front of 1,000 people who are much smarter than I. You’ve got to get out of your comfort zone, make an effort, maybe do things that make you feel uncomfortable. In the long run, it’s also fun to meet new people.

I often learn a lot about my clients when I ask them questions about things like how they like to travel. Do they prefer to travel alone, or do they like group tours? I have clients who now have friends all over the country because they met on a trip and had a blast together.

Now they go and see each other during the year. They’ve developed this new friendship that was one of those chance collisions. It was because they went on a group tour instead of by themselves. It’s just interesting how this evolved just very naturally through awareness, which is what you and I are trying to do today.

Dr. Coughlin: At the risk of scaring people, the fact of the matter is that we know that this is not just about being nice and being social and hearing echoes of our mothers from decades ago saying, “Hey, you should go out and play with the other kids.”

Patti, as you know from your medical background as well, this has profound medical, physical implications. A meta‑study was done by the “Journal of the American Medical Association” and others. Do you know that being socially isolated and feeling lonely has the medical equivalent, a physical equivalent, as smoking 11 to 15 cigarettes per day?

A good colleague of mine named Rich Marottoli at the Yale Medical School, he and I, years ago, had done research on driving and health. The reason why we talked about driving so much was if you think about it before you do anything else and before you meet anyone, you’ve got to get there first.

We found that that social isolation or inability to get out there and meet people and whatnot that is, more often than not, in the United States, facilitated by driving, not only led to greater heart attacks and stroke but also bad eating habits, not taking your meds, cardiovascular disease, depression, and the like.

This is not just about getting out there to be with nice people. Heck, I blow the Myers‑Briggs scale off in terms of being an introvert. You know something? Even introverts need people too.

Patti: So interesting. Joe, as always, this is so enlightening. Let’s do this. We’re going to end this here. What do you say you and I get back together and talk about some of the things that you are now working on at MIT to solve this problem, to make it easier?

Folks, some of the stuff that we take for granted today came about as a result of the things that MIT and others identified as a problem. Let’s think about it. When I was younger, when I drove into the driveway, we had to lift our garage door. That was a problem…

…especially for older people. Those doors were heavy. Now, as a result of needing to solve that problem, we all have these garage door clickers. The door automatically goes up. Something that was originally invented to solve an issue that was targeted towards a particular population is now mainstreamed.

I’m so excited to learn about what you and others are doing at the MIT AgeLab.

I’m so proud and honored to know you, Joe, and to know some of the things that you’re working on. Let’s reconvene.
Folks, if you’re watching, tune in. We’re going to be talking about what’s the next backup camera that we can look forward to. Joe, thank you.

Dr. Coughlin: Great, Patti. Always good to be with you.

Patti: I love you. I am so grateful. My feet feel so good in these sneakers; thank you so much!

Thanks to all of you for joining us today. If you have any questions, get on our website. Actually, I just learned from a client, of all people, Joe, that the website now has that Forbes conference, that main stage, on the cover, which is interesting.

Anyway, please, go to the website. Ask whatever questions. Let us know what you think about these podcasts and what you’d like to learn about. Also, most importantly, feel free to share this with other people.

Joe, your podcasts are viral. Do you know that your podcasts, the ones that we did before, are the most popular podcasts that we’ve done since the beginning?

Dr. Coughlin: You put another cheesesteak on the table, and I’ll be right back down to Philly again.

Patti: Oh boy. You don’t have to say that twice.

Thank you all for joining us today. Thank you so much for being there and giving us your feedback. I hope you all have just a fantastic day.

Ep84: Tackling Life with Kevin Reilly

About This Episode

Patti welcomes special guest, Kevin Reilly to the show. Kevin is a former Philadelphia Eagles Linebacker and Special Teams Captain who was diagnosed with a devastating cancer that ended his professional football career and almost took his life. Kevin shares his story of unimaginable pain and the struggle of recovery that led to his true purpose in life. At a time when Americans are struggling with rising inflation and economic concern, Patti acknowledges that this message of faith, hope, and perseverance will help put everything in perspective.

Patti Brennan: Hi, everybody. Welcome to the “The Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. I am so excited about our guest today. His name is Kevin Riley.

Before I go into the formal introduction of Kevin, I’d like to share a little bit of a story about how we were introduced to him and what makes him so special? At least to all of us. We were introduced to Kevin actually throw his wife. We were having a conversation Bernadette Hunter and me.

Bernadette, as you probably know, is my right arm. So we were talking with Paula and in the conversation, she talked about her husband, Kevin Riley, and even though he’s a famous author, a speaker – he speaks all over the country – former NFL player, I didn’t know who he was.

As soon as Bernadette heard his name, she remembered that he spoke at her son’s school, and it was one of those engagements where they invited all of the kids and their parents. She said, “Patti, I will never forget Kevin’s message.” She took it upon herself to call him. She just wanted to let him know what a difference he had made in her son’s life and in her life as well.

In the conversation, she brought up a young woman who was going through a bit of a struggle from a career perspective. Knowing Kevin and his real goal in life to make a difference in young people’s lives, she asked if he would be interested or would he be willing to talk with her. Kevin Riley being Kevin Riley said, “Absolutely.”

What I learned about this conversation was – it was a three-hour meeting, mostly laughing, some crying, and by the end of it, this young woman had a clear direction, a career path, and a new friend. That’s Kevin Riley. What’s interesting about this story is that young woman was my daughter.

I have to tell you that as a professional, somebody running a company, etc., I think, gee, I hope I’m there for my kids, but sometimes, they need to meet with people outside of the family nucleus.

To have somebody, a complete stranger honestly, to spend that kind of time to meet with her and help her, and then on top if it, you guys, literally has been back in touch with her, “How you doing? What can I do? How can I help?” They’ve developed the relationship over time.

What I’ve also learned since that conversation, I basically said to Bernadette, I said, “Bern, this guy’s amazing. I’d like to meet him. I’d like to learn more about him.” Of course, in the conversation, I learned about his book. I read his book. It’s called “Tackling Life”.

Tackling Life by Kevin Reilly

For those of you who are listening and not able to watch, I will tell you that if you were, you would see that Kevin Riley is a forequarter amputee. He was a Philadelphia Eagle, and during his time with the NFL was diagnosed with a devastating tumor.

Kevin, thank you so much for joining us today.

Kevin Riley: Well don’t feel too bad, Patti, about not knowing who I was. After about four weeks of dating Paula, she had the nerve to ask me what position I played. I thought what position do you think I played. She thought for a second, and she said, “Left out.” There’s no such position, but if it ever has a new position in the NFL, maybe we can call it left out.

Anyway, I really appreciate being here today, and one of my great experiences was talking to your daughter and trying to help people on the way. It’s very fulfilling and humbling for me to be able to help people. I’m really happy to be here with you today and discuss some things that maybe you and I can help some other people out there that are struggling right now.

Patti: It’s so interesting because some of you may be watching and listening and say, “Well, gee, what does this have to do with financial planning? What does this really have to do with what you do for a living?” I will tell you that it has so much to do with what we do because let’s face it, anxiety, depression, there’s so much is rampant in our country today.

There’s so much to worry about, whether it be COVID, or long COVID, whether it be cybersecurity and an attack on our systems, whether it be the electric grid or what have you, the implications on our economy and the markets, new tax laws, dysfunction in Washington DC. Let’s just make a list of all the things that can keep us up at night.

When I asked Kevin, I said, “Kevin, when you think about this conversation and when you look back on it, what would make you feel like it was really worthwhile? What would you like the message to be?” Why don’t you share with everybody what you said to me?

Kevin: Perspective is one of the things that brought me out of the doldrums. I’m a forequarter amputee as you said, and that means I’ve lost my left shoulder, my left arm, and four ribs.

I was only 29 years old when that happened. I had three children, two, one, and infant. The first day that I was back out of intensive care, I was looking at their pictures, and I was in a position at that time, with a lot of the tubes out of me, just to be thinking about the future. It didn’t look very bright to me.

Here I am 29 years old. The doctor comes in, and I’m dying to talk to him, and he says, “You were under the knife for 11 and a half hours. We had to sew you back up because your vital signs were going down.” I said, “Well, was it successful?” He said, “I think I got it all.” I’ll never forget him saying that because my heart dropped.

“What do you mean you think you got it all? You just put me under an 11 and a half hour operation.” I said, “And I’ve lost my left arm and my shoulder. I don’t know how I’m ever going to make a living again.”

I’m sitting here looking at these three kids, wondering if I’ll have a job. Will I have to go on permanent disability just the thing that you were talking about? Here I was taking a deep dive down the rabbit hole, thinking all the things that could happen.

I think it was Mark Twain that once said, “Some of our biggest worries in life never ever happen to us.” If you take that into consideration, you wonder then what should I be worried about.

An interesting concept came up just this week from a friend of mine, Father Rob Hagan, who is the Villanova chaplain. He gave Mass the morning of our game Saturday, and he just put something in really good perspective. He talked about there are too many things in this United States going on. We all have the two minutes roll right up to our face. It’s like we have pressure on us all the time.

He said, “You’ve got to pick four or five things that you’re all in with. That’s where you dedicate your time. Not all these little things that don’t matter. Not only five days down the road, but five weeks down the road, and five years down the road. Some of your biggest concerns will be the nights you lost sleep over little things.”

He said, “If you think about it, they should be in an area like my God. It should be an area like my family, things to be all in, my health, my brothers and sisters, Black, White, in different cultures, different religions, hey, even different political parties, which has become just a bad situation right now.”

If you think about that, yeah, you can’t handle everything today. Let’s put it in perspective and think about the things you really need to think about and the things you really covet.

One of the things that I was with Coach Dick Vermeil, we speak sometimes together and he opened it to some Q&A after his speech. A lady said to him, “Let me ask you something. If somebody asked you about integrity, how important would you say integrity is?” Very, very calmly and in one sentence he said, “If you have integrity, it’s everything. If you don’t have integrity, it’s everything.”

That should be one of your top models. If you have integrity, then you go through your list of your God, your family, the people you deal with on a daily basis. Those are the things that are important.

Those are the things that will fulfill your life when all of these things that we look at as special toys, nice houses, that’s all well and good, but if you’re not getting pleasure out of fulfilling obligations, and being good to people, and giving back, you’re really missing the point.

Cardinal George of Chicago had a great saying on his deathbed. He said, “The only thing we take from this life when we die is what we give to others.” When you think about it, you’re in financial planning, there might be couple million dollars left behind, but they’re not going to put it on a tractor-trailer to bring in to throw on your funeral.

If you think about that, everything else will have a way of falling in place, your financial stability, your love life, your job. The other thing that I’d say if you had to put a sixth thing in their perspective, is just try to be kind on a daily basis to everybody you meet.

I’m a big proponent of when somebody is angry with you or you’re having a problem, and they call it being a Karen or a Kevin today. I don’t know why. I wouldn’t get that word.

It’s never about you. It’s about them. They’ve just hit their last straw. They just had enough for the day because of so many priorities that we’ve put in front of ourselves to try to progress.

Patti: It’s so true. As you were talking, Kevin, I was thinking about something that I wrote about recently in one of my letters and this concept of fear and using the acronym FEAR, F E A R, False Evidence Appearing Real, or another one is Future Events Already Ruined. How’s that for a concept?

When my kids were younger, we used to do this thing called a brain dump because these are tools that we all need to use from time to time. In our family, the brain dump was quite simple.

My kids would get a blank piece of paper, and I would have them take a pen to this piece of paper and write down everything that they were worried about, everything that they were thinking about, and keep writing, writing, writing until they were spent. They couldn’t think of one more thing. Then they would fold it up, put it in an envelope, and put it away for six months.

Six months later to the day, they would open it. I wouldn’t look at it. It was private, but they would open it. The question that I would have them answer is, how many of those things that you were so worried about actually occurred? Those that did, how bad was it?

I don’t know about you, but for me, I found that the things that happened that may have not turned out the way I wanted, boy, have I made mistakes in my life, have things been harder in some respects than I had hoped that they would be. That’s when I really learned. That’s when I really grew.

I think that that’s sometimes is missing. We don’t need to avoid adversity. We need to mitigate it. We need to be aware of it, but things are going to happen. It’s not the things that happen to us. It’s what we do about it.

It’s, how often do we get back up? What do we do? How do we handle ourselves with that integrity that you were just talking about? While it’s happening, are we pointing fingers at other people? Are we blaming other people, or are we taking in the information and saying, “What can I do now going forward to turn this thing around? What can I do to make a difference?”

People have lots of opinions in America today. People have lots of thoughts. I’m not here to change anybody’s mind about anything, but what I try to do is listen and understand their perspective. I don’t consider myself in the sales profession, right and I do think that to a certain extent that’s a profession.

I feel like that people like you, and hopefully me – I don’t know that I’m at your level, Kevin – but hopefully, when it’s all said and done, that people will look and say, “She had a way of influencing people with integrity to help people to see that perspective that you’re talking about.”

Failure, it’s not a person. We often talk, “I don’t want to be a failure. I don’t want to be a failure.” Failure is not a person. Get rid of that label. It’s an event. It’s feedback. It just tells you, “Hey, what you did, didn’t work. Let’s try something else.” Right?

Kevin: Absolutely. When you and I were talking a little earlier about the fear of falling out of where you are right now, because you’re comfortable, at least you know how to handle it even if you’re not happy. You know how to handle this area.

We’re always afraid of the unknown. Not so much about the future but more about the past, “What happens if I lose my job?” I don’t think anybody is going to be sleeping outside in the rain and snow if they lose their job, but they think that might happen, where they think it might come to that consequence.

It reminds me of a little story, again, lesson learned. Here I am, missing my left arm. I became a peer visitor for Walter Reed Hospital, trying to help some of these poor guys coming back from Afghanistan and Iraq that have lost limbs.

At that time, Walter Reed Hospital was almost exclusively for amputees. Governor Carper – he was a Navy veteran – asked me if I’d get down and talk to him. I get down and I talked to him at this one point. There are about 12 people there in the room that are doing rehab work, all levels of amputations. You know what I didn’t expect? I didn’t expect to see women. There were two women there.

I’m thinking, “My gosh, these bombs that go off to blow the cars up, they’re very indiscriminate. They don’t care. It could be women. It could be men. It could be dogs. It could be babies. They just don’t care.” To make a long story short, I said, “I’m going to come back and I’m going to go through the eight-hour training program that they call peer visitor. I want to help these guys and gals.”

After my peer visitor training and you have to be blessed to get your certificate, they want to make sure that you know what you’re talking about. One of the biggest things they stress over and over, God gave you two ears to listen to more than one mouth to talk. It’s all about listening to the other person.

Here I am, and they said the best usage of your time Kev because you can’t get down to Maryland three times a week, and that’s what it really takes to be a good peer visitor because those guys and gals are going to tell you things…they’re not going to tell their family, their doctors.

We even went through an hour and a half of understanding suicidal tendencies, which scared me. Oh, my gosh. That would be on me to be able to tell somebody that I saw this. Anyway, I’m getting away from my story.

They said, “where you could really help us is because you work for a Fortune 500 company and do hiring. These people are really scared when they go out looking for jobs.”

When we release them from the hospital – by the way, they wouldn’t release them until they did their DLAs, daily living activities – you had to be able to cook five meals. If you were going to drive a car, there was a simulator there. They were anxious to go home. I’ll tell you the service is really good and saying, “We’re going to give them basic skills.”

Here I was to help them with doing interviewing skills, and also looking at their resume, and giving them some advice about the interview they’re going to go to. One day comes, and I meet my first triple amputee. He’s a captain. He’s a Marine. He’s missing both legs below the knee and his left arm, and he’s missing his left eye.

I’m sitting there, and this guy has the greatest attitude you’d ever want to see. He’s so happy that his uniform fits him like he wanted it to. He’s so happy to be going home. He’s got three interviews. He can’t wait for me to tell him how to handle himself.

Like I’m going, how is this happening because a lot of the times when I go in to see somebody, that’s just lost a limb because of cancer, they’re usually down, and that’s because people set low expectations for them. Their family members, their friends, they mean well, but their empathy is setting the bar low. This guy because he was a marine because he was with other marines rehabilitating, there’s a camaraderie there at esprit de corps that can’t be touched.

He says to me about 20 minutes into the conversation, “Can I ask you a personal question?” I said, “Sure.” He said, “Did you lose your dominant arm or your non-dominant arm?” I said, “I was lucky I lost my non-dominant arm. How about you?” He said, “Yeah, I lost my non-dominant arm also. Aren’t we lucky?” I’m not even in this guy, same arena. He is putting me up there with him.

I learned a lesson that day if he doesn’t feel bad about his chances in this world. I’m never going to feel bad about it. That’s when I go back to a saying that Rocky Bleier, who counseled me while I was at my worst day at Sloan Kettering, he said, “Your job going forward is to be the best one arm person that you can be, so you try everything until you find out you can’t do it.”

When I was in the hospital, I had a well-intentioned volunteer who was 70 years old, who came to visit me. He had this knife that was called an Alaskan knife. You can rock it back and forth, and you can cut your food with it.

He said, “Make sure you take this when you go out to dinner dates because you don’t want to look like a 12-year-old and have your partner next to you cutting your meat up. Oh, my goodness didn’t even think about that.

Then he’s talked about his shoes. He said, “Are you going to go back to work with Xerox?” I said, “Yes, I am.” “All right. What do you do?” I said, “I’m an executive.” “You have to wear a coat and tie?” I said, “Yeah.” He said, “Do you have to wear dress shoes?” I said, “Yeah, just like the pair you have on.”

With that, he said, “Not like this pair.” I said, “I got a pair of wingtips just like yours. Those funny little strings, too, that they call laces.” He said, “Not like this pair.” I said, “Maybe not the right size of the same color. Wingtips are wingtips.”

He said, “Give me your hand for a second.” With that, he took my hand, and he put it on this little flap that I didn’t see. He said, “Pull upon it.” When I did, it was a Velcro flap.

He said, “If you’re going to have to wear wingtips like this, you’re going to have to get the pre-tied one like mine because you’ll never be able to tie your shoes again.” I said, “You got to be kidding me.” He said, “No. I’ve been trying for over 30 years.”

Then he said to me, “Pull on my tie.” At that point, I was really glad that he didn’t ask me to pull on his finger. I pulled on his tie, and it was one of those clip-on ties that I had going to Catholic school. My mother couldn’t be tying my tie because we had six kids in the family, and I was the oldest. That’s another story for another day, but I never slept alone until I was married.

Anyway, he said, “You’ll never be able to tie your tie again, and if you go down to 5th and Madison Avenue, they’ll give you a discount. And make sure you get about 12 or 14 ties because they always call me back and want to know what’s the name of that place again?”

When he left, I went, “Oh, my gosh.” I said, “What else can’t I do?” I’m thinking of buttons, and zippers, and keyboards, oh, my. Here was a guy that had well-meaning, but he came, and he set the bar low.

When I told the story to Rocky Bleier, he said, “You must promise me something.” He’s on the phone with me. He said, “You must promise me that you won’t quit on anything unless you try it a dozen times.”

I said, “Hey, Rock, listen, I love your enthusiasm, but let me tell you something. This guy’s got to be a little bit more of an expert than you or I with being one-armed.” He said, “Let me tell you about experts, Riles. Experts built the Titanic, and amateurs built the ark. Experts can be wrong.” He made me promise that I wouldn’t quit on anything until I tried it a dozen times.

Then he said, “I’m going to send you a little poem.” Now Rocky Bleier, for you fans out there that don’t recognize the name, four-time Super Bowl winner, and he had his leg so badly mangled with a bomb in Vietnam that they said he would never ever play football again.

He didn’t buy it. Got the right people. Took him two years to rehab it. Used some cadaver parts to put back in his bad knee. He not only made the team, he’s got four Super Bowl rings. Here was a guy I could listen to that had overcome major adversity.

He said to me, “I’m going to send you a little poem, and I want you to memorize it. Instead of stepping back and counting to 10 before you take on the task again and you’re going to be frustrated. You’re an A personality just like me. It’s going to be difficult, but I want you to say this little poem to yourself.

It goes like this, “If you think you’re beat, you are. If you think you dare not, you don’t. If you like to win, but you think you can’t, it’s almost a cinch that you won’t. If you think you’ll lose, you’re lost, for in this world we find success begins with a fellow’s will. It’s all in the state of mind.

“If you think you’re outclassed, you are. You’ve got to think high to rise. You got to be sure of yourself before you can win the prize. Remember life’s battles don’t always go to the biggest, fastest, or smartest man, but sooner or later, the man who wins is the man who thinks he can.”

I’ve followed that philosophy. There are three things I can’t do. I cannot play the banjo. I cannot jump rope by myself. I cannot give the number one sign left-handed to angry motorists on 202.

I was told I would never be able to go in a half marathon again. I was told don’t even think about hitting golf balls, you’ll have a bad back. This, that, and the other. I found out so many of those things I could do if I adapted. So many of those things, without Rocky Bleier there that day, everybody had set the bar low.

For our listening and watching audience, I just want people to think, aim for the top. If you aim for nothing, you’ll hit it every time. If you aim beyond your ability, wherever you fall will be better than anything you could have ever achieved by not trying at all.

Patti: I just want you to keep on talking. For those of you who are listening, I want you all to know that if you get a chance, you have to watch the video because while Kevin was talking, he was tying his tie with one arm. It’s an amazing thing to watch, and he was talking at the same time. It’s so interesting. It’s fascinating, Kevin, to hear your story and to hear this kind of approach that you’ve taken to life. I’m just curious, were you this way before you had the tumor?

Kevin: Yeah, I was in many ways. Part of that was growing up in a large family. I was supposed to be the leader, and I tried to play that role. My Catholic education gave me a pretty good moral compass, but I would have to tell you it’s the Salesianum experience, the four years at the all-boys school was really the factor that set me on the right road.

One of the things that happened in that environment that people don’t know unless you’re in it is that you can’t be anybody but yourself. They will call you out. If you’re a fraud, if you’re lying, if you lack of integrity, they will call you out, and you will change because that is more embarrassing than changing.

Patti: Interesting.

Kevin: I have seen it in other all-male schools, and I’m sure that in all-female schools much of the same thing. The camaraderie’s there. Salesianum calls it the brotherhood. Let me tell you about the brotherhood. I bled out during my operation. They put a flag up, anybody wanted to give blood. I had 11 guys that I played football with at Villanova, NFL, and Salesianum, five of them were from Salesianum, that caravanned up to give me blood. Now a couple of them, I didn’t want their blood, but that’s the way it goes.

Patti: Yep.

Kevin: That’s how they care.

Patti: Wow.

Kevin: What more can you do for another human being than give your own precious blood? It’s that kind of stuff right there that keeps me up above.

I try to tell people this 1972 Miami Dolphins that drafted me after they won a Super Bowl, they went undefeated that year, and it hasn’t happened since. It’s a rarity. It will only happen in football because baseball, soccer, hockey, they play too many games, basketball, too many games for anybody to go undefeated.

I want to tell you something. People think that they should go undefeated in life, and there isn’t a person yet that has gone undefeated in life. I say that in a positive stance because you just mentioned it a while ago.

When you have a problem, and you deal with that problem, and you face that adversity, if you didn’t learn a couple of lessons, shame on you. Dig yourself out and say I’m going to be better than this, and I’m going to work at it.

Again, you have to set your goals, and you can’t set them all over the place.

If people would ask you tomorrow name the five things that are important to you, you ought to be able to rattle them off, one, two, three, four, five, and remind yourself this is what’s important.

Patti: Wow. So true. This is the message that needs to be spread. I said to you before the podcast when we were talking about this, “What would you like the listeners to get out of this? If there’s a phrase if there’s something that you really want them to remember, what would it be?” Why don’t you tell the listeners?

Kevin: With everything that’s going on in this country, it’s still the best country in the world. More out-of-pocket thoughts, more, as they say, people that are thinking beyond the block. Why are we able to make so many inventions? Why are we able to create so many new things?

China’s got five times as many people as we got or something like that, but they’re under duress because of the lack of freedom that they have. Freedom in this country is so important to allow you to do whatever you want to do, even though as you said earlier, your opinion is different than mine on this subject, but that’s OK.

The one thing I would just like people to remember is this is just try to be kinder out there to everybody. Everybody’s going through tough times out there. You won’t know until you do it how often it’ll come back and help you.

Patti: Kevin, as you were talking, I was thinking about something that I wrote about in my most recent letter. We hear about all the negative stuff, but when you think about it, 50 years ago, about half of the world’s population was in extreme poverty.

Today, it’s about nine percent. Every second, one person is lifted out of extreme poverty, but in that same second, five people are lifted into the middle class.

Think about that, as we look at all the negative stuff, and that’s got profound implications. There are 7.8 billion people in the world today. 3 billion people don’t have access to electricity. If you go in Africa, it is not unusual to see a little kid by a lamp outside a street lamp trying to do their homework.

The progress that we are making on a daily yearly basis, I wish we could measure that and make that the headlines, because there’s a lot to look forward to, and there’s a lot to be in awe about.

Let’s face it, even COVID, the progress, it’s not arithmetic, it’s geometric. There is so much that we can look forward to, so much for our children to look forward to. Let’s focus on that. As we look at adversity and I think that your message about being nobody goes undefeated in life, it is all about perspective. There’s nobody better than Kevin Riley to share that message.

Kevin: Well, I’m no saint, by any means. I’m 70 years old now, and I’m probably more humble than I’ve ever been, and I’d like to even get humbler because when I look back, I’m not so proud of some of the things I did, but it’s a reminder that you don’t have to always talk your own track up.

I say that because we live in this great country and the technology is moving so fast, and in such a good direction for cures. The desmoid tumor disease that I have, we think that in two years, we may have a cure for it. We have two medicines right now that are shrinking the tumors, but they can’t kill it. We’re looking for the silver bullet.

15 years ago, this thing was just strangling people. I look at it like you do. It’s just a blessing that way. People ask me now, “What do you miss being one-armed?” I miss hitting a baseball. I miss hugging people with two arms. It’s not things you would think about, off the top your head.

I told somebody the other day when they called me about possibly trying this prosthetic arm because they wanted a former athlete to do it. I said, “I don’t want to learn that now.” I said, “You know what, I don’t want to tell you something. I really appreciate your call. If God gave me my left arm back right now, I want to get my weight for two months.” I’m so used to not having it.

I just ask people to look in perspective of what they have and don’t be afraid to climb the ladder and reach your goals. We’re going to be accountable someday for the talents that God gave us.

You got to sit back sometime and say, “Am I using the talents that God or the Supreme Being whoever you call that in your life? Am I using them to the best of my ability where I might just trying to stay safe?” A lot of that can be broken by just trying to help other people with whatever talent you have.

Patti: Kevin, thank you so much. Thank you for that message. So much powerful stuff for all of us to think about, related to our daily lives and the people that we interact with, and how we handle ourselves. Thank you so much for joining us.

Kevin: I appreciate it. Appreciate being on the show.

Patti: It’s a real treat. Thanks to all of you as well for joining us today. If you have any questions, if you’d like to learn more, my first recommendation, if I may, is get this book. This book is amazing.

Kevin is out there spreading this message to companies like mine and large companies, Fortune 500 companies. He’s willing to help on whatever level, and I will tell you from my perspective, you’ve helped me a lot today. Thank you for everything that you do. Thanks to all of you for joining us.

If you have any questions, go to our website, www.staging.keyfinancialinc.com. Thank you so much for joining us today. I hope you have a wonderful Thanksgiving surrounded by the people that you love. Take care now.

Ep83: Biden’s New Tax Proposal

About This Episode

Patti meets with her Chief Planning Officer, Eric Fuhrman, to unravel the intricacies of Biden’s New Tax proposal, the Build Back Better Plan. It seems that while a lot of items are being “negotiated” off the proposal, there is a handful of line items that should be causing concern for many Americans – and not just the top-tier wealthy Americans. Time is running out to take advantage of some “must-do’s” in financial planning and estate planning before the end of the year. Patti and Eric give detailed solutions to take advantage of some key opportunities still available to save on taxes and help preserve capital.

Patti Brennan: Hi, everybody, welcome to “The Patti Brennan Show.” This show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today, we are taking on a wonderful subject. It is the subject of the proposed tax legislation, and joining me today is none other than Eric Fuhrman. Eric, welcome to the show.

Eric Fuhrman: Thank you so much, Patti. Indeed, tax legislation, I mean I think this is a topic mundane for most people, but our job today is to breathe excitement, electricity and life to help people really understand how it can make a difference in their life.

Patti: This is really interesting stuff. Just stay tuned, because we have a rich history of how this whole thing called income taxes really came about and why.

Actually, when you dig into it, it gives at least for me, a better perspective of what they’re trying to do in Washington, and why, and how it really kind of gels out in the end.

Eric: Absolutely, so I mean there’s so much to cover. I just hope we can condense it all.

Patti: We will.

Eric: If you’re driving, you might want to pull off into a parking lot somewhere because this is going to be good.

Patti: And by the way, as always, all of this information will be on our website, staging.keyfinancialinc.com. We’ve got a great white paper already done. It’s got all this stuff that we’re going to be talking about in today’s show.

So, Eric, let’s start out with the history. I did a little bit of digging in preparation. I wanted to kind of look back at the history and the intent of tax law right, and when it first started.

Eric: Taxes have been around and been part of any great country and so forth. What defines our times though is that so many people think in the moment, since the 2020 election, there’s been this steady drumbeat of major overhauls and tax law changes coming. I just feel like so many issues that define the present. This is a very contentious topic.

Really, you have people split on both sides that they believe taxation is a necessary tool to balance out income equality to make needed investments.

Others view it as an overreach and expropriation of treasure from people that work hard, and it just tears at that capitalistic identity that goes back to the founding of our country.

I don’t know that we’re going to solve one side or the other. As you point out, the history is so interesting. That tells this story of how it evolved, how we got here, and it is able to allow you to understand the policy choices and why they’re being made with a much more informed or enlightened perspective.

Patti: Absolutely.

Eric: That’s when we roll back.

Patti: We are here to enlighten and ask…

Eric: Enlightenment, right?

Patti: You got it and have fun in the process. So, when you look back, when did all this stuff start? You know what, it started with the Stamp Act. It was when we were colonies and Britain came out and imposed this Stamp Act. The colonists were not happy about it. They got mad. Guess what it led to?

Eric: Revolution? I don’t know.

Patti: You got it, the revolution.

Eric: That’s the outcome.

Patti: Taxation without representation is tyranny, and that’s really interesting in terms of framing even today’s conversation. The Stamp Act was in 1765 led to the revolution.

And then we won that war and then lo and behold, guess what came back? Here we go. In 1797, there was a new tax that was imposed.

Basically, that was the beginning of what is now known as estate taxes. If someone passed away, you had to present the will with a particular stamp on it, and you had to pay for that stamp.

That new law was formed because we were bracing for a potential war with France. Literally, that allowed us to build the navy. That was the beginning of the United States Navy. We didn’t end up going to war with France, but we had a navy.
Most of the time when you look back at history, these taxes came in and went, and it was typically to finance wars.

Eric: What’s interesting is when you think about a fledgling Republic, like the United States was way back when, governments are scrambling to raise revenue. In modern society, we take for granted that a government can borrow, because we have a well-established bond market and a system to be able to raise funds from the public.

Back then, your only way to pay bills was to tax or print. Obviously, printing leads to very bad things inflation and so forth. This whole tax system that we see the day has been evolving for hundreds of years.

It was Abraham Lincoln, back in…It was the Revenue Act of 19 1861, where he enacted the first national income tax. Back then, it was three percent on individuals earning above $800 which is about 18,000 adjusted for inflation.

That was the genesis of this modern-day federal income tax. Now, the problem with a tax, or authorizing one, is you have to be able to collect it.

Patti: I was just going to say, how in the world did they ever collect? There were no computers. How did they collect the money?

Eric: That’s a great question. Probably a subject for another podcast of collection methods. The Revenue Act of 1862, passed a year later by Abraham Lincoln, was meant to address that issue. That provided the foundation for what we now know as the Internal Revenue Service.

Patti: Ah, so it was good old Abe.

Eric: Yup. Throughout history, as you point out, there have been so many iterations of these different tax schemes, and bills to try and raise revenue. This argument has gone back and forth over the centuries, so this is nothing new today.

It wasn’t until the 16th Amendment was ratified in 1913, which vested the power with the government to tax any source of income and led to the modern-day taxation system that we now see.

Patti: In preparation for this, I think it’s so cool that conversation that you and I were having with the book that you’re reading. Why don’t you tell our listeners and people who are watching about the book and the war of 1812?

Eric: The book is called “Hamilton’s Blessing.” It’s an interesting book because it focuses on Alexander Hamilton and his contributions to forming the national debt and many different systems that we see today.

It provides a rich history of how things changed, how it affected the national debt, how did the government raise revenue. It’s fascinating for me, being a resident here outside Philadelphia, is that so much of that historical…

Patti: Precedent.

Eric: Those things took place right here in our backyard. Major figures, when you drive down Philadelphia, you see streets like Girard Avenue and so forth.

These are named after influential figures in the day that were financiers and were part of this amazing story of taxes and debt that take us to this point. I’m not through it yet, but it’s a page-turner.

Patti: It’s so interesting because back then, right before that war, the government was broke. It did not have the money to finance this war that we were about to go into. As I understand it, they went to this guy named…I don’t know what his first name is, Mr. Girard.

Eric: Stephen Girard.

Patti: Stephen Girard and said, “Hey, we need some money,” and Stephen Girard said, “OK, I got some money.” That’s where he bought 95 percent of all of the government bonds. He owned the bonds, the government had the cash, we went to war, and we won.

Eric: He was the richest man in America. He was a merchant out of Philadelphia. Yeah, the treasury needed money to continue the war of 1812, and they came to the one individual who bought 95 percent of the bond issue, which gave them money to continue to do that.

Patti: I wonder what interest rate the government paid on those bonds back then.

Eric: I think there is a mention of interest rates in the book. It escapes me now, but to be honest, I would enjoy a date night where you could sit down and someone would give you a two-hour lecture on the history of taxation. I’d have to convince my wife, so hopefully, there would be wine service or something.

Patti: Totally.

Eric: Otherwise, I’d be going solo.

Patti: All right. Let’s bring it to today. Here we have this proposal. Now, let’s go through a little bit of the mechanics of how do we get to where we are today? Who came up with these ideas? Who is responsible for putting together this change in legislation, and what is that process all about?

Eric: I think what’s important here, just to close out the historical story, is since the 16th Amendment of 1913 was ratified, we have this marginal tax system. So much about what the current laws about related to the individuals is that top marginal tax bracket. You can see that throughout history. The lowest rate has been very, very consistent.

The top tax rate, though, has gone anywhere from 7 percent to 92 percent, which that was right after World War II. There’s been tremendous volatility in that top tax rate, and it’s a very political issue, because wealthy households, high-income earners are the people that are subject to that.

Patti: It is an inflammatory issue, because those same people say, “We worked hard to get to this point, and you’re killing us here. You’re taking this money that we’ve earned and that’s taken us a long time to get to the point where we can generate this cash flow.”

Talk about Hauser’s law. This is fascinating and important for everybody listening to understand.

Eric: It was an interesting observation by an economist many years ago. There’s been criticisms to it, just like anything else. Everyone’s going to criticisms, but…

Patti: The important thing is this is based on empirical data. It’s not a theory. We talk about Laffer’s Curve and the idea of if you tax something less, you’re going to get more of that thing. This is not a theory. This is based on data.

Eric: Right. It’s not a theoretical argument that people can debate.

What you see when you lay it out is that despite the top marginal rate being anywhere from 7 to 92 percent, despite the highs and the lows of that tax rate, the federal receipts, the money the government collects as a percentage of output – output being GDP – has stayed very, very consistent.

Hauser’s law observed about 19.5 percent. It’s oscillated above and below that number, but about 19.5 percent. The inference is that regardless of how you manipulate the top tax rate, it has not had any effect on increasing the government’s share of output.

The lesson is if you want more tax revenue, figure out policies that increase output, because changing the tax rates doesn’t have any material effect.

Patti: It is important and it is interesting, in terms of how they tinker with the rules, what you can and cannot do. Ultimately, the goal is to create revenue for the government to provide the services that so many people in America need.

That tight range of 15 to 19.5 percent is really important. Let’s face it, our economy has grown tremendously. We are a $22 trillion economy right now, so something’s working, right?

Eric: Not to get economical or technical here, but the key is whatever these policies are, you want to make sure that it doesn’t discourage employment, that it doesn’t discourage productivity of those that are employed.

The underlying thing that guides and drives standards of living are output, how productive we are. Can we be more productive with the hours that we’re working?

You want to make sure whatever the policies are, they’re encouraging those types of things because more output leads to better standards of living for everybody. The pie gets bigger, everybody benefits.

Patti: In our conversation, we were talking about taxation, tax policy being initially to provide economic value. It has now become a little bit more social value. What is the intent that we’re trying to achieve here?

Eric: Is there some kind of economic engineering that’s behind the changes? Is it social engineering that they’re trying to reinvent?

Patti: I like that better, the engineering because that’s what’s going on.

Eric: Is the tax system used to raise revenue to pay for important things, or is it used to create certain outcomes, socially and so forth?

Patti: Close the gap between the rich and the right…exactly.

Eric: Which, again, this is not a new argument. This has been going on forever.

Patti: Absolutely, and we’re not going to solve it today, but it does make me think a lot, in terms of what they’re trying to do down in Washington.

Eric: Exactly right. Onto the new tax law. We digress.

Patti: Right. As always, we’re going to get into actionable items throughout this podcast and at the end of the show, key considerations.

Eric: I was going to put a plugin there. You beat me to it. I was going to say, “What do you call that? Key considerations? What?”

Patti: There you go. I think we call it key considerations.

Eric: Good. Mental footnote.

Patti: Again, none of this is advice. We just want you to consider, go to your advisors, understand that these opportunities are here now and they may not go away as of January 1st. That’s the most important thing.

Eric: Some of these things could be ephemeral.

Patti: Good deal.

Eric: Good to join income taxes?

Patti: Yeah.

Eric: Exactly.

Patti: You know what? Let’s get one thing out of the way. How about we get the international tax law out of the way? Lots of changes in this proposal as it relates to the international tax system.

Eric: You must be…

Patti: A lot more…

Eric: I was going to say you must be referring to the globally intangible low tax income or maybe the more obscure foreign-derived intangible tax.

Patti: Talk about a snooze fest. Oh, man.

Eric: That is a snooze fest for us for sure.

Patti: We’re not going to talk about all that. That is part of this legislation. It is something that they want to target.

Eric: The thrust is targeting multinational corporations that have great ability and resources to defer, hide income, and so forth.

Patti: You got it. Good. Let’s focus on the income tax changes as well as the estate tax changes because they’re big. I’m going to say especially the estates’ tax stuff. Let’s focus on the income tax. What’s the proposal say? Who’s it going to hit, and what should people do today?

Eric: You always have to think about in these first couple situations is the rate upon what level of income does that rate then apply? The first is this proposal. Keeping in message with the whole election cycle that we’re not going to raise taxes on anybody below $400,000 of income.

The next proposal says, “Let’s take that top tax rate of 37 percent, go back to the 2017 level of 39.6, but rather than have that 39.6 kick in at $628,000, we want it kicking in at $450,000 if you’re married, $400,000 if you’re single.”

Statistically, if you’re making 450 a year as a household, you’re in the 98th percentile. The proposal wouldn’t apply to a lot of people, but that’s one of the first changes that is being considered.

Patti: More of that income is taxed at that higher rate. We’re talking about almost $180,000 taxed at that top tier, so it is not inconsequential. It’s a broader tax. More people are going to be caught in that highest tax bracket.

Eric: There’s this other interesting one that would be brand new, which is the surtax. If you were in an extraordinary high-income year where if you’re married, your adjusted gross income is over 5 million, 2.5 million if you’re single. This is something that would be brand new.

Again, it would not ensnare most individuals, but it would certainly affect people that have a large transaction that occurs in a single year, like, let’s say, a sale of a business or some kind of divestiture of a major asset.

Patti: Real estate, something of that nature. It’s setting a precedent also that’s saying, “OK, if you’re at a particular tier, we’re going to hit you with a surtax.” Again, we don’t know what we don’t know, but I wouldn’t be surprised if this gets passed this way, the level upon which that surtaxes hits could affect more people going forward.

I think the key thing that you said there, the key again, Eric, is adjusted gross income because that is different. Really important, everybody, listen up on that one.

Eric: Right so, all these tax laws that are proposed are based on adjusted gross income. A lot of people think, “How can I evade this? Maybe by making a charitable contribution or having…

Patti: Mortgage interest…

Eric: …additional deductions?” All these things are being applied on adjusted gross income, or at least the surtax, in that case, would be applied there. It’s a key consideration.

Patti: Be careful. Be careful. Don’t get caught in that. Basically, what we’re talking about is instead of 37 percent, the exposure is 42.6 all in.

Eric: Right. When you add everything in with the surtax and so forth. This brings into play if you’re not maxing out employer-sponsored retirement plans if you’re a higher-level employee that has access to a deferred compensation plan. These are vehicles where you can get that AGI number down below the limit.

Patti: It is really important. That is very, very key because there’s a domino effect with all of this. Not only are the ordinary tax rates affected, but so are capital gains, right?

Eric: Exactly right. This requires advanced planning and modeling because things like a deferred comp plan has to be made in advance. You can’t change it. You got to make it the year before. You have to really look at the bracket and look at all your options.

Patti: Which is why we’re talking about this now. Always remember, by the way, those of you who are listening today and watching this video, this is based on what we know today. They’re still making the sausage. These rules can change between now and if this thing eventually gets passed, so stay tuned.

We’ll be doing probably another podcast, but in the meantime, look at the worst-case scenario and understand that now is the time that most employers are requiring you to make an election on your deferred comp plan. You may or may not have been involved in it. This is the time to look at it really closely.

Worst comes to worst, you’re reducing your taxable income even if the tax rates stay exactly the same. You’re just taking additional money and putting it away for later on. It’s a forced saving, depending on your employer and you have to understand the rules of your plan and understand the potential risk.

Boy, it’s good sound planning, anyway. Right?

Eric: Right.

Patti: Talk about capital gains.

Eric: Let’s think of this in the old-fashioned term. We’re talking about a tax on labor. What about a tax on capital?

Patti: Right.

Eric: Now, that’s a separate tax regime, separate tax system, and the rules are changing there as well.

Patti: Here’s the thing that made me mad. I don’t know about you, Eric and those of you who are watching, they kind of slid something in at the last minute and here’s what it is, this 25 percent rate on capital gains at certain levels, that is retroactive to September 13th of this calendar year. If you sell anything after September 13th and you’re ensnared in this…

By the way, the new rates don’t become effective until January 1st of next year. We’re talking about those people for joint filers who may have income over $501,000 plus or minus. If you’re in that bracket and you sold something after September 13th, you’re paying the higher tax.

Eric: Yep, exactly. Right. It is sneaky just because the idea is they don’t want people rushing for the exit before year-end to take and manage…

Patti: Which is exactly what we would be doing, right?

Eric: Yeah.

Patti: I don’t know about you, but we’d be making some phone calls and doing the analysis. Eric, we already bought a software program to do the analysis to say, does it make sense to sell for capital gains at the current rate or wait, and at what point what’s the crossover period? That’s off the table. So much for that software.

Eric: It’s the way software goes, right?

Patti: Yep, you got it.

Eric: Again, it’s that the same old story here. It’s the rate and what income does that new rate applies. I think the vast majority of people, the same rates of 0 or 15 percent will apply. It’s only again the high-income earners, so they’re increasing the rate and lowering the threshold when that rate kicks in.

The good part about capital gains is that you do have a measure of control over when things are realized. Ideally, that might mean holding on to an investment, and maybe selling it over time rather than it all at once, let’s say when you retire, but it’s challenging because there’s always risk to holding an investment.

You always say all the time, I’m going to steal a saying from you, don’t let the tax tail wag the dog.

Patti: Fundamentals are important because, yes, there might be a tax, but don’t you want to keep the money? You’re still going to keep 85 percent of whatever it is.

If you’re holding onto an asset, whether it be a stock, or a mutual fund, or a piece of real estate, especially right now, you might have to pay a higher tax, but you’re still going to end up with more money.

Eric: It’s an important distinction here to remember too. What’s the goal of investing? The goal is for appreciation, to make a profit. Wherever we can be strategic and help smooth that out or lower it, absolutely you want to do that, but I would much rather pay a capital gains tax than have a carry forward loss.

Patti: You betcha. Absolutely. For those people who are listening, there are certain asset classes where you can do it over time. That’s called an installment sale. That’s probably going to become very popular for those of you who own businesses, rather than get a lump sum, have an installment sale so that you’re not paying taxes all at once. That’s still available. There are definitely still some planning opportunities for people who own businesses, both from an income tax and an estate tax perspective.

Eric: Then there is this other sneaky one that hides in the tax code. Which is this net investment income tax.

Patti: Yeah, ugly.

Eric: In the current law, it says 3.8 percent tax that gets applied above certain income levels but it’s being applied to passive incomes, so things like interest income, dividends, capital gains. Well, they’re expanding the definition, so now it’s not just passive income, it’s income earned in any kind of trade or business.

They’re going to raise the income thresholds before this kicks in, but again, they’re expanding the definition. Again, really targeting high-income earners, which tend to be business owners and things like that.

Patti: Yup, realtors, everybody. You know you got another 3.8 stacked on top of everything else.

Eric: You’re absolutely right, then we’re going to have that.

Patti: OK, so let’s talk about the estate tax changes and the gift tax changes because that’s big.

Eric: I feel like for you this is the icing on the cake. This is your forte.

Patti: I don’t know, maybe it’s philosophical, but people work all of their lives to save, accrue, pay the taxes. Done, you set it aside, and then somebody passes away and you’re getting taxed all over again. Under the current law, you can leave $11.7 million per individual to your heirs. It could be your children, it could be other people, etc.

A couple can leave $23 million without a federal estate tax. The excess over that is taxed at 40 percent. Keep in mind, everything you have is included in that number. It is the value of your home, your retirement plans, your life insurance, everything is included no matter where it’s located, so it can add up pretty quickly.

Now, the new proposal is basically accelerating the time when the Sunset Provision was to kick in. The Sunset Provision, we kind of knew that they were probably going to take that 11.7 back down to five and a half. What they threw in here…Again, this was a surprise.

I don’t think anybody was expecting it because, as they were doing this, we had lots of people in Washington who were giving us updates in terms of what was and was not included, and estate, reducing the amount that you can leave to others was not part of this initially and then at the last minute, it was included.

Basically, under the proposal, effective January 1st of next year, the proposal is six million per person. Still a lot of money, so let’s understand that most people are still not going to be affected by estate taxes.

But for those of you who are listening where when you add it all up, it is currently close to that point. Because, chances are, you’re not going to die tomorrow. The estate taxes are due at the second death. Hopefully, you’re going to live for another 10 20 years.

The question is, what happens in 10 years? What is your estate going to be in 10 years or in 20 years? To understand the scope of the issue and say, well, is there anything that I want to do now to capture what we have until December 31st.

Then going forward, what do we do from there? How do we do that? What do you do? What are the options? By the way, the rate is going to increase from 40 percent to 45 percent, so again, higher rate on the excess over that amount.

Eric: I was going to say it sounds like we’re moving over to a key consideration, right?

Patti: Yes, very key.

Eric: Is this where you’re going to take a sunset and make it a sunrise?

Patti: Well we are going to do a sunrise, absolutely.

Eric: Because we’re all about the sunrise.

Patti: You got it. Also, there is a great opportunity through the end of this year to do something and to capture something that we will probably never see again in our lifetimes. That’s pretty much everybody’s assessment.

Eric: The idea is to try and use it before you lose it, right?

Patti: Exactly.

Eric: Then what are the strategies you could do that?

Patti: Here is the deal. Let’s pretend Ed and I have a taxable estate. Basically, you can do something called a spousal lifetime access trust. I’m making him do it.

I’m making him do it.

Eric: He’s giving you the gift?

Patti: Oh, yeah, you better believe that. He’s going to put in 11.7 into this thing called a SLAT, or a spousal lifetime access trust. Now, keep in mind, he’s still alive and I’m alive. I have lifetime access. I can get all of the income.

I can get whatever I might need for my health, education, maintenance, and support. Those are called the ascertainable standards. It has been tried, tested, you’re good. He puts it there, we have access to it if we need it when we need it.

To the extent that we don’t, here is where the real benefit comes. First of all, OK, we are getting another $5.7 million that out of the taxable estate never was taxed. That’s just the beginning though, Eric, because in addition to that, to the extent that we don’t use it, use the Rule of 72, 7 percent rate of return.

Every 10 years, that capital will double. Round it up. $12 million becomes $24 million, becomes $48 million in just 20 years, by doing this thing called a SLAT, we’ve avoided the tax on almost $50 million. At 45 percent, that’s a lot of money.

Eric: Probably more, we all know Ed’s going to live to 120, right?

Patti: Absolutely, yeah.

Eric: For sure.

Patti: It will be Ed, I’m sure. A spousal lifetime access trust may be something to consider. What else is available there? Well, there is something called a qualified personal resident’s trust, where you can take either a home or a vacation home.

Neither one has ever been rented. It has to be a legit residence. You can put it into a trust. Here is the deal. It’s not a gift today because any time you put money into a trust, it’s a form of a gift. Let’s say that you have a property, let’s say it’s worth a million dollars. We ran these numbers on a 60-year-old and we did a 20-year trust. I’m just going to round off numbers. Because it’s not a gift today, it’s a gift 20 years from today, there is a certain discounting that is allowed. Instead of using up a million dollars of that wonderful 11.7, we’re only using 500,000.

The asset is in this trust. It’s called a grantor trust. If this is your situation, you continue to pay the real estate taxes and the utilities just like you owned it before. What happens at the end of the 20 years? Well, this is where you got to really understand how it works because at the end of the term, everything is done and the kids own the house.

If it’s a house that you’re living in, just understand that you better be nice to those kids because they’re going to own your house.

Eric: Interesting concept then. Does that mean they have to come in and clean it then?

Patti: Oh, yes.

Eric: That you can live there but they clean it.

Patti: Totally. It’s payback time.

Eric: They’ve got to put food in the cupboards. It’s just a natural assumption.

Patti: You got it. Exactly. By the way, they’ve got to provide the home healthcare, they got to do all that stuff.

Eric: Cut the grass. Fill up dad’s lemonade when it gets low.

Patti: Yes. All right, so here is the real perk in the right situation though. Do you know how you can leave $15,000 per person per year? That’s the gift tax exclusion. Again, understand how gifts work. You can gift $15,000 to all of your children, their spouses, your grandchildren. There are no forms that have to be filed there is no 709 gift tax return. You’re good.

What if you want to help one of the kids out with a home, and you want to give them $150,000 for the down payment? Well, that’s a different ball game. That’s a gift over the exclusion, so you have to file the 709. Here is the thing. You can use that 11.7 while you’re living or when you die. It can be used either time.

This is where we’re taking advantage while we’re living before it gets taken away. It’s a neat way of taking advantage of the rules as they are. A lot of people ask me, “Well, Patti, how about if I don’t want to do $11 million? We don’t have that much. Why don’t we just do three?”

Here is the deal, you’re not really accomplishing anything. Because we know you’re going to have six available under this proposal, so you’re not accomplishing anything.

To really get some leverage out of it, you want to gift in one form or another, spousal lifetime access trust, qualified personal residence trust, or some of the other tools that we still have available through the end of December. It is a form of a gift, and you’re using up that $11 million.

Eric: I want to clarify that point because, originally, when I was looking at it, there was a little bit of a point of confusion for me, which is, if you don’t maximize what’s given to you, what’s going to happen is it will go to six and then they will back out any prior gifts. It’s not like you can use a little bit above and you’ll still have six.

It goes to six and then they back up the prior gifts. To your point, if you don’t utilize it, it’s going to be a debit against that six million.

Patti: Exactly, Right, because when you file that 709, they’re keeping track. They’re keeping track of what your prior gifts are and when someone passes away, that final tax return it’s adding all those prior gifts to figure out, do you have anything left? What is the excess and what’s the tax?

Eric: Another interesting point that was left out which was a big topic…

Patti: Yes, big.

Eric: Step up in basis, that’s not there. There is still going to be, as it is now, step up in basis.

Patti: Basically, and that’s important, Eric. Really important for everybody listening to know because that was contentious and that was something that we were honestly worried about. Here is the way this works.

Let’s say that you paid $20,000 for an investment, and the value of that grows to $100,000 as of the date of death. You’ve held on to it. You didn’t need the money, and now it’s worth $100,000.

Well, under current law and even under this proposal, the cost basis of what you paid for it, it’s an accounting thing, it just steps up to the fair market value as of the date of your death.

I will tell you in my own family situation. My parents had a place in the Poconos, they paid $50,000 for it. When dad got sick, we changed the deed and moved it out of joint names, and we moved it into dad’s name. We pretty much had talked about it because dad loved it, but mom wasn’t loving it.

What happened was, when dad passed away that $50,000 cost stepped up to the value as of the date of death. That was $250,000. My mother sold the property, she paid no income tax on all of that gain.

Step up in cost basis is important for your planning, it’s important for your portfolio management, and it has been retained. Very important. The reason I’m making a big deal about this is that this would have been a very broad tax. Here the administration is coming out and saying, “We’re only taxing the rich.”

“Only those people making over $450,000 or $400,000, and only people who have more than $12 million in assets. We’re not going to hurt or we’re not going to tax people, Middle America.” Guess what, that would have crushed Middle America because it’s a broader tax.

I don’t know about you, but there are a lot of people out there who have investments and real estate. Think about your home. You’ve probably got a gain on a primary residence or a vacation home. Under current law, it steps up in cost basis. If they had said no more step up anymore…and it was worse.

You ready for this one? They proposed that there would be a valuation upon death. Whether you sold it or not, you got to pay the taxes then. It was quite draconian.

Eric: You mean you have a tax bill without a cash flow to pay the bill because you haven’t sold the asset.

Patti: Exactly, which is really important. You’ve brought up an important point with all of this when we think about America, we think about, what is America made up of? It is made up of small businesses and farmers. The estate taxes really hurt small businesses and here’s why.

Let’s say that you have a business and it is…I’m just going to use a value of five million dollars. Now, here’s the deal. You might think it’s worth two, but the IRS is going to think it’s worth five because they want their money.

You’ve got this business and somebody passes away, the IRS says, “OK. Fork it over. You got to give us 45 percent of that business plus estate, so half the value of that business. $2.5 million has to be paid in the form of a tax.” Family looks around and says, “We don’t have that kind of money. Where are we going to get that kind of money?”

Guess what, they got to sell the business. This is exactly where the term fire sale came about. Everybody knew, “Hey, this family farm has to be sold to pay the tax. We’re going to give them 40 cents on the dollar, 50 cents on the dollar.”

The family didn’t have any choice because the tax bill was due in nine months. They had to sell the farm or the business to pay the estate tax.

Eric: I guess the other thing that’s a real challenge, assuming that…again, this is all proposal, these new grantor trust rules, planning would usually call for something called an irrevocable life insurance trust, to create a life insurance policy that’s removed from the estate but it gives you that liquidity.

As you said, so much of America is made up of small businesses and farmers. It’s a liquid asset. This was a technique to create the money to cover the tax, so you avoid that fire sale. Now they’re changing the rules on that, on that insurance.

Patti: It’s brought back into the taxable estate.

Eric: It can potentially be brought back into the state.

Patti: Again, I’m so glad you brought it up, Eric because this is really important for everybody listening. If you have an insurance trust, an irrevocable insurance trust, which is exactly what Eric said, it was there, you pay a premium, you pay your $10,000 a year, or whatever it might be for your million dollar insurance policy.

Hope you live a long time, but if you don’t, at least that money would come in triple tax-free because of life insurance, there’s no income taxes due, there was no estate tax due, and there’s no inheritance tax due, as long as it’s owned by an insurance trust.

Now, where do you come up with the money to pay the premiums? Typically mom and or dad, or both, make a gift into the trust. It’s held there for a period of 30 days.

After that period, it pays for the insurance. That is what is being threatened, because if after January 1st, if you do that there, the grantor rules are changing and that’s going to cause inclusion.

Some of that million dollars that you thought was going to come in tax-free, guess what, is not going to be tax-free, anyway, or a portion of it. The takeaway from here, the key consideration is, if this is your situation and you have an insurance trust and you really want to have it to provide that liquidity to pay the tax and you can’t say in the trust, please use this to pay the tax.

It’s a complicated formula I’m not going to get into it, but the fact of the matter is, at least you have the money to pay the tax, so you don’t have to have the fire sale. The takeaway from this, where the planning technique is to front-load your insurance trust between now and December 31st.

Throw in 10 years of premiums. Again, assuming that you even have it. These are big world problems, big problems but again if you don’t know about it, you’re not going to do it, and you wish that you had.

Throw in $100,000. By the way, it doesn’t have to be cash you can transfer in existing investments, just do a journal from one account into the insurance trust account. It’s there to pay the premiums for the next 10 years, so you’re good.

Again, we want to be creative. We want to be proactive. We want to understand the implications and how each one of you who is listening, the things that might apply to your situation, throw out the rest.

For those people where this might apply, there are things that can be done, and honestly, should be done. The thing about some of this stuff also is that there’s no real downside. You do a spousal lifetime access trust.

Ed set it up. Remember, he’s setting it up for me. He sets it up. What if the law doesn’t change? What have we given up? Really not much. What about the personal residence trust, what have we given up? Really not much, because again, it’s a grantor trust.

Eric: Proactive planning really pays dividends and so forth. What do you think?

Patti: IRAs, retirement plans, funds scam. That’s going to affect a lot more people. What’s happening in the retirement area, I’ve talked long enough. Eric, you take it away here.

Eric: Thanks. There are some rules that are not going to touch most Americans. There have been certain very crafty entrepreneurs that have used IRAs to accumulate massive, massive balances and IRAs without ever paying any kind of tax. These laws are targeted at these certain individuals, where an IRA balance might be above 10 or 20 million.

Now, for the average person putting in the maximum every year, it’s nearly impossible to get there without just an absolutely fantastic compounded rate of return. These are situations that they’re trying to head off.

If your IRAs are above 10 million or 20 million now, there are special required distribution rules, regardless of age where you have to distribute that money.

Again, most people aren’t going to be faced with this. The one that is more germane to the average American techniques that most people can take advantage of either individually or through employer plans really deals with rollovers and conversions.

They’re changing the rules there, where they want to eliminate the ability to move money from an IRA to a Roth if you’re above certain income limits to eliminate the ability to convert after-tax money into a Roth. You might have heard of this strategy called the backdoor Roth.

Patti: This is a big one. This is a big one personally because this is what we were having all of our clients do if they had it available through their employer and have the cash flow.

What that means is what you could do is make contributions up to the Internal Revenue Service max, $26,000, depending on your age, but you could still put in more into your 401(k). You just wouldn’t get a tax deduction for it. That’s called an after-tax contribution.

When a person retires under current law, you have a one-shot opportunity and it’s a great opportunity. Take all that after-tax money that you were saving year after year after year and move that instead of rolling it over into a regular IRA, which you never want to do, FYI.

You roll it into a Roth IRA. Guess what? You don’t owe any taxes because you already paid the taxes on it. It’s a sweet deal. Most Americans are not going to be able to get that kind of money growing tax-free for the rest of their life when they don’t even have to take the required minimum distributions.

Eric: Yeah. I think they’re just trying to short circuit these ways to get money into Roth IRA accounts. Because again, the growth will never, ever be taxed and they’re just trying to figure out ways to curb those avenues to get it in there.

The other thing too is you have to distinguish some things like the backdoor Roth are these in-plan conversions of after-tax money, the Roth money. Those things are being excluded, but some of these other things, conversions, and rollovers, are dependent on income. It’s not like some of it is going away.

If you’re going to retire, you might just have to defer a tax year before you do it, so that way you’re in a lower bracket and so forth.

Patti: By the way, I’m glad you brought it up. This is not for everybody. There are situations where it does not make sense for someone to do a Roth conversion. It really doesn’t. Again, run the numbers, understand the downside of doing it. Because if you do a Roth conversion, you’ve got to pay that tax right away.

Eric: Yeah, that’s an important point. It’s not like the transaction is for free. You’re just making an election, is it better to pay tax now or later? That’s driven by tax rates and your assumptions.

Patti: I hope it’s OK, Eric. I just have to say this. Let’s go back to the estate tax stuff for a second. Here we go. You think about people who have been saving, saving, saving. They have these wonderful balances in their IRAs, in their 401Ks.

Let’s say that someone accrues $2 million. Not unusual between a husband and wife to see that kind of money in a retirement plan. Basically, pass away, etc. The problem is that that $2 million is included in their taxable estate.

You stack on top of everything. When you think about it, someone is paying a tax on a tax because the kids are going to have 10 years to pay the taxes on those, I say the kids, anybody, your heirs are going to have to pay the taxes on that $2 million.

Basically, $600,000, give or take, is really a tax that somebody is going to have to pay either right away or eventually. When we include that $2 million, it’s not really $2 million because $600,000 is going to go in the form of income taxes. Now you’re paying estate tax on an income tax. You’re paying a tax on a tax. We don’t want to do that.

For those people that may have an estate situation, this is the year. This may be the year to do a Roth conversion on those retirement plans. Pay the taxes while you’re alive so that the kids aren’t paying an estate tax on it when you pass. Does that make sense?

Eric: Yeah. Gotcha.

Patti: All right, good deal. Thank you for letting me digress.

Eric: No problem. Any time you want to go back to estate taxes, just let me know. I’m in the passenger seat here. You’re driving. Maybe I’ll chime in and be a front seat driver.

Patti: Good deal.

Eric: Where’s the car going next?

Patti: Yeah. I say we pull this all together. Because I think we’ve talked a lot about history. We’ve talked about the history of taxes and what is being proposed and some of the key considerations. Really, to boil it down and really keep it as simple as possible, here’s the deal.

If you have income of $400,000 to $450,000, above those amounts, those are the people who may be paying a higher ordinary income tax rate and higher capital gains. Just understand that going forward.

When it comes to estates, there’s a lot of things that may change. This is the time to consult your adviser, your estate planning attorney to figure out is there anything that we should be thinking about or considering?

A lot of this other stuff, it’s noise and it will continue to be noise until we know what the final proposal looks like. The things that were not included, important, step up in cost basis is still there.

The SALT limitation, we were hoping that they would remove that, state and local income taxes, that $10,000 on your itemized deductions. A lot of states are pushing to remove that. That is still there. That did not change.

Like kind property exchanges. For those of you who have rental properties, there is a nice little perk that you can sell one and buy another. As long as it’s a similar type of property and you follow all the little nitty-gritty rules, no capital gain tax is due. That remained. That was also being threatened, but that did remain in this proposal.

For those people who have businesses, some of the discounting tools like family limited partnerships and things of that nature that were being discussed, etc. Those opportunities will also remain.

Eric: The other thing to remember too is that these are all proposals. This is not the first one. Our branch of government, the legislative branch made up of the Senate and the House, Senate has what’s called the Senate Finance Committee. They are responsible for overseeing taxation. They have a proposal.

The most recent one we’re talking about today came from the House, the House Ways and Means Committee, which is the House version that oversees tax policy.

If they decide to come out with something new before the end of the year, it looks like we have a wonderful opportunity to do another podcast. Because this is not the first time we’ve had one of these and it continues to evolve with every iteration here.

Patti: All of this stuff is very important. Again, keep in touch with your advisors. Those people have their finger on the pulse of what’s going on in Washington and most importantly what you can be doing about it. Thank you, Eric. As always, this was fun.

I hope you enjoyed it as well. Lots of topics and lots of information, history, etc. Perspective, hopefully, and some action items as well. Things, key considerations that can make a big difference for you as well as your families. Thank you so much for joining us. Go to our website, staging.keyfinancialinc.com.

We’ll have all of this information on the website. In the meantime, I hope you have a wonderful fall. I hope you have a wonderful fall. Enjoy your family. Happy Thanksgiving. I’m hoping that this gets launched well before Thanksgiving. Thank you so much for tuning in. Take care.

Ep82: It’s Time for Medicare Open Enrollment!

About This Episode

Patti meets once again with her Chief Planning Officer, Eric Fuhrman, to sift through all the Plans and regulations of Medicare. Open enrollment for 2022 starts October 15th and ends on December 7, 2021. Each Plan offered in Medicare has different coverages and it’s important that consumers are aware of the inclusions and limitations associated with each. Patti and Eric carefully dissect the nuances of each Plan, while also reminding the listener of key dates in the timeline to be aware of. Also discussed are key considerations if a spouse is still employed and has other healthcare coverage.

Patti Brennan: Hi, everybody. Welcome back to the Patti Brennan Show. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. Joining me today again is the professor, Eric Furhman. Eric and I are going to be talking about a wonderful topic. It’s Medicare, and the dos and don’ts during the open enrollment periods, as well as the other enrollment periods that are relevant to Medicare and some of the different coverages it provides.

Welcome to the show, Eric.

Eric Furhman: Thank you, Patti. Good to be here again. I’m really excited for today’s topic. I was having trouble sleeping last night, so I’ve had to double my caffeine intake to be ready to go for this one.

Patti: This is the most exciting topic, isn’t it? I’m sure all of you who are listening and watching today are just at the edge of your seats, right? We’re going to make this fun, enlightening. There’s a reason why you’re tuning in right now.

Eric: I like to think from the listener’s perspective. I always like to try and put myself in their shoes. I like to believe it’s because the Patti Brennan Show is the most electrifying podcast in the financial industry, but I think under the surface, what’s really important, and I hope what people keep tuning in for is that it’s educational.

It’s content-rich, and more importantly, the topics are timely. That they’re germane to the present situation. We’re looking at Medicare open enrollment, which starts in two days, and that’s what we’re here to talk about today.

Patti: And, most importantly, we’re going to end the show with key considerations, action items, things to consider, so that it’s also really practical.

Eric: Yep, absolutely, and keep your ears tuned in because you’ll have a little notification when the key consideration comes in to really reinforce the topic.

Patti: Absolutely, OK. Let’s start from the very beginning, Eric, because I think it’s really important that everybody sets themselves up properly as it relates to getting the best coverage they can for the least amount of money. Let’s talk about the initial enrollment process.

Eric: Yep, absolutely. I think you brought up a good topic, so spoiler alert. We’re talking about a government program, so it’s complicated. There’s a lot of things that you have to navigate when it comes to open enrollment.
As you point out, there are many different enrollment periods. We want to highlight all of those today, not just the open enrollment period, which is most relevant between now and December…

Patti: I don’t know about you, Eric. I find this is the most misunderstood area during open enrollment. People think, “Oh, I can change anything.” The answer is, “No, you can’t.”

Eric: You can make some really critical mistakes if you’re not careful or working with somebody to provide proper guidance. I think the big thing is that, really today, the open enrollment is applying to people that are already on original Medicare and Medicare Advantage.

That’s what the open enrollment period that we’re about to enter is for. Really, each year, Medicare publishes information, data, and statistics on these plans that are provided to participants. Then open enrollment’s really that opportunity to go through review coverages, review changes, review costs, and then be able to make a change if there’s a better option that fits your needs.

Patti: Right, because you may have selected a coverage, a company, or what have you, and they may be taking away some of the coverage that you actually need. You got to go back to square one and say, “OK, what’s plan B?”

Eric: Yeah, exactly right. Maybe a good segue here is to start and say, “Well, when can you initially enroll?” There’s that initial enrollment period that applies when you’re approaching age 65, so maybe that’s a good place to start.

Patti: Let’s do that, because, boy, if you don’t do that right, it could be an expensive mistake. Let’s talk about when can people start to enroll for Medicare?

Eric: Basically, age 65, that’s the critical number. When you’re within three months of your 65th birthday, the month of your birthday, and three months after, that’s a seven month enrollment when you can enroll in what’s called “original” Medicare.

This is the Part A hospitalization, Part B, which is the medical insurance, and then you can get a meta gap policy and so forth.

Patti: Let’s really simplify this, Eric. Part A, hospitalization. Part B, basically anything but hospitalization.

Eric: Right, seeing the doctor, tests.

Patti: Seeing the doctor. Think about it as inpatient, outpatient. That’s A versus B. Now, inpatient, understand that it only covers 60 days. Part B, outpatient, again, there’s different levels of coverages, etc. That’s really important to distinguish.

Now, you don’t have to get what is called a meta gap policy, but this is the time also to be looking at that kind of coverage, as well as Part D, which is prescription drug coverage.

Eric: Exactly right. The thing that you have to consider is, when you’re getting to 65, some people might not be working and retired, at which case, you want to transition to Medicare. There are many people that may be working, or they have coverage through a spouse who is working.

There’s a critical distinction there to determine whether or not you should sign up, because that can really make a difference. The distinction for Medicare’s purposes is how many employees work for the employer?

If you work for an employer with more than 20 employees, then the group plan is the primary player. Medicare is secondary. In that instance, you don’t have to sign up for Medicare at 65, because you have coverage through the group plan, and the group plan’s the primary payer.

If you’re working for a very small employer – and most of the employment in America is through small business, where there are less than 20 employees – then, in that case, Medicare has to be the primary payer, and the group is secondary.

If you’re in a situation like that, you need to sign up for Medicare Part A and B, because if you don’t, then you won’t be able to get in under what’s called the special enrollment period, where you are exempt from these late enrollment penalties. It’s really critical to get in that seven-month window.

Patti: It’s a really important time to evaluate, “OK, what’s the worst thing that could happen? I’ll sign up for Medicare, and OK, I’ve got the group coverage, but Medicare is pretty darn good, too.” I think there’s a lot to consider and really understand in terms of what’s the penalty if you don’t sign up for Medicare?

Eric: Right.

Patti: Why don’t you go through that? That, to me, is really the issue here.

Eric: You’re right. If you already have coverage, and there are more than 20 employees, you don’t have to sign up. You have what’s called credible coverage. It’s a special kind of exemption, where you can get in under a special enrollment period eventually when you retire or lose the employer coverage.

The question is, should you sign up anyway? Is there any downside? Usually, signing up for Part A really doesn’t have a downside. There’s no premium to it. The only consideration there is if you’re participating in a healthcare savings account.

You can’t have Part A in a healthcare savings account, because there’s a penalty. There’s basically a six-month lookback.

Patti: Let’s take a step back. An HSA is an account that is established if you choose a high deductible savings plan. You choose the high deductible savings plan, and then you have the HSA, which is really, it’s one of those free lunches that probably will go away at some point, but it’s a really good deal in the right set of circumstances.

This is not one of them, OK? Once you hit 65, you really do want to turn that off, because the penalties of keeping it are significant. To me, I think about this whole issue when I think about insurability, because if you don’t sign up and get the proper holistic, all-around coverage, you may not be able to get the kind of coverage you want without proof of insurability.

An insurance company can say, “Hey, you know what? You had your opportunity within that seven-month period of time, but you’re not looking so healthy anymore, so we’re going to deny providing coverage for you.” That, to me, is a huge risk.

Eric: Again, this would go, I guess, beyond when there’s employer coverage, but talking about what’s the guaranteed issued rights with your Medicare supplement or meta gap policy. Which will tie into some of the special enrollment considerations and so forth with some of these other things.

The initial enrollment, I think the big thing to tie it together is it’s a seven-month period of time where you can sign up. Again, you want to do that unless there is existing group coverage. Again, the number of employees in that group plan, or the number of employees in the employer, really dictates whether you sign up or not.

Patti: I think the other thing that we need to consider is if someone is no longer working for their employer. Let’s say that they’re 64 and six months, and they are no longer working for their employer. They decide to go on COBRA.

Rightfully so. That’s the right choice. COBRA lasts for 18 months. However, that seven-month period, and the exclusions, if you will, are based on when the work stopped, not when COBRA ends.

Eric: Right.

Patti: Which is really, really key.

Eric: Yep, exactly right. That’s a careful consideration, too, because a lot of people would think, “Well, I have COBRA, and then it’ll just switch when it’s over.” The work stoppage date is the real key date there that determines when the clock essentially starts ticking in terms of your ability to enroll.

Patti: Let’s think about the example where somebody has a high deductible plan, they’ve been doing the HSA, they can’t do the HSA anymore. Is that really that bad, when we consider what the deductibles are?

Eric: Yeah, I guess that’s the question. It depends on what’s happening if it’s a Medicare-approved expense. I guess in theory, if you’re on a high deductible plan, you have to spend a lot of money out of pocket before the plan pays.

When you sign up for Part A – so when it’s an instance of hospitalization, because that’s what Part A’s covering, so let’s say you have some kind of surgery – the Part A deductible is much less. It’s less than $1,500 a year.
In essence, signing up for Part A, you have an event. You really only have to meet – again, you have to check the circumstance, but – potentially just the Part A deductible before Medicare would step in and pay.

Again, there’s no premium, and you might have a lot less out of pocket by signing up for Part A, even if you could delay it.

Patti: That works for me.

Eric: Yeah.

Patti: All right, good deal. Open enrollment, here we are. It’s open enrollment period. What can people do during this period of time? Let’s frame it in terms of the dates. It starts October 15th and goes to December 7th.

Eric: Mark it on our calendar every year at Key Financial. What are the big dates? Open enrollment, Patti’s birthday, that’s in there.

Patti: Wrong. No, no, no.

Eric: Make sure that’s on the calendar.

Patti: I don’t want anybody paying attention to my birthday anymore. No, no, no.

Eric: Right, exactly. I think the key thing for the listeners to understand is that this is for people that have a Medicare Advantage plan or are on original Medicare. This is not when you’re first eligible. You’ve already got care.

This is the period where, really, there is the most flexibility to make changes. If you’re on original Medicare, you can switch to a Medicare Advantage plan, which is called Part C. If you’re on Medical Advantage plan, you can go to original Medicare.

You can go from a Medicare Advantage plan to another Medicare Advantage plan. Prescription drug coverage is big here. This is where you can move from a Medicare Advantage plan with no prescription drug coverage to one that offers coverage.

You can go from a plan that does have coverage to one that doesn’t. I’m not sure why you would be compelled to do that. You can also join a Medicare drug plan, and you can switch between drug plans. The drug plans are referring to Part D. This is where you can go back and forth.

Again, you’re switching the main medical coverage, and also, the ability to switch the prescription drug coverage as well.

Patti: Here, I think it’s important for all of our listeners and everybody watching. It’s really important to develop a relationship with somebody who is really plugged into this area, because either you do this or you don’t.

Every year, these companies will change what they’re going to cover. You might be on a statin, for example, they may have covered it for the last five years. All of a sudden, they decide, well, they’re not going to cover that particular statin.

You’d have to go to that one, and your doctor doesn’t really want you on that other one. OK, you go to a different company that will provide and cover the meds that you’re actually on. This is an area where it really helps to develop a relationship with someone who knows you and is willing to do that legwork to figure what’s going to be the best coverage for you?

Eric: I have to tell you, I feel like had a moment there. I think we literally got into ICU nurse Patti, and you just came right out. We got the ICU nurse. That was great. Talking about statins and things like that.

Patti: Yeah, absolutely. You know what? As long as we don’t start talking about Vtac and Vfib, we’re good, Eric. We’re really good.

Eric: You would have to do that podcast solo because I’ll just be a listener on that one.

Patti: All right, good deal.

Eric: I think what’s important to understand, too, is that you’ve got a lot flexibility to change. You can actually change your mind multiple times within this enrollment period. The one thing you can’t do is switch the meta gap policy, or also known as Medicare supplement policies.

You can’t make changes there. When you’re on original Medicare, you have Part A, Part B, and then you have to have a supplemental. You can’t make changes to the supplemental. That’s very, very rigid, so I think that’s important to understand.

Patti: The meta gap policies are those policies, just to make sure everybody understands, it’s those policies that go by the letters. They go from A to N, and the coverage is different, depending on the letter. This is heavily regulated, by the way, so it is important for you to know that there is a net under there.

It is really important – this, again, is where the initial enrollment period comes in – you really want to make sure that you’re going to have the coverage that you might want and need. The cost is the cost. It’s all part of this whole healthcare issue.

Eric: I think the other important thing for people out there to recognize is, if you’re happy with your current coverage, just don’t do anything. Just keep it the same. Everything will become effective on January 1st. If you are going to switch, because there’s a more compelling plan, better pricing, there’s no medical underwriting to switch plans.

It doesn’t matter what the health history is. You can go from one plan to the other, and so forth. Depending on that distinction, do you go from original Medicare to Medicare Advantage? No problem. You basically enroll in Medicare Advantage. That will drive you out of original Medicare.

Patti: I was just going to say, there is a distinction there, right?

Eric: You’ve got to be careful. The real consideration is if you’re in Medicare Advantage and going back to original Medicare. Part of the issue here that you can expand upon is that, what you’ve got, if you’re going from Medicare Advantage to original Medicare, you’ve got to get that supplemental plan.

There’s very narrow criteria for what’s called guaranteed issued rights, meaning can you get into the plan without any kind of underwriting or where the company can deny you or charge you a higher premium?

Patti: Let’s step back for a sec. We talked about Part A, Part B. Now, we’re talking about this Advantage stuff. Medicare Advantage is considered Part C. All it is, folks is it’s a bundle of all of the different coverages.

Medicare Advantage tends to be lower cost, lower premiums. It looks really good when you look at the different things that it will cover that are not covered under Medicare A or B, and even some of the meta gap policies.
It’s a very attractive alternative, and it may be for the rest of your life. You’ve just got to really be careful because once you have it, it might be difficult to go back to original Medicare. We have had situations here at Key Financial where the Part C Medicare Advantage coverage began to be…

It was not nearly as comprehensive. They were having much more difficulty getting things covered. They wanted to go on standard Medicare, which is heavily regulated, as well as the meta gap policies, and they could not. Very important, because they had health issues.

There wasn’t an insurance company in the world that was going to insure them for the meta gap policy, so there was a huge exposure, meaning over 60 days in a hospital, it was all on them if they move back.

Eric: Right. I think anyone listening might, after hearing that – because you hear these horror stories – they would have a natural apprehension of going away from original Medicare to Medicare Advantage, but there’s something in Medicare Advantage called trial rights.

Patti: Good point. Very good point.

Eric: Let me ask you, if you’re a consumer, do you like when you get to try something?

Patti: I love it, yep.

Eric: You’re not committed. You can give it back.

Patti: It’s the puppy dog clothes, Eric. You take the puppy home, you fall in love with it. You’re not giving that puppy back, right?

Eric: Right. It’s just like cars. You get to now drive cars to see if you like it, and you can bring it back.

Patti: Wouldn’t that be nice, to be able to drive a car for 12 months, and then give it back if you don’t like it.

Eric: Well, here you go. That’s what Medicare Advantage trial rights are all about. If you enrolled, during that initial enrollment period, if you get into Medicare Advantage first, and you don’t opt in to original Medicare, you can switch back to original Medicare and get into a meta gap policy, where there’s guaranteed issue, if it happens within the first 12 months.

Also, if you’ve never been in Medicare Advantage, and you say, “I want to give it a try,” if it’s your first time in Medicare Advantage, again, you have those guaranteed trial rights, whereas long as, within the first year of joining, you had that…

I think you phrased this beautifully. I don’t want to steal for thunder here.

Patti: Go for it.

Eric: I think you said, “Mulligan,” right?

Patti: Yep.

Eric: To go back and still have those protections in place. These protections are not there if you’re someone that is just terribly indecisive, and you just keep going back and forth.

Patti: Right, switching plans.

Eric: You only have that preserved one time, for the first 12 months, and that’s it. You do get that trial period, and we’re consumers in America. We love trying stuff for free.

Patti: You know what, Eric? This is one of many things I love about you because here we are, we’re talking about this very arcane type of subject, and you just provide a balanced approach. Don’t be afraid. Don’t be freaked out about these, sharability issues because you do have this opportunity, and it still might be the right coverage for you.

Eric: I think the other part, too, which maybe we haven’t properly explained, is a lot of people may not know about Medicare Advantage. What’s the difference with traditional Medicare? The way I have always understood it and read about it, basically, it’s like your employer coverage.

It’s a one-stop-shop that really has everything together, the limitation there is you’re working with an insurance company. You’re within a network in terms of how your care is provided, where Medicare is ubiquitous. It’s accepted across the country, no matter…You can basically go anywhere, but just an important distinction there.

Patti: Have we covered everything that we need to in open enrollment?

Eric: I think we’re good there. The key consideration, right?

Patti: Oh, there you go. Ding, ding, ding.

Eric: There we go, yeah, bringing that back in. The big thing is that’s where the most flexibility is for people to update and make changes, but it’s not the only run. There’s the Medicare Advantage open enrollment that starts January 1 through March 31st. It’s a second bite at the apple if you will if you decide you want to make changes.

Patti: For anybody who’s listening to this, and you’re driving, please don’t worry. You do not have to be writing this stuff down, because we’ve provided all of this information on a white paper. You’ll have it right on our website.

We’re going to be talking about actually five different periods, and they’re all really important. We’ll have the key considerations in the white paper, so you can just go to our website at staging.keyfinancialinc.com, print that out, and you have it right laid out in front of you.

Eric: Yep, exactly. When you log in, you’ll see Patti’s angelic picture on the front, so you know you’re in the right place.

Patti: Oh, boy. Oh, boy. I’m going to put your mug up there, you know what? That’s what we should do. We just rotate it, because this is really a lot more than Patti Brennan, that’s for sure.

Eric: You’ll have to bury it somewhere on the website, so who knows? The Medicare Advantage, that’s really where, if you’re on Medicare Advantage, you can then again switch to another Medicare Advantage plan, and you can also drop your Medicare Advantage and return to original Medicare.

Now, the distinction here is you can only do it once in that period from January 1 to March 31st. You can’t change your mind one election, then it’s done. Again, Medicare Advantage to Medicare Advantage or Medicare Advantage to original Medicare.

What you can’t do, unlike open enrollment, is go from original Medicare to Medicare Advantage. That’s really the big thing there that you can’t do. It’s much more limited in scope.

Patti: You can’t change drug coverages. You can’t do a lot of the things that we’re able to do right now, right?

Eric: Yeah. There are a couple of other can’t dos, but yes, you’re right. If you’re in original Medicare, you can’t switch your prescription drug plan and so forth. Again, a couple of considerations there.

Patti: Very good.

Eric: Then there’s another one. These dates are overlapping, but then there’s the Medicare general enrollment period. I hope nobody takes offense, but we consider this the procrastinators’ enrollment period.

Patti: Yeah, and it’s important, because there are those procrastinators out there, or they may not have realized the time limit in terms of when they have to enroll. For those of you who are listening, if you’re not on Medicare, and you’re like, “Oh, my goodness. I guess I need to do this,” when can you do it, and what are the caveats to that? There are some.

Eric: That Medical general enrollment period gives you the second chance if you didn’t get enrolled during that seven-month enrollment period, but the downside is, OK, you can enroll, but your coverage doesn’t start until July 1st.

You’re going to be without insurance for a significant period of time, and unless there’s some kind of special circumstance, you’re probably looking at a late enrollment penalty for, say, your Part B coverage, Part D, and so forth.

Patti: We should probably talk about Part B because that’s not free. What is important for everybody to know is that the premiums, I think, based on, let’s say, $81,000 for joint filers, you’re in the $180 per month range, per person.

It can quickly rise to close to $500 per person, per month, for just Part B, not even including the meta gap policy. This is not going to be without its costs. It’s important when you do your financial plan to include the cost of these coverages in your retirement projections because they’re there.

I would also include a buffer for additional things that may not be covered, to the extent that you want them to be. Again, understand that, while you may not be on meds today, drugs today, you may be in two years or five years, so that’s another important consideration.

We find that those are the issues that can be cost-prohibitive, where people really get smacked. They go to the pharmacy, and all of a sudden, they’re paying a $700 pharmacy bill, because they just had to pick up their prescriptions for that month.

That’s a real surprise for many people, so really just make sure you understand the rules of the game with the coverage you’re selecting and continue to review it.

Eric: Absolutely. All good points to cover, and especially when you’re in retirement, most people then transition to a more rigid income structure, so really making sure that you’ve got affordable coverage. You avoid these self-inflicted wounds of late enrollment penalties, which are totally avoidable that you do that.

Patti: What’s this thing with the special enrollment period? I really like that part, Eric. That’s another period where, again, not so much a mulligan, but all is not lost if you didn’t enroll in Medicare, because there are some exceptions to the rules.

Eric: Special enrollment period, this is where I feel like we really go down the rabbit here.

Patti: OK, I’m ready.

Eric: You do it again. Just so people know as well, a great reference, and I’ll put in a little plug for them, is medicare.gov. That’s where most of this information is coming from, so all this can be found on that website to tell you about these situations.

The special enrollment is one where there’s so many unique situations that might apply, I don’t know that we can cover them all in this with the time that we have.

Patti: One of them that’s very practical, let’s talk about something that happens all the time. We’ve got people who are moving from New York to Florida, Pennsylvania to Texas, whatever. California has a lot of people going to Texas.

OK, you’re 68 years old. You’re on Medicare. What do you do then? These coverages are based on the state in which you reside, and in most cases, the county in which you reside. What do you do then?

Eric: Exactly right. That’s one of those special circumstances, where if you move to a different service area, and that coverage isn’t provided, then you have that special enrollment period to make the change with guaranteed issue rights.

It’s interesting how they define “move.” Most of us would think moving from, say, state to state, but there’s other things. If you’re working in a foreign country, and you come back to the United States. If you move into a skilled nursing facility and then come back out, that’s another opportunity to change.

The other one that’s listed there is if you’re released from jail, that would be technically a move.

Patti: Oh, I’m really happy to hear that one.

Eric: Yes. If you’ve been in prison for some period of time, you can do that as well. Also, too, these changes, you can lose coverage because you left an employer, or again, and we said, COBRA comes to end. Again, you’ve got to pay attention to COBRA, versus when your work stoppage is.

Or the plan, Medicare can terminate the plan, sanction the plan. The plan may not renew. Believe it or not, there’s lots of other situations beyond your control that could happen and put you in a special circumstance, where you can make the change.

Patti: Which is, again, really important, because I just always look at the insurability, that guaranteed issue situation, because these insurance companies, they’re getting tough out there. They really are getting tough, and they’re not going to take any risk that they can avoid.

That’s really important, I think, as we relate to this medical insurance, and making sure that, if something happened, you’re not going to bankrupt yourself.

Eric: Absolutely. The big thing is making sure you can get coverage, is one thing. The other important consideration here is the timing. Usually – and every situation’s different, but usually – within two to three months of this event is when you have to file for the change.

The window there is pretty short. You’re not getting the seven months, the six months, or the eight months. It’s usually two to three months after that circumstance that you’ve got to apply for the change.

Patti: Boy, it’s the government, so keep proof that you contacted them. Write down the people, the names, the dates, the time that you called. Try to send emails, if you can. It’s just a mess out there, so keep the proof, because there is a time limit.

Eric: Yeah, absolutely. Sadly, I guess we are rolling to the last topic.

Patti: Yeah. Now, we’ve covered the special circumstances, the special enrollment. Now, we’ve saved the best for last.

Eric: Oh, boy. I can’t wait, right? Here comes dessert.

Patti: Let’s talk about the five-star ratings. What is that all about?

Eric: The five-star rating, basically, Medicare goes out, and now, they collect surveys, pricing data, and so forth. They assign a star rating to Medicare Advantage plans and Medicare prescription drug plans, or Part D.

The important point to note is that there’s only, what was it, 21 five-star Medicare Advantage plans that are out there.

Patti: They’re not available in every service area, right? It’s not like you have 21 Medicare Advantage plans to choose from where you live.

Eric: Yeah, the five star enrollment, it’s another unique area of this whole enrollment dialog, but it may not even be available to you, as you said, because it’s not available in all service areas.

Patti: Eric, this is bizarre. It feels like the rotten tomatoes when they’re rating movies, and you’re only going for 80 percent. You want the best ratings. Why is the government doing this all of a sudden? It feels like – I could be totally off base, but – now the government is rating insurance plans?

Are they trying to get people to choose Medicare Advantage, so they’re off of original Medicare? Are they trying to incentive, say, “Hey, you’ve got to look at this insurance company over here. They’re pretty darn good. Then we don’t have to pay for your coverage, and we don’t have to cover you in you’re in the hospital, or you get really sick, and you need chemo, and all of that”?

Again, I could be wrong about that.

Eric: It’s a thought provoking question. I guess the question is, how does Medicare work with the Medicare Advantage plans. I want to go back to Rotten Tomatoes. Where do you draw the line? Is it 80 percent or above you take? In my house, my kids go for anything under 20.

Patti: Oh, boy. Back to the five star plans.

Eric: I guess to your point, I always feel like these things are done with the intent to inform the consumer. So much regulation and thing is all about improving standards, improving quality, but also, making sure you’re communicating that in an understandable way, because we’re talking about programs that affect tens of millions of people.

I would hope that would be the spirit. Perhaps there’s some nefarious intents, with someone cloaked in a secret room. I don’t know. It’s a great question.

Patti: We always talk about, everybody’s worried about is Social Security going to run out? What many people don’t realize is it’s not really Social Security that is the issue for the government. It is the cost of Medicare and these entitlement programs.

Eric: You did it again.

Patti: Oh, here we go.

Eric: Here it goes. Every time we do this, some kind of new topic comes up for future podcast, so stay tuned. Who knows, maybe, you never what you’re going to get here on the Patti Brennan Show.

Patti: Absolutely, yes, and we’re talking to talk about the new tax law – the potential new tax law – because there’s a lot of stuff that people listening can and should be thinking about before the end of this year. That’s our next podcast. That’s going to be fun.

Eric: Oh, yeah, I’m looking forward to it, but I might have to lay on the couch and take five before we come back to that. That’s a big topic to be able to talk about.

Patti: Absolutely. All right, Eric, well, thank you so much. This has been fun, as always, enlightening, hopefully, for everybody listening and watching today. I can’t thank you all enough for always tuning in. It’s just been amazing.

I hope it is fun for you, it is different. We try to take these very dense subjects and hopefully lighten them up a little bit for you, and give you really actionable steps. Again, just to refresh your memory, go onto our website.

All of this information is on our website in the podcast section. White paper, all of these enrollment periods, what you can do, what you can’t do, and some of the landmines that we’ve talked about today. Thank you so much for taking the time.

We love having you here. We love the feedback that you’ve been giving us. Thank you for sharing the podcast. It’s been unbelievable. I hate to use the word, but it’s become viral. Eric, thank you, as always. It’s just fun. We spend a lot of time in advance of these podcasts thinking about what we want to share.

You do so much work on them, and I really am grateful, so thank you.

Eric: It’s the highlight of my day, always.

Patti: Yes. That’s it for today’s show. Again, go to our website, staging.keyfinancialinc.com. If you have questions, give us a call, send us an email. We are here for you. Thank you so much. I hope you all have a great and healthy day.

Ep81: Issues to Consider When Moving Out of State

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked, but should be asked, question). There are many reasons people choose to move to another state. The hot real estate market of 2021 may have accelerated the issue for many considering retirement or job change. Before making this decision, there are several issues to consider – many involving serious potential tax consequences. Patti guides the listener through a checklist of important items to keep in mind before making the big move, to better understand the rules when establishing state residency to fight potential tax audits.

Patti Brennan: Hi, everybody, welcome to the “Patti Brennan Show.” This show is for those of you who want to protect, grow, and use your assets to live your very best lives. This is part of our ongoing “Ask Patti Brennan” series.

People ask questions and a lot of times we get the same types of questions. Today, we’re going to talk about, “I’m thinking about moving to a different state. What issues should I consider before doing so?”

You may be a remote worker and you might be tired of paying the high rents in the city. You may be retiring and want to move to a warm-weather state. What are some of the things that you might want to keep in mind as you consider moving to a different state?

So, first of all, it’s really important for you to know that you can only have legal domicile in one state. A lot of people are doing this because they want to move out of the higher tax states.

Let me be the first one to tell you, if you haven’t heard it before, a lot of the higher tax states are going after people who are moving out to make sure that it’s legit, to make sure that you are actually spending more than six months in the new state.

So you’ve got to set this up so that if you are claiming to be living in a state like Florida for example, that you can prove that you are actually doing so. That’s especially true if you’re keeping two homes. So, how do you go about doing that? Well, first of all, again, understand the six-month and one-day rule. You also want to set yourself up so that it is completely defensible.

For example, change your driver’s license, your voter registration, your passport, your doctors, that’s probably a really sensitive area and believe me, some of these higher-tax states are asking the question, “Hmm, where is your doctor? Are you really living in Florida, for example? Or are you just setting it up so that you don’t have to pay our state taxes?”

Also, you want to make sure that the second state, or your primary state that you’re moving from, can’t claim residency. You can be domiciled in another state but you may have to file two tax returns if, for example, you’re working part-time in one state and part-time in the other.

In addition to changing your driver’s license and doing the standard things, tell UPS, tell the Post Office, the IRS, have everything mailed to the new state. Other examples would be Medicare, Social Security office. If you’re a veteran, notify the VA.

Everybody that you do business with, every piece of mail that you receive, notify those people that you are now living in this new state. Again, I’ve mentioned the doctors’ offices, that’s kind of a very personal thing. Also, hairdressers, believe it or not.

These states are getting very creative. They’ll look into your EZ Pass records and see, “Gee, are you really driving back and forth? How much time are you spending in one state versus the other?” Airline tickets, I mean it’s just really incredible what they’re doing to go after that tax money.

In addition to understanding how your actions might develop the defense, if you will, against a state coming after you for taxes in their state, you really want to also consider, what’s some of the programs that you might be giving up? For example, if you have a special needs child, or you’re using some of the social benefits in your state.

States will vary tremendously, so please understand what you may be giving up or may be getting in various states. Again, the income taxes, if you’re torn between one state or another, understand the income tax ramifications, one versus the other.

For example, in Pennsylvania, 401(k) distributions, IRA distributions are not taxed on a state level whereas they are for people who, for example, move to Delaware. That’s an important consideration because, especially when you’re retired and start receiving that income, that can add up to a lot of money.

In addition to that, what are some of the creditor protections that one state might provide versus another? Again, very important for people who work in certain professions. If your move is tax-motivated, be very careful about how that is construed. You may have to file taxes in both states and there’s some crediting that might occur.

If you are paying for your own move, unreimbursed moving expenses in certain situations will be tax deductible so definitely keep that in mind. Look at your state withholding and your federal withholding as well. What’s that going to look like in your new residence, in your domicile, if you will?

Here’s a question that I often get that is kind of complicated, “What happens if you’re married? You file a joint return. One spouse is living in one state. The other spouse is living in another because they may have to work there? How does that work?”

Well, again, it depends on the state. Some states will require that, even though you may be filing a joint tax return on a federal basis, you would have to file separate returns on a state level, but not all.

When you move to the new state and declare your domicile, I would highly recommend you meet with an estate planning attorney to review your estate planning documents. While it may not be necessary to make any changes, you may want to do that anyway because there are state-specific rules that may apply or not apply anymore.

So that would be number one. Number two, if you are on Obamacare or you’re on Medicare, the supplemental plans that are out there are based on where you live so it is important to understand that a move will affect or can affect your medical benefits. Just know it going in, and understand it, and make your decisions accordingly.

There’s a lot of things to take into consideration, the cost of moving, the property taxes may be higher. There may not be an income tax, but the property taxes are ridiculous.

Also, understand the concept of homesteading where you get a lower property tax as long as it’s your primary residence. When you pull all of this together, you’ll have a very clear understanding of the implication of moving to, again, a state like Florida versus staying in Pennsylvania or New Jersey.

Staying in California, California is another state that’s getting very aggressive going after people who are moving to Texas, for example. It’s very interesting to see a lot of the tech companies and people who work in that area, in the San Francisco area, are moving to Austin because it is a very tax-friendly state and a very tax-friendly city.

So, lots of considerations as well as quality of life. Where do you want to live? At the end of the day, it’s your life. It’s quality of life. Where’s your family, where are your friends, what’s important to you? We can figure out the money part. Just understand the implications, and plan accordingly.

Thank you so much for tuning in today. I hope this was helpful. If you have any questions, please go to our website. Write in your questions. We are here to help you in any way we can. Thank you so much. Have a great day.

Ep80: Alzheimer’s Disease – America’s Healthcare Crisis

About This Episode

Patti welcomes Dr. Jason Karlawish, co-director of the Penn Memory Center, and author of “The Problem of Alzheimer’s – How Science, Culture, and Politics Turned a Rare Disease into a Crisis and What We Can Do About It”. They define the difference between mild cognitive impairment, dementia, and Alzheimer’s and address the stigma associated with this disease. America is one of the few western global democracies that has not formulated a national healthcare plan to cover the rising costs associated with caring for individuals suffering from this disease. Dr. Karlawish identifies the signs to look for in diagnosing this disease and reveals how recent biomedical breakthroughs can spur our healthcare system from failing these patients to saving them.

Patti Brennan: Hi, everybody. Welcome to “The Patti Brennan Show.” This show is for those of you who want to protect, grow, and use your assets to live your very best lives.

Today, we’re going to be having an important conversation about a disease that affects all of us. It’s Alzheimer’s. It’s the impact of Alzheimer’s not just on the individual themselves but the family and society as a whole and what can we do to arrest this awful disease once and for all.

Joining me today is Dr. Jason Karlawish. You guys, I am so excited to have Jason with us. This is just such an honor. I will tell you before we started airing, I said, “Jason, I will tell you I’m really intimidated. You’re like a superstar in this field.”

“Really, I bow to you.” Jason has written an amazing book. It’s called “The Problem of Alzheimer’s – How Science, Culture, and Politics Turned a Rare Disease Into a Crisis and What We Can Do About It.” That’s what I loved about this book. I read it over the weekend and last night.

If you’re watching this, you’re going to see that I have the book here with Post It notes all throughout. There was such good information, dating back, going through the history of the disease, the starts, and the stops, what we’ve discovered, things that don’t work, and maybe a few things that could. Jason, thank you so much for joining us today.

Dr. Jason Karlawish: You’re so welcome, Patti. It’s a pleasure to be on the show.

Patti: By the way, everybody, you should hear Jason’s pedigree. He’s the professor of Medicine, Medical Ethics, and Health Policy and Neurology – Jason, I’m not sure how you’re doing all this, but it’s amazing – at University of Pennsylvania. He’s also co-director of the Penn Memory Center. You can’t get a better expert on this disease than Dr. Jason Karlawish.

Dr. Karlawish: Thank you.

Patti: With that, let’s just start from the beginning. The question I have, that a lot of people have, is “What’s the difference between mild memory loss…” I understand that the first symptom of Alzheimer’s is memory loss.

I don’t know about anybody listening to the show, but there are a lot of times when I’m wondering, “Am I beginning to lose it here?” How do we differentiate between mild cognitive impairment, MCI, versus dementia versus Alzheimer’s?

Dr. Karlawish: Let’s unpack that. Great question. Let’s start with the most basic question that is probably the most common question. What’s the difference between Alzheimer’s disease and dementia?

Simply put, dementia describes someone who has developed disabling cognitive impairments. They have trouble with memory, attention, concentration, multitasking, and those problems with those cognitive abilities are causing them to have disabilities, meaning troubles doing their daily tasks.

Early on, those troubles are things like managing money, deciding what restaurant to go to, traveling to the restaurant, getting the menu, picking what you want to order, and then paying the bill and calculating the tip. All those are cognitively intense tasks, and someone with dementia has trouble doing them. They need someone else to help them. That’s dementia, disabling cognitive impairments.

Alzheimer’s disease is a disease of the brain that causes dementia. It’s not the only disease of the brain that causes dementia. Another common disease of the brain that causes dementia is a disease called Lewy body disease. That’s what Robin Williams, the comic actor, had. He had Lewy body disease.

There’s another disease called frontotemporal lobar degeneration. Very different disease but in the end, the common problem, if you will, is dementia. That’s the difference between Alzheimer’s disease and dementia.

Alzheimer’s, a disease that causes dementia. You threw in mild cognitive impairment. What’s that? In the book, I recount the history of mild cognitive impairment. It’s a relatively recent concept. It’s only about 20 years old when that concept was premiered in the medical literature.

What mild cognitive impairment describes is an individual who has a cognitive impairment that’s causing inefficiencies in daily activities. They take longer to do things that they used to do, if you will, quicker. They may make a mistake, but then they catch it. That’s MCI. Just like dementia, a host of different diseases can cause mild cognitive impairment. One of those diseases is Alzheimer’s disease.

One of the points I make in the book is, once upon a time, you had to have dementia to be diagnosed with Alzheimer’s. About the turn of the century, the advances in this idea of mild cognitive impairment began to allow someone to be diagnosed with Alzheimer’s before they had dementia when they only had mild cognitive impairment.

Again, if you’ve got a label of mild cognitive impairment, that doesn’t mean that you have Alzheimer’s disease. The next question is, “What’s causing my mild cognitive impairment?” It might be Alzheimer’s. It might be another disease. It might frankly be some of the extremes of aging to go with a host of other things that can impair cognition.

MCI needs a workup if you will. That’s the kind of thing we do when we see folks at the memory center here at the University of Pennsylvania.

Patti: Do you find that MCI automatically progresses? Does it always get worse, or would it stabilize?

Dr. Karlawish: No, it depends on the cause. In well-done studies of persons with mild cognitive impairment, depending on how they define it, etc., over time, depending on issues of definition and whatnot, about half develop further cognitive problems and develop dementia. That’s because they have a disease.

The other half doesn’t really change much. Some even revert. Again, it reflects that these are heterogeneous causes causing these problems. If there’s one thing I would say to your listeners, if you’re told somebody has dementia, it doesn’t mean they have Alzheimer’s. It means they have a disease.

It might be Alzheimer’s. It might be Lewy body disease. It might be a vascular disease. Same thing with MCI. They may have a disease, but also given the subtleties of MCI, they may not have a disease. All the more reason to get those conditions worked up and not just simply go with the label.

Patti: Jason, when you use the words worked up, how exactly is that done? One of the things that I didn’t share with you is that, in my former life, I used to be an intensive care nurse. What we learned is that the only time that you really have a definitive diagnosis is on autopsy.

Dr. Karlawish: A definitive diagnosis of Alzheimer’s, you’re right. Once upon a time and for a long time, that was how you could just tell someone that the cause of their dementia was Alzheimer’s, which of course is somewhat ghoulish, because what you’re essentially saying to the patient is, “Until you die, I won’t be able to tell you definitively whether you have Alzheimer’s or not,” which means I won’t be able to tell you, hence the ghoulish aspect of it.

That’s because it’s not until you get the brain of the individual and slice it up and look under the microscope can you see the characteristic pathologies that are seen with Alzheimer’s. The advances though that have occurred – and I talk about this in the book – that is rather spectacular is that we can now visualize those pathologies in a living human being.

We can do brain scans, PET scans in particular, and also analyses of the spinal fluid that can visualize the pathologies that cause someone to develop dementia. That’s a set of technologies that are available now but variably available for reasons largely related to the quality or lack of quality of our healthcare system when it comes to the diagnosis and care of older adults with cognitive problems.

Patti: I would imagine that a lot of people would be reticent to get that diagnosis. I would think that they would be almost afraid, like, “Oh my goodness, I’m going to be labeled as having dementia. People are going to treat me differently.”

Dr. Karlawish: That’s exactly right.

Patti: What are your thoughts on that? Are there advantages, or is this thing just going to progress? It is what it is. You’re going to have to figure it out, right?

Dr. Karlawish: There are two things that we’re talking about here, really. One of them is we are talking about stigma, stigma meaning a mark on someone. When other people know that mark, they treat that person differently. They separate from them. They distance from them. They stereotype them. Certainly, if there’s any one disease that enjoys, sadly high octane stigma, it’s Alzheimer’s disease.

The reason why we care about stigma are many. Number one, the well-being of the person who’s labeled. But number two, the issue you just raised is when a disease is haunted by stigma, people are reluctant to find out if they have the disease. They avoid the places where the disease is diagnosed. That’s understandable. Stigma creates a sense of revulsion, distancing, etc.

Stigma’s a very real problem in Alzheimer’s because you’ve got patients, frankly, people out there who have problems but just won’t get them worked up and refuse to have it worked up because of stigma. That’s one problem right there.

Then the question is, how do we combat stigma? What can we do to do that? One way we do that is we have conversations like this. We raise awareness in the community. Read my book, dare I say. The more something is discussed and talked about, the less stigmatizing it is.

Having said that, though, there are real advantages to getting a diagnosis and to getting a diagnosis early. I think this is why you and I have come together in fact because some of the earliest problems with cognitive impairment, they’re not troubles with bathing, dressing, grooming, and feeding, late-stage problems.

They’re troubles doing very sophisticated cognitive tasks. What’s one of those tasks? Managing your money…

Patti: You bet you.

Dr. Karlawish: …paying your bills, all those things that require – what we call in my field – higher cortical function. Early on in this disease, they are impaired. The tragedy of patients who don’t get a diagnosis early on, they have these impairments. They start making mistakes. They get defrauded. They lose money. It just becomes this disaster by the time they finally get worked up.

Patti: Agreed. What I understand with Alzheimer’s is, especially in the beginning, you can have good days and not-so-good days. That makes it even worse. It makes it even more difficult. If you’re married to somebody, they’re just not having a good day. Then you find out three months later that they made an investment in some random offshore thing, and all of your money is gone.

Those are very real stories. People need to understand that, the awareness. Just face these things because there are things that you can do to protect yourselves and help the person.

Dr. Karlawish: Even if there’s not a treatment, and there is a treatment out there now, which we can talk about. I think it’s a very debatable and controversial treatment. Even before the FDA approved that drug, which will soon be available perhaps, even before that, there were real concrete things you can do. In the book, I talk about this.

The word I use is planning. They say, “What do you mean, planning? Whether I get on a ventilator or not, get CPR?” No, no. What I’m talking about is planning. I’ll speak personally.

If I had cognitive problems, let’s say I had MCI, I would want to have a plan in place that someone’s watching over how things are going with my money, emphasis on the watching over, not managing it, not joint on all the accounts so they can defraud me but able to watch over and say, “You know what? Actually, you already paid that bill.”

Or, “You’ve bought that thing twice,” or, “Wait a minute. What’s this purchase, a 20-year maturing security and you’re 90 years old? [laughs] You’re not going to see that mature in time, probably. So let’s have a conversation.”

The same thing around driving, you can pick a number of very important activities in daily life that you want a plan in place to monitor. If things are detected, someone can step in and help who you trust.

If you wait for a fire, you know you’re going to burn some part of the house down. Instead, you can put in alarms and other systems that the place might not catch on fire. If it does, it’ll get taken care of very quickly.

That’s the model I think that has existed. Unfortunately, though, most family members don’t have access to that kind of education, skill-building, because of the limitations of our healthcare system.

Patti: It is so interesting because, as you were talking, I was thinking, “Boy, I hope my colleagues are listening to this podcast. I hope the financial advisers are out there.”

Dr. Karlawish: They should because they’re on the frontline.

Patti: Exactly, because we know our clients. We know what’s normal for them and what’s not normal. I will tell you it has come up. Someone will come into me and say, “Patti, I was just speaking with so and so. Something just didn’t seem right.”

Or, they’ve been asking for more distributions from their portfolio than ever before, or we’ll get a call from the CPA, and the CPA will say, “This person has not filed their taxes. They’re not giving me the information. Something’s not right.” It just raises that red flag to dig a little deeper.

Dr. Karlawish: Let me speak personally, certainly, in my clinic. I recount them in my book, in my practice, but frankly, I’m going to be candid in my own family. I have witnessed just that the earliest signs and symptoms were things that the tax accountant and the investment manager were picking up.

I’ll tell you my own personal story. Frankly, I finally called those folks. They’re like, “Yeah, no, I’ve noticed stuff.” I was on top of it early on because it’s my gig. It’s what I do.

Patti: It’s more than a gig.

Dr. Karlawish: But I thought to myself, “How many other of your clients are doing this? You’re just watching this happen.” I thought, “Wow.”

Patti: It’s very interesting what we do as a practice. Whenever we take on a client, the first thing that I do is have them sign a form that gives us permission to speak with someone in their family. We don’t necessarily give them any personal information, etc., but a trusted person within their family if we notice something isn’t quite right.

Dr. Karlawish: That is good practice.

Patti: I want to get it up front while they’re healthy, while they understand, and they’re in agreement that that’s probably the best thing to do. It’s really we’re just looking out for them.

We’re looking out for their family whether it’d be financial damage or otherwise. As you said, some of these people should not be driving a car. That’s really important for them to know that we care more about them than their money.

Dr. Karlawish: The issue here, especially with this disease, is from diagnosis to death, it can last as long as 10 years, very variable. But let’s set that aside. If we’re talking about a chronic disease, we’re talking about a disease which, early on, persons need help. As they get more disabled, they need more help.

In America, that means help that you get because you paid for it. The one thing you don’t want to do is go into your retirement with a pile of cash, lose it because of fraud and other bad investments, and then go into developing worsening cognitive problems because then it’s either the family or the state that has to step in and pay for the stuff that you could have paid for.

That’s why this disease ramifies across families and into society because of the cost of the long-term care paid for mostly now by American families, but I think something that also needs to be addressed on a policy level, of course.

Patti: It was so interesting that one story that you told in the book about the gentleman whose wife was diagnosed with Alzheimer’s. He met with his advisers. His advisers basically gave him three alternatives.

Number one, you could put all of your assets into an irrevocable trust and lose control of that money forever. You’re going to have to ask for a dollar to buy a newspaper. You can’t do any of that yourself. You’re going to have to ask a separate person, an independent person. It’s an irrevocable loss of control. That was option number one.

Option number two was, hey, you could get a divorce. Divorce your spouse. That person will receive some of the assets and then eventually go through it, and then they will qualify for Medicaid.

By the way, that first option, which is the irrevocable trust, is a way to try to qualify for Medicaid. For anybody listening to this podcast, please understand the rules of your state and the fact that there is typically a five-year look back if you do attempt to pauperize yourself in this fashion.

I will tell you, I’m going to come clean with all of you listening, I’m not a big fan of those things at all. Both of these things have a little bit of a moral ramification. It just walks that fine line. It’s typically not in your best interest to do either as well. Option one, option two. Option three, of course, is just pay as you go and hope you don’t run out of money.

Dr. Karlawish: Just keep on paying until you hope you don’t run out of money. That’s what he chose to do, that guy. I remember him well, a husband. They managed to get through it with a lot of assets lost. In fact, she was an early onset case, that is to say, age of onset was before the age of 65, which is uncommon.

That family’s faced a lot of strains related to loss of income for retirement as well as for support of adult children beginning careers, education, etc. This is why the disease ramifies into the American family because you’ve got savings that you need to do things like pay for your well-being in retirement, support the education of other family members, etc.

When that’s hoovered up by the cost of long-term care, which can get into triple thousand digits depending on the severity of disability, for the average American family, that’s a cost that can be, frankly, bankrupting or at least financially destabilizing.

Again, most Western nations, Germany, etc., have a long-term care social insurance program to minimize that risk upon the well-being of the families. We don’t have that in this country. In this country, you just pay until you go, until you qualify for Medicaid, meaning you meet poverty thresholds. Then the state will step in and help out.

I don’t think that that’s acceptable. That’s putting the American family in the front line of a risk that they shouldn’t face with their finances and well-being.

Patti: It’s also really short-sighted too.

Dr. Karlawish: As a society.

Patti: You think about the cost of this disease and the impact on our economy and the impact on those families. You think, “Geez, if we could just cover it, the impact wouldn’t be nearly as great.”

Dr. Karlawish: Exactly. That conversation is lost in policy-making circles. I totally agree. Long-term care social insurance will be expensive. It will require an additional payroll tax. Absolutely. The problem right now is that the American family is paying off the books.

I have family members who will tell you, “I cut back on work. I left the workforce. I didn’t advance as far as I could have at work because I had to take care of my mother, my father, my husband.” Even folks who are retired will say, “Well, less assets to transfer to the next generation because we’re spending on this.”

It’s a hidden cost in the American economy. The standard complaint, oftentimes from one side of the aisle, is this will require raising taxes and cost billions and billions of dollars. I’m like we’re already spending the billions of dollars it’s costing our economy in terms of efficiency and productivity.

Why don’t we just be honest and face the problem like adults do, and say we’re going to have to ban together, put in a payroll tax, raise the funds, and provide that cushion of long-term care social insurance for the American family who needs it? Germany does it. Japan does it. France does it. For some reason, we just don’t want to do it as a country.

Patti: It’s a very effective solution because it works. When you have social insurance, because private insurance, as you well know, is also out there, it is really, really expensive.

Most people can’t afford it and/or just when they get to the point where they’re ready to make a claim in their 70s or their 80s, the cost of it is skyrocketing, and they can’t afford to make the premium payments, so it lapses. That’s not working.

Dr. Karlawish: Most of those policies only kick in when you’re really disabled. I look at some of the policies people have, and they’re like, “Oh, look at this. I’m covered.”

I’m like, “Well, yeah, but it only really is going to pay for a home health aide to help with bathing, dressing, grooming, and feeding, which is the last few years of the disease. Meanwhile, you’ve got about five or six years of needing supervision, an adult day activity program, etc., and none of those costs are covered by this policy.” A lot of policies are a lot of hats but not much cattle.

Patti: It’s the question of is it hands-on care or standby care.

Dr. Karlawish: It’s the standby care that you really need. For many of my family members, the care that they need until someone really as having trouble with mobility is I need someone around during the day. I can’t be there all the time.

That person’s going to be there to help that person live a day that’s safe, social, and engaged. That’s a very different role than someone who’s going to bathe, dress, groom, feed, and toilet someone.

Families struggle to find that kind of person. Again, I could tell you personally my family’s struggled to find someone. We finally did. The system isn’t in place to access that kind of person. I’m just again fortunate, given my expertise, that I knew what to look for and how to find it. I really pity the average American family who has to struggle with this disease.

Patti: I do too. It’s really hard to watch. I think about the isolation. That stigma really carries on for the whole family, the spouse, etc. They become that much more isolated. A, they have to be there all the time to take care of that person, and other people aren’t coming around as often.

So difficult, so very, very difficult. I really am interested to learn more about the concept of social insurance, and again, these problems – I’m going to be casual here – they drive me nuts because there is a solution. Come on.

We were talking about this again before we came on broadcast, and it’s so interesting with COVID 19. You throw enough money at a problem. You can solve it. Look at where we are today.

I know that Alzheimer’s is a much more complicated disease. If we come together as a nation and say, “OK, we don’t know whether or not we’re going to be directly affected by this, but if we are, there’s going to be other Americans who are going to help us in the form of this social insurance that will help us provide the care that we need.”

Dr. Karlawish: COVID was a wake-up call that vast problems that ramify across society needs a united social approach. They’re not problems that are solved by the grit of the individual. The grit of the individual is needed, but it’s only part of the solution. You’re right.

What are these problems? The word I use to describe them is they’re humanitarian problems. They cut across disciplines, and they ramify outside of just the medical space. You have to approach humanitarian problems united and with a kind of top-down all-hands-on-deck approach. We did it with COVID, more or less. There were moments there where things got a little weird.

Dr. Karlawish: We can do it with Alzheimer’s disease. That is to say dementia. We just have to be united in that. I have hope. America has an Alzheimer’s plan. It’s not as well known unfortunately as it should be, but it has resulted in some progress, particularly in better understanding the biology of the disease and developing diagnostics and treatments.

Progress has been a little uneven on care, but it’s better than what the alternative was, which was zero progress in that space.

Patti: You’ve mentioned this Alzheimer’s plan a couple of times. What exactly is it? I’m not familiar with it.

Dr. Karlawish: Most Americans aren’t, which is unfortunate because I think it leads to this sense of desperation that we’re not doing anything. It’s one of the variables that, unfortunately, led to the FDA decision to approve aducanumab, namely this sense of desperation.

Around about 2011 or so, President Obama signed into law the National Alzheimer’s Project Act. In the book, I recount the really brilliant efforts by the Alzheimer’s Association to get this to come to law.

One of the strategic things though that was done was to not make it a big public blowout, to not have the president make a public announcement to a bicameral meeting of the Congress that we’re going to take on Alzheimer’s. A lot of that had to do with it’s so hard to unite America and Washington around a problem, especially if they have to spend money, that the better way to do it was to do it quietly.

In summary, when Obama signed that into law to create the National Alzheimer’s Project Act, he did it somewhere in Hawaii just about ready to go on his week-long vacation. You can’t even find a photograph of him signing that into law.

Anyway, what the Project Act calls for is all federal agencies, departments that in some way involve the lives of persons with dementia need to unite together and put together an Alzheimer’s plan. Every year, we revisit that plan as a nation. It’s beginning to create some coherence around our approach to the disease.

I’ll wrap up with the most impressive thing that’s occurred was substantial increases in the NIH funding for Alzheimer’s research, such that my colleagues and I now enjoy the ability to get our projects funded and also to train the next generation of researchers and clinicians to take on this problem.

Compared to the way things were five, six years ago, I’m very optimistic. It’s all made possible by this National Alzheimer’s Project Act, which again as you point out, I’m going to be self-promoting, but until people read my book, most people don’t know about it because it just was never promoted.

Patti: It is so interesting. I did read about it in the book, and I was thinking, “Wow, where have I been? I never knew that that existed.” I feel like it’s a shame that it wasn’t publicized. Again, it’s only through transparency that we take away some of the stigma associated with the disease. It’s out there. Let’s not pretend that it isn’t out there. Let’s quantify the cost.

That’s also part of this, Jason. We have to make it crystal clear how much money our economy is losing because of this disease. It is billions and billions of dollars. Again, the most recent example is COVID. There isn’t one corporation. There isn’t even one agency.

The University of Pennsylvania is not going to be able to solve this problem by itself. We need just a massive amount of energy, intellect, and money to attack this head-on.

Dr. Karlawish: One of the problems about the cost of Alzheimer’s disease, which is really better said as the cost of dementia to America is that it engages the politics of welfare because the way that you get to the triple-digit billion dollars per year cost of this disease is not the cost to the healthcare system, meaning the cost of drugs, scans, hospital visits, etc.

The way you get to the triple-digit billion dollars annual cost is if you take the work of a caregiver a daughter, a wife, a husband, occasionally a son, and you say, “How many hours a week did you spend giving care to your relative?” They give you that number. Then you say, “If that was a job, how much would you be paid to do it?”

Once you assign a wage to the labor of caregiving and you add up across all the caregivers doing caregiving, that’s the triple-digit billion dollar figure people talk about. The problem, of course, is that that engages the politics of welfare because that’s saying that the work of a caregiver is work that ought to be compensated and counted.

In America, there are some real differences about that. There are some people who think, “That’s just what families should do. That’s a family problem. We’re not going to deal with that problem,” or you have to be poor enough, and then we’ll finally step in and help you out to do that problem.

As long as that’s the conversation that you have, you’re unable to have an honest conversation of American workers are less productive and/or the American family’s savings are being taken up by this disease because you’re caught up in people saying, “That’s welfare issues. Welfare is socialism,” and all of the things.

You find yourself lost in this bizarre political conversation where helping people with Alzheimer’s and their families threatens socialism to America. You’re like, “Wait a minute. How did we arrive at this bizarre conversation that our liberty will be taken away by caring for people with dementia? Our liberty’s being taken away by Alzheimer’s disease, not by trying to help them.”

Yet socialism is this thing that we have to fear. I’m like, “This has nothing to do with socialism.” Yet that’s the conversation that we have. Until we break that rhetorical logjam…It’s almost darkly comic political conversation.

Patti: It’s weird. That’s what it is. I cannot even believe that people could frame it in that way.

Dr. Karlawish: That’s been the rhetoric though. The rhetoric since the ’80s was…Actually, much of the rhetoric around expanding public welfare was sidetracked into conversations about socialism and the threats of a socialist takeover.

The American Medical Association opposed Medicare. Many politicians backed this because they feared if you have Medicare, that Medicare will lead to a Communist takeover of America. Ronald Reagan, at the time he was an actor in the 1960s, did a PSA record – at that time, it was actually a record – in a project that the AMA sponsored called Operation Coffee Cup.

I recount in the book how then actor Reagan was warning the AMA wives if Congress passes what would come to be called Medicare, that’s going to lead to socialist takeover of America. You look at this. You have to laugh because it was bizarre.

Yet that was the conversation, and yet that same kind of conversation continues today. The opposition to many of the infrastructure improvements that are proposed in the infrastructure package is this will be socialism. I just shrug my shoulders and say, “But who’s going to take care of these problems?” These are big problems. They can’t be left to the American family to solve.

Patti: It is so, so interesting. I’ve got your book in front of me, Jason. I’m reminded of this comparison that you made with solving polio and other comparisons. I’ll just read this.

“We could basically do that for the Alzheimer’s, colleagues chide me. Build more memory centers, nursing homes, and adult day activity centers. Noodle our way to better team-based care. Set our hospital cell phones to vibrate at night, or they insist, ‘We could just cure this damn disease.'”

Dr. Karlawish: They go to polio. They say, “Look at that. With polio, we could have built more iron lungs and everything else. Instead, we discovered the vaccine. Polio became a thing of the past,” assuming, of course, someone who has the polio vaccine hidden in a vault doesn’t release it and people get vaccinated, witness current problems with COVID.

Anyway, that we’re going to drug our way out of this problem, make it like polio, a disease of the past, the problem with that is every bit of the science is showing us that the many diseases that cause dementia are just that. They’re many different diseases.

Just like there are many routes to developing cancer depending on the organ, we certainly have made progress in cancer and heart disease with therapies. The notion that we’ll never have any heart disease or cancer is just not rational policymaking to say, “That’s how we’ll solve the problem of cancer and heart disease.”

That’s the same thing, I think, with this disease. We absolutely should expect progress in developing effective therapeutics such that some people don’t experience disabling dementia. Others experience it slower. But sadly, some still don’t respond to the therapies. You can’t get them, whatever it may be. That’s how we have to think about this disease.

The idea of curing Alzheimer’s, it’s rhetorically powerful. It motivates people. There’s no question, but I think we have to have a more rational approach that says, “How can we more effectively treat this disease?” Drugs are part of the solution, but they are not the only part of the solution.

Patti: Since you brought up the drugs, I’d love to hear what you think about Biogen’s drug and the controversy that is now surrounding it. What do you think?

Dr. Karlawish: I think that the drug should still be available but only after a patient signs an informed consent form to enroll in a research study to finally establish, “Does this drug actually slow the progression of Alzheimer’s disease?”
Unfortunately, FDA didn’t see it that way and decided that, based on the data Biogen presented them, data that has yet to be published, that the FDA would grant Biogen the ability to sell the drug, although still requiring “a confirmatory study” to establish whether the drug in fact benefits patients.

They did this because they wanted the drug available because patients are desperate. Nothing else is available. I get the argument, but I think most in the field were a little aghast when they saw the FDA’s decision because we were really making progress with this drug and other drugs to establish whether drugs like aducanumab change the natural history of the disease.

FDA went ahead and jumped the line and said, “Let’s make it available but continue doing studies of it.” Try and do a study of a drug like that when it’s available commercially is a little difficult to do, plus it sets now an evidence bar that is lower for other drugs out there.
Many of us in the field were very frustrated. We really were making progress with drug discovery. Aducanumab actually may be effective, but the data that were out there don’t really show that to the level that I think were necessary to prescribe it.

The FDA didn’t see it that way, and now we have this mess. A drug is available with questionable data. At the same time, we still need to do studies to establish whether that drug is effective as well as other drugs that are like it. I think the field finds this an extremely frustrating situation.

Patti: If I hear you right, what I’m hearing is that, because it is available to do a study, one group having the placebo and another group getting the drug, or however you’re running these studies, you can’t do it as effectively. Is that what you’re saying?

Dr. Karlawish: The patients with Alzheimer’s shouldn’t have to bear this cross, which is, “If you qualify for the drug based on severity, do you want to get the drug clinically, or would you want to enroll in a clinical trial that will help other people, and you may or may not get it?” I think making people make that choice is bizarre.

Patti: I see.

Dr. Karlawish: The other problem, though, is you’re putting out a drug that the FDA admits the evidence is, at best, provocative that it may actually alter disease course. FDA’s argument was, “We can lower the standard of evidence because there’s a regulatory mechanism in place for serious and life-threatening diseases, Alzheimer’s is one of them, that allows a drug to be put into practice on the basis of a weaker standard of evidence.”

I think many in the field felt the evidence here didn’t even rise to that. More research was needed. I know you say, “Well, of course, a physician at the University of Pennsylvania would say more research is needed. That’s what you guys and gals do.”

My push back is no, no, no, I know what this disease is like. I have this disease going on right now in my family. Yet, for a big, vast, large as this, as complicated as it is, it was premature to put this drug out into the marketplace. It needed more study.

It’s going to be difficult to do that study, and the FDA’s new evidentiary standard threatens that drugs will be put into practice on the basis of evidence that can’t let me confidently say to a patient, “This drug is worth its risks and its worth its costs.” For many in the field, it’s an extremely frustrating situation that we find ourselves in.

Patti: Is it something that can be undone?

Dr. Karlawish: Future drugs, we’ll see. There’s a drug, for example, that Eli Lilly has called Donanemab. Donanemab is a promising drug. We were all very excited about the data that were published in the “New England Journal of Medicine” in May of 2021.

Now, FDA’s lowered the evidentiary standard. We’re like, “Wait a minute. Does this mean you’re not going to do the confirmatory trial we all really want to see, or are you going to let the trial happen, please?” That’s where, I think, the field’s a little worried right now.

Aducanumab, Donanemab, and Lecanemab, all these drugs that are showing promising signals are getting out there too damn quickly. That’s a real problem to be able to study them and tell patients they’re effective and to tell society they’re worth the cost. These drugs are expensive, and a lot of people could take them.

Patti: As I recall, I could be wrong on this Jason, but isn’t it true that when Biogen first went to the FDA, when they did it at lower doses, and the FDA did not approve it. Then, later on, they bumped up the doses. They were trying to fool around with that, and that’s when the FDA finally said, “OK, you can start.”

Dr. Karlawish: The relationship between FDA and Biogen around this drug is to be better understood. In fact, Janet Woodcock, the acting commissioner of the FDA has called for an Office of the Inspector General investigation to look at, more closely, the relationship between FDA employees and Biogen. We’ll wait to see what that investigation shows.

The fact that she had to call for that raises real concerns about the nature of the relationship that FDA officials had with the company. They were close, but maybe too close is the concern.

Bottom line, the studies that Biogen did that led up to the data that are available had a lot of decisions made that were more driven by business than science – move things along quickly, get things done without spending a lot of money. I get the perspective of a company. I can’t fault a company for doing what companies do.

On the other hand, it didn’t serve the science as well as it could have. You’re right, one of the issues was they leaped into phase III without really good data around dosing. They had to amend the protocol to change dosing regimens in the middle of the phase III studies, introducing variance and noise in the data.

The other thing they did was they threw a futility analysis into the study. You say, “Well, what the heck is that?” Basically, a futility analysis lets you decide whether there’s no chance this study will work.

If that’s the case, you just stop it and say, “I’m not going to keep this study going. It costs me money. Why should I spend money on something that has no chance of working within certain levels of probability based on how the analyses are conducted?”

Biogen did that. In fact, they did the futility analyses. The futility analyses said, “It’s not going to work, likely,” so they shut the study down. More data rolls in. They analyze that data. Guess what? It works in one study but not the other. What you’re left with is like a forehead slap of, “This didn’t have to happen. These were business decisions.”

I’m pro drug. I’m alive because of drugs. Early in my life, I had a very bad illness, and I was saved. I have family members who are alive because of drugs, who are living well because of them. It’s not about being pro or anti pharma. It’s about being smart about how we use our pharma technology and businesses to develop drugs.

I think there’s a lot of concern with the aducanumab decision that something’s going awry at the FDA, and they’re making decisions that no longer serve public health.

Patti: In addition, or aside from the issue of drug treatments, what else can be done to improve the lives of people who have been diagnosed with dementia and/or Alzheimer’s?

Dr. Karlawish: First, let’s get them diagnosed. First, we need to create a national network of centers for adult cognitive disorders where folks can go, get evaluated, and get an answer, which may be a diagnosis, may not be a diagnosis.

COVID has taught us that we can use telemedicine approaches for some of this, so we don’t have to have a center in every urban area, but maybe there are ways to interconnect them. We need centers that can get people a diagnosis.

Then we need to begin to deliver the standard of care. No one should be diagnosed with dementia caused by Alzheimer’s, Lewy body disease, whatever the disease may be, and not get education and training for how to identify the common problems, make a plan, and access the services and supports they need. We should do that.

Then back to your industry, we need to get your industry talking with my industry because you gals and guys are on the front line, oftentimes, of detecting things. How could we begin to learn from each other about what’s going on with a client so that, rather than just waiting for the disaster, some effort can be made to intervene and talk? That’s another area of progress.

More generally, technology holds a lot of possibilities for us to live better with this disease. One of the reasons why, in my family, I’m able to make sure things are OK with a family member is I have online view-only access to a variety of accounts. I can tell when there are problems going on or not. That’s because of technology.

So too with the car, monitoring the location of the car. There’s a host of ways that technology can allow us to maintain our independence in the community. These are all things we can do now. Everything I’ve described, we just have to muster the will to do it.

Patti: I have a dear friend who is at MIT. They have the MIT Age Lab, and I’m on the board there. It’s fascinating to me some of the things that MIT is coming up with to help people in these later stages of life, whether they have Alzheimer’s or dementia or not – carpeting that can sense when someone has fallen. I think the whole area is so interesting.

To your point, we may not get a “cure” in our lifetime, but we sure can band together and find a better way of approaching this awful disease.

Dr. Karlawish: Exactly.

Patti: It’s just got to be the American will, banding together and working together to figure out a solution and help to improve the lives of the patients and the families that are dealing with this.

Dr. Karlawish: A big, vast, national problem requires us to reach back to some of our core values. United we stand, divided we fall. I know that sounds rhetorically cute, but we’ve lived through a period of time in recent history, recent time – it’s not yet history because history has to be 30 years old to be history…

Patti: I didn’t know that. That’s interesting.

Dr. Karlawish: Technically, what makes something history, it happened 30 years ago or more. Whatever, that’s a convention in the field. We’ve lived through times where we seem to think that the way to advance is to divide. I think that this is the kind of disease where that’s not a useful approach. It requires leadership.

Patti: I agree with you. It’s fine to debate. Sometimes, having opposing opinions, together you come up with, ultimately, a better solution. As long as we are focused on the solution, working together to come up with ideas and alternatives, that’s the key.

Dr. Karlawish: For example, a couple more solutions here while we’re coming to the end here. We have to rethink the way we run residential long-term care. No one wants to “live in a nursing home,” but the fact of this disease is for many patients, there does come a point where home no longer works, the space that they called home for a variety of reasons.

I think it’s just simply folly to think that all long-term care should be and can only be delivered in the home. Certainly, it should be and should be available. We also need to recognize there’s a role for people to move to a residence, a place that they can now call home that’s different than the home they were in.

The problem is it’s a stereotype is the nursing home. Yeah, many of them are awful, but they’re not awful by the nature of being residential long-term care. They’re awful because we’ve never invested in the resources needed, and the regulations needed, and the ownership structures needed to create long-term care facilities that actually deliver long-term care services and supports.

Again, that’s another thing that can be solved right now. We just have to muster the will to do it. Many of the owners of nursing homes own them because they’re great investments of property. They don’t really care what the hell goes on inside of it.

Can you imagine if hospitals were run that way? I own this hospital because it’s a great real estate investment. I’m trying to do everything I can to cut costs to continue to profit from that. That’s the reality with nursing homes in America today. That’s bizarre.

Patti: It’s really interesting. Wouldn’t it be interesting if we approached this the same way we approach, as you say, hospitals or even schools? There are some pretty nice schools out there. Kids are learning.

It’s a really interesting alternative approach. There was a part in your book where you discussed the concept of home. You said that home is where the heart is. I loved that comment. I loved that quote because it is so true. People with Alzheimer’s and dementia, they don’t really know where home is.

Dr. Karlawish: They can begin to lose that. That’s right.

Patti: I will end with the one story that you told about Justice Sandra Day O’Connor. In fact, you can tell it if you’d like.

Dr. Karlawish: Justice Sandra Day O’Connor’s husband had Alzheimer’s disease. He had dementia caused by Alzheimer’s disease. The justice herself now recently announced, about a year or two ago, that she herself has Alzheimer’s. She retired from the Supreme Court in order to care for her husband.

Patti: There you go.

Dr. Karlawish: Good example of the impact of Alzheimer’s on the American family and our productivity. A Supreme Court justice stepped down in order to care for her husband.

There came a time in the course of his disease, not uncommon, sadly where he reached a stage of disability where home was no longer working. The home they were in, he was too disabled. He required too much intensive supervision and care that it just wasn’t working anymore for Justice O’Connor and the family to do that at home.

They moved him to a new home, to what we would call a nursing home, a long-term care facility, an institutional setting. In that setting, he met another person, another patient, another resident. They developed a relationship. As that relationship developed, he became actually calmer and better accustomed to the environment.

Frankly, it was a private matter that became public because O’Connor is obviously a public figure. The family was willing to confirm that that indeed had happened and that they were letting it happen, that they were understanding that their father had found a relationship that was working for him in his new home that was going to let him live comfortably.

They did what I think is the right thing to do within the boundaries of coercion and other things. They let it happen as opposed to breaking them up and separating them and whatnot.

I tell that story not because I think it’s a happy story or a sad story, but it’s a story about life. Life is a mix of the happy and the sad. The sooner we see that that’s what this disease presents, I think the sooner we’re going to be able to live with it.

All disease is bad, by definition. If it wasn’t bad, it wouldn’t be a disease. This disease is uniquely bad. I think we have to be honest in the ways that we think we are best to live with it and not pretend that we can drug it away or ignore it or all the other approaches that are just not very productive approaches.

Patti: Jason Karlawish, I don’t know what to say. You have so exceeded my hopes and expectations for this podcast. I have learned so much today. I’m so grateful for your expertise and how you laid things out. I’ve learned so much. It gets my juices fired up to see what I can do personally to move these things forward. It’s just one person and then another person and yet another.

Dr. Karlawish: Thank you, Patti. It really means a lot to hear that from you.

Patti: Grateful to you. We’re both in Pennsylvania. I hope that we can keep in touch. I mean it when I tell you I’m happy to step in and help any way that I can.

Dr. Karlawish: Thank you very much. That means a lot to me. I really appreciate that. Greetings to all your listeners. If people want to learn more about the book and my writing and the other work I do, they can visit my website, which is jasonkarlawish.com.

Patti: I will tell you I’m holding up the book as we speak on this video. It is literally amazing, just chock full of information. It’s also inspiring because there are solutions. There’s no one better to lead that charge than Dr. Jason Karlawish.

Dr. Karlawish: Thank you.

Patti: Thank you so much for spending this time with me today and with all of our listeners. Thanks to you for tuning in. I hope this was helpful. If you have any questions, please go to our website at staging.keyfinancialinc.com.

In the meantime, stay safe, stay healthy, and know there are people out there who are willing to help. Thanks so much for tuning in. Take care.

Ep79: Resources for Parents of a Special Needs Child

About This Episode

This episode is next in the podcast series, #AskPattiBrennan – a series of episodes in which Patti answers one of her listener’s frequently asked questions. These podcasts are shorter in length and address one FAQ or RAQ (a rarely asked, but should be asked, question). In this episode, Patti addresses another important question asked by her clients. “I have a child/grandchild with special needs, what resources are out there that can assist me in providing and maintaining a good quality of life for him/her?” Patti identifies some great state and federal programs, as well as key estate planning opportunities that should be taken advantage of. She also offers other solutions to questions regarding adoptions of children with special needs.

Patti Brennan: Hi, everybody, I’m Patti Brennan. Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives. As you probably know, at the end of every podcast, I encourage people, go to our website. 

If you have a question, just send it to us through the website, and we’ll address it in the “Ask Patti Brennan” series. We get a ton of questions. The ones that I’ve gotten recently, especially as it relates to child care, expecting a baby, adopting a baby, and in those circumstances where a family may have a child who is disabled, what do we do? 

We’re going to dress the ladder. If any of you who are listening or watching has a child, or a grandchild, or a family member who has special needs, listen in because there are some really interesting things that you can do to maintain the quality of their lives irrespective of what may have happened. 

Today, we’re going to address the financial issues with heart, with an understanding, that is the most difficult thing that a parent can go through. There are solutions. First and foremost, let’s talk about what they are. 

The federal government and state government do provide really great social nets for people who need assistance because of disabilities. There are Social Security Income referred to as SSI and then SSDI, Social Security Disability Income. Now, if your child’s under the age of 18, and based on your income and your resources, they may qualify for SSI. 

In addition, they could also qualify for SSDI, if they became disabled before the age of 22. If you are receiving Social Security benefits yourself, you can also get Social Security. That helps from a cash flow perspective. It’s really important. If you don’t know about it, you’re not going to claim it. If you’re worried about whether or not you’ll actually get it, don’t worry about it. Try. 

If you’re turned down, which frankly some people are initially don’t stop, get an attorney and contest it. It just sometimes is the way things are framed so that our government officials understand what the challenges are that you’re facing. SSI, SSDI. 

Now, again, based on whether or not you’re able to collect, there’s also Medicaid for medical insurance. Medicaid gets a bad rap, but I got to tell you that that’s a wonderful benefit. There’s a lot of great insurance that is provided through Medicaid. This is exactly what it’s there for. 

For those people who don’t have the income or are in a situation where they may never be able to work, Medicaid is there for those people. 

There’s also something called CHIP, depending on the state in which you reside. CHIP programs are also there for assistance. Interestingly enough, I’ve had clients and I’ve had people who literally have chosen their state of domicile where they actually live based on these benefits, because sometimes the benefits are better, for example, in Illinois, than they may be in another state. 

You may want to research that. If it just means going over the border and getting thousands and thousands of dollars of better benefits, by all means, check it out. There are people who specialize in all of this, and that’s what you want. 

You want the resources. You want the attorneys, the financial planners, the social workers, the professionals who work with families, with children, and frankly, adults who are disabled, who will never be able to provide for themselves. 

Moving forward, if it turns out that you may not be able to qualify for those government benefits or your child may not be able to – I hate to use the I word – I’m going to tell all of you, “Go out and buy a big, fat life insurance policy,” because as long as you’re alive, chances are you’re going to be there and you’re going to want to provide for that child.

But what happens if you’re no longer here and if the rules change, governments change, etc. There is nothing like life insurance to solve a problem when it manifests. The thing that caused the problem if someone passed away, here’s the money to solve it. 

Be very careful how it’s constructed. You want it own by a particular type of trust. Again, I’m going to say it 1000 times today, “Get a good attorney who specializes in working with families with someone who has special needs.”

In addition, there is something called an ABLE account. If the child suffered his or her disability before the age of 26, they will qualify for an ABLE account. Now, at first, I was really excited about these accounts, but they did get watered down. 

The most important thing that all of you need to know is they can’t let the balance go over $100,000. ABLE accounts are there. It’s another kind of pot of money that can be used for the child where it won’t disqualify that child for government benefits. 

Now, let’s talk about estate planning because this is an area that a lot of people have questions about. There are some controversies. Should we have a trust for that child? Could we actually disqualify that child from the wonderful government benefits? Again, be very, very careful.

There is something called a special needs trust. If it is designed properly and has the right language, you can set aside money for that child, and it would not disqualify them for any of the wonderful government benefits that we all contribute to. I mean, I’m going to say as a sidebar, we all pay taxes, right? 

This is probably one of those things. I really don’t mind paying taxes because this is what America is all about. We’re here as a community to help those people who may not have been quite as fortunate, who may have just been born with certain disabilities and unable to provide for themselves. 

I think that this is an important social program that is out there to help those families and those children who will be very much in need for the rest of their lives. 

Special needs trusts are there. Again, be very careful how they’re constructed. As you think about the trust, you got to get the right trustee. Who’s going to be that person who’s going to understand what the rules of the game are and be able to give that child support and understand how it’s going to work in the state in which they reside?

From a tax perspective, a little kind of a sidebar perk, if you will, if it could be called one if you adopted a child with a special need with a disability, there is a child tax credit of $14,400. That will offset a lot of the adoption costs and provide you, again, another benefit of adopting a child with a special need. 

Even if you’re not adopting, you will get the child tax credits that are available to all Americans. It’s $2,000 per child depending on your income. If your modified adjusted gross income as a couple or partners is below $150,000, then that tax credit goes up to $3,600 if the child’s under the age of six. Again, just be aware that these credits and tax benefits are available to you. 

I think as we go forward, medical expenses are based on your adjusted gross income. Let’s say that the child is or the adult is able to work, but they’re not probably able to earn enough income to take care of themselves for the rest of their lives. 

If there are expenses, medical expenses that they incur, that person will not be subject to the 7.5 percent limitation against AGI, so 100 percent of their medical expenses are going to be tax-deductible. That’s important that whoever’s doing their taxes understands that and gets the full benefit of that write-off. 

Going forward, as we think about these things – again, I’m going to go more on the side of the parent – I think if there’s any time for you to specify how that child responds to a different type of care, let’s assume we’ve got a child with autism or some other disability, you know that child better than anybody.

If something happened to you, it sure would be wonderful if you could write down in a letter of intent or a letter of instruction what tends to work when it comes to managing that child on a day-to-day basis, and frankly, what doesn’t work as well. 

Write those things down for those people who may be taking care of your child after you’re gone. You may want to appoint a guardian or conservator. Again, this is all part of your estate planning. I would say that probably the most important thing is to find an advocate. 

Get an advocate, whether it’d be a sibling, a friend, somebody who’s going to fight like the dickens for that child. You want a support system and pull everybody together to make sure that that person, that child, that adult is getting the care, and the love, and everything that they need for the rest of their lives. 

Thank you so much for tuning in today. I really appreciate your questions. Please feel free, go onto our website at staging.keyfinancialinc.com. Let us know what you want to hear about. Some topics are tough. This was a tough one. It’s what we’re all about. We’re all in. We’re here to help any way we can, and we can. Thank you so much for tuning in today. I hope you have a great day. Take care.

Ep78: America’s Economic Imbalance and Rising Inflation

About This Episode

Patti meets with her Chief Planning Officer, Eric Fuhrman, to discuss concerns most Americans have right now regarding rising inflation. To understand the relationship between our economic imbalance and inflation, they first define the two concepts and then give a global historical perspective. Is history repeating itself in relation to the economic crisis we faced with inflation during the 1970s or is this transitory, short-term inflation? What do the pandemic and global economic shutdowns for 2020 have to do with the rise in inflation we are now seeing? Patti and Eric delve into what is happening and why. As consumers, Americans should be aware of how long the economic recovery might take and what goods and services are affected more than others. As investors, Patti offers some suggestions on what steps should be taken during this time.

Transcript

Patti Brennan: Hi, everybody. Welcome to the “Patti Brennan Show.” Whether you have $20 or $20 million, this show is for those of you who want to protect, grow, and use your assets to live your very best lives.
Joining me today is Eric Fuhrman. He is known by many of you who have been subscribing to the show as the Professor. The Professor and I are going to unpack a topic that…geez, it just seems like everybody is talking about today. Right, Eric?

Eric Fuhrman: I would say so. The only suggestion we might have, we should play some kind of dramatic music when we make the introduction. The Professor, you need some kind of drama to really…

Patti: We probably should get your Alma Mater, your school song, playing in the background, something like that.

Eric: Yes. Maybe a clip from “Gladiator” or something like that.

Patti: Absolutely. I’ll believe with this…

Eric: Russell Crowe movie.

Patti: With this topic we need the Gladiator. Today, we’re going to be talking about inflation, an important topic for everybody who’s watching and listening to the show.

Eric, it’s funny, I have to share with you something that someone told me about the podcast. They said that when they listen to you and Brad, they always feel like they get the facts and nothing but the facts. It’s unbiased and very clear, and they always walk away feeling better. I just wanted to say that to you. I really appreciate the time and effort that you put into this podcast.

I also want to let everybody know that in preparation for these shows, we put together whitepapers. Up until today, we haven’t put them on the website. It occurred to me that, “Geez, we’re doing all of this work. We’ve got charts, and graphs, and a lot of really good content.” In addition to listening to podcasts, you can go to the website, and you’ll also see the whitepaper addressing the topic that we’ve discussed.

With that in mind, we’re going to talk about, geez, what is the big deal with inflation? Is it something that we all need to be worried about? By the way, what are we going to do about it?

Eric: I just want to follow up on that comment there. Appreciate that. I think that we owe it to our clients but also anybody who listens to the podcast to really come with hard-hitting facts, not just facts but things that are supported by evidence that can be demonstrated by observing the world and what we see and weaving together a compelling narrative.

Hopefully, that creates a podcast that’s going to cause somebody to take the scenic route to work so that they can get all the facts and figures and listen to it from start to finish. That’s what we want. It’s not just for you to tune in but to tune in to the very end.

Patti: Oh, absolutely, and I know I would do it, especially knowing what we’ve put together for today’s show. It’s really good stuff. Again, to your point, it’s just facts. We’re hearing the headlines, and we’re hearing what the Fed thinks and what other people think. Where is all this information coming from? How are they backing it up?

Eric: What’s neat about you and me is we’re both nerds because we’re talking about inflation here, but I think what’s important is that the enthusiasm comes through and is infectious and that hopefully benefits anybody listening to the podcast that they come away with an understanding of something that maybe is not the most exciting topic but certainly affects your pocketbook and your finances.

Patti: It also affects how you sleep at night because, geez, you look at the headlines right now, and people are reading 5.4 percent inflation. This is scary. Are we going back to the ’70s? Eric, this is probably dating myself. It’s well before your time, but I find there is a generational difference between people’s perceptions of inflation.

I grew up in the ’70s. Geez, we had to wait two and a half hours in gas lines just to fill up our tank. In fact, I will never forget this, Eric. I don’t remember. It might have been 1980. The EPA came out with the most fuel-efficient car in America. It happened to be the Volkswagen Rabbit diesel engine. My father, Gene Clark, the father of seven children went out…

Eric: God bless him.

Patti: God bless him. He’s right. He went out and bought a Volkswagen Rabbit that fits for people if you’re lucky, but you know what? Hey, it gets 50 miles per gallon. The only problem that he discovered was that the tank itself was only 10 gallons. We were still waiting in line as often as the rest of us.

That’s the way we grew up with inflation and the long gas lines, and it’s never going to end if the world was going to run out of oil. It is a fear that’s out there. We remember Germany in the black and white pictures of the bread lines and something that you brought up about China which we’ll get to later.

It’s a very real thing because of these rising prices. If the incomes are not rising along with it, how are people going to afford to live?

Eric: What I think is so interesting is that what you really highlight on here, which is important, because I was born in the ’70s, at the end of the ’70s, I didn’t live through it. Our experiences really shaped our expectations of how we view inflation.

For me, I didn’t have an income back then. I wasn’t buying things. My parents were, but I just remember them complaining a lot when gas was more than the dollar a gallon.

The baskets of goods that I purchase throughout my lifetime are more things like electronics and other things. The basket I purchased might be different than the basket of goods that somebody who’s older that purchase, so we see it through different lenses really shape our AR experience in the time period that we grew up.

Patti: Let’s unpack this a little bit. Let’s give everybody a primer on inflation. What exactly is it, Professor?

Eric: Inflation can arise for different reasons. Usually economy at any given time is able to produce a relatively fixed quantity of goods and services, but the prices to produce those goods and services can drive inflation higher if this idea of too many dollars chasing too few goods.

There’s more demand than there is supply. We believe there is right now that can drive prices higher. It’s a human phenomenon that has been around for centuries, so it’s nothing new.

Patti: If I hear you right, it’s caused by an imbalance of some sort. Too much money, too few supplies. It’s an imbalance, right?

Eric: Right.

Patti: Now, we’ve got that. Right now, we’re talking about this 5.4 percent inflation. That is significantly higher than the Fed target of two percent. Are we on the weight of runaway inflation? By the way, is all inflation created equal as everything going up?

Eric: That’s a great point that people need to understand, is they tend to focus on that headline number. That’s a dramatic increase. Again, the number is measuring June from this year to June of last year. We were in a much different place last year where prices were not rising because we were going through COVID.

Patti: Boy, that’s a good point. Guys, really lock and load that point. It’s year over year. Remember where we are. Just as Eric just said, in June of last year, we were in lockdown. People were not buying anything.

Eric: Also, here, for those that are watching online, we are putting up charts of these graphs, so you can see it, but figure one that we’re going to present that the human brain needs to fill a void.

When you look at this number, you see a chart where it’s just going straight up. The brain has to fill that in, and the brain is likely going to say, “Well, it’s just going to keep moving in the same direction. We’re just going to extrapolate the past into the present.”

The reality is, when you look over a much broader timeframe, inflation has a lot of oscillation. It moves up dramatically. It falls dramatically. We just want to take a step back and realize that, yes, it is a big number, but I think we just need a deeper understanding and recognition that trees don’t grow to the sky. It just doesn’t go on forever.

Patti: I love this part in your whitepaper that referred to certain self-correcting mechanisms because what happens is when there is a lack of supply, prices go up, and then capitalism is what capitalism is. Other entities say, “Wow, they’re really making a lot of money. This profit-driven society that we have,” and more people get into that particular areas, so the supply increases.

As the prices are also going up, and then consumers, people like you and I are saying, “I’m not paying that much money for that house,” which is something that we’re experiencing right now.

How many people have we receive calls from who were looking at buying a second home or maybe getting a larger home and they’re saying, “You know what, we’re waiting this one out. The prices have gotten ridiculous”? That becomes a self-correcting mechanism also.

Sooner or later, more supply people are not going to be buying and having this feverish, pitch of overbidding for these homes, that’s number one.

Number two, as the prices begin to level out and even go down as lumber has, builders are now saying, “OK, I was pausing on building that development. We weren’t going forward with it, but now I can do so, I can build a home, and have a profit.” It does begin to dissipate over time in normal times. Let’s just say that, right?

Eric: Yeah. You highlight. This is Economics 101. We all have to figure out how to allocate scarce resources. You and I, as consumers, freely engage in cooperative exchange if it’s to our benefit. It is the buyers and sellers that set the price.

Transactions are occurring, prices are rising, but people are still coming together and finding value in that transaction. That transaction is ultimately what creates output and economic prosperity, which defines our standard of living.

If prices get too far out of whack, just like you’re saying, we hear people that are now saying, “I’m going to delay or defer the purchase,” you and I can make a decision whether we exchange or whether we opt out and say, “I’m just going to wait.”

Just like you’re saying, as more people are exchanging, if prices are rising, that will bring sooner or later more supply to the market because that means profit margins are going up or people decide it’s too high, it’s not worth it, and they wait. Now, eventually, the price will slow down or…

Patti: As inventories rise, it all comes down to that.

Eric: Or at least, that’s how all those charts go that when you were an economics class, you had to fill out on your test.

Patti: It’s interesting because it’s getting back to that 5.4 percent. I was fascinated with figure number two here in terms of, “Gee, what really is inflating and what really isn’t inflating?” Take it away, Eric. I thought this was terrific.

Eric: I think the point here is that the headline number is an aggregate basket of thousands of different products and services that are being valued. Inflation is most certainly not evenly distributed, and it affects some people in some industries more than others.

When you look at headline number 5.4, more than a third of that increase is just related to rises in used car and truck prices. That’s one element

Patti: That blows me away, I’m sorry. That is amazing of all of the metrics and all of the things that were are being measured. It’s not even new cars. I could understand the new car prices increasing faster because manufacturers can’t get ahold of the chips, right?

Eric: Right.

Patti: But it’s the used cars, which I just think is fascinating. It’s a third of the increase, which is not everybody is buying a new, used car. I don’t think that’s a word yet.

Not everyone’s buying a new, used car every single year. Not everybody is going to be affected by that part of the CPI U.

Eric: What’s so interesting, you have three categories that increased 44 percent year over year – fuel oil, motor oil, used cars, and trucks – but other things too like transportation services, airlines. You’ve had double-digit increases and these areas, but we have to think and put that in context of what has basically transpired over the last 18 months.

Yes, the numbers are high relative to history, but we’re also talking about a historical event that has not occurred in the modern age with just-in-time supply chains where people don’t build massive inventories. They order things when they need them.

Something like this has never occurred or unfolded in this way. I don’t know that you can say this situation is just like the 1970s. This situation is unique, and we have to understand that.

Patti: It is so interesting because again on that chart, figure number two, the second and third categories are motor fuel and fuel oil, which by the way, just to bring you back a year ago, do you guys remember that oil prices went negative. Negative. Now, that’s never happened before. That’s your starting measurement, and then you’re comparing it today.

Again, when you hear these figures, understand what they’re measuring, year over year versus annual things of that nature, and make sure that you are…At least, I’m going to speak from our perspective. We’re always evaluating these things in their proper context.

Eric: Context is everything. Some people who have been locked down in their homes will be happy to hear that alcoholic beverages have only increased by 1.9 percent, so far less than the CPI. Clearly, some people are benefiting from the inflationary trend.

Patti: Which is interesting, because I think that comes down to…I mean, everybody was drinking a lot more. Hey, you know what? It was out there, so I might as well go for it.

Eric: Moving on. What you tapped into earlier was this generational difference in terms of expectations, but it is interesting. Surveys are done on inflationary expectations, and there is a pretty distinct difference based on when you were born.

Some people would say certain cohorts of the population have a sampling bias to how they view inflations. Most of our clients tend to be on the older end of the age spectrum. We hear a certain perspective, and that perspective is really formed by experiences over 30, 40, 50 years.

Patti: You bet. At the same point, our younger clients who don’t seem to be as concerned about it, also need a little bit more education, that never says never, right?

Eric: Yeah.

Patti: We do have some of the signs of inflation that it could get to be an issue that needs to be dealt with in a more forthright manner. Let’s talk about the drivers of it.

Let’s talk about the drivers of inflation and then maybe break it down, Eric so that the listeners can get a better understanding of why the Federal Reserve and Jerome Powell, in particular, seem to believe that this is all going to be temporary. This is transitory. How come?

Eric: Inflation is a general rise in the price level, but it can occur for different reasons. Economics has given us a way to delineate between two forces that might cause inflation. The 1970s style would be what’s called cost-push inflation where you have some kind of shock or something that happens.

Basically, the natural resources that make the products that we consume or the cost of labor, these things are rising and that’s increasing production costs, and supply ends up shrinking because of that. If you and I still want the same kind of stuff, but there’s not as much of it to go around, that’s called cost-push inflation.

We think and believe when we look at what’s going on in different indicators that this is actually the other form of inflation, which is called demand-pull. That’s more of a situation where demand is growing, and there’s just supply is not growing fast enough to meet everyone’s demand.

If you want to tease apart COVID and decisions that were made, I think we have a framework that supports the demand-pull inflation theory more than the 1970s style cost-push.

Patti: All of the things that were done in 2020, during COVID, whether it’d be fiscal or from the Federal Reserve, fiscal in terms of checks to every American, rich or unemployment benefits, the evictions.

The fact that people couldn’t be evicted from their homes and their apartments, and then the Federal Reserve stepping in, lowering interest rates, and doing the bond-buying programs to increase the supply of money in the economy, making it so that banks didn’t have to have the reserves that they did before that loosened up the lending requirements, and so the banks could lend more.

There’s a lot more money in the economy, just pure cold cash. On top of it, we were in lockdown, and we couldn’t spend it. Savings rates went up, and that was wonderful, but eventually, that will catch up with us.

Eric: It’s interesting. For us, we have our client base to take a sampling, but how many phone calls that we get our client said, “Well, we’re just not spending money. You don’t have to send us the same amount, or you can stop the distribution. We’re fine on cash”?

These are people that are not doing this discretionary spending, and cash is just piling up, is not being spent. As you pointed out, you have a government stimulus that is injecting money into the economy and directly into people’s pockets.

Patti: It’s really interesting. I just thought about this. Even the suspension of the requirement for people to take their required minimum distributions, most of our clients, they said, “Hey, I don’t need it. Don’t send us our required minimum distribution this year if we don’t have to take it. Just leave there.”

As a result, their taxes went way down. I just think the domino effect of all of the decisions, it’s fascinating. The unintended consequence could be some inflation.

Eric: When you put the pieces together into this mosaic of this demand-pull theory, what you come away with is what you’re describing, is that there’s pent-up demand. There are people that have cash. There’s stimulus, but guess what? They can’t spend it because of lockdowns and social distancing.

Those things are now melting away or have been removed over the last couple of months, so you’ve got all this money and all these people that are itching to get out and spend. You’ve got a huge burst of demand.

Think about producers. Think about businesses. If you’re a business and you go through something like COVID, what do you need to survive? You need cash. You need lines of credit. If you have inventory, inventory is cash tied up in the balance sheet, so what do you do? You liquidate.

As we’re piecing together this theory, you have a lot of cash, a lot of pent up demand that is basically being released all at once, not over time, at the same time that you have suppliers that are dealing with record-low inventories and cannot rebuild them because they needed cash to survive. Inventory’s been liquidated. You’ve got these two really incredible forces coming together at the same time.

Patti: Eric, it’s so interesting because as we were preparing this podcast, you told me about the story of taking your family out to a restaurant this weekend. I will have you tell that story, but I think that along with inventory…

Remember, we are a nation, an economy, of goods and services. Geez, as part of this whole issue, many people let their employees go or put them on furlough, never to see them again. Why don’t you tell our listeners what happened this weekend?

Eric: My mind was in tune with this because this is something that’s been in the works for a while. I took my family out to a restaurant that was on the water, a beautiful place. It was so interesting. We went to check-in, two and a half hour wait, people, sitting everywhere. In my mind, I’m thinking, “Wow, a lot of demand. People want to get out.”

As we wandered around while we were waiting, trying to pass the time, the interesting thing that I noticed is there’s a two and a half hour wait, there are people everywhere, but there are empty tables all over the place. Why are there empty tables?

Patti: There were no servers.

Eric: Right.

Patti: Right, they…

Eric: Not enough people to wait on it, so there is a true economic cross. That kind of thing can play out in terms of rising prices, but there is also an opportunity cost because those are sales that those businesses are not able to realize because they can’t service the customer.

Patti: Exactly, and they don’t have the people putting in the orders, therefore, they’re not having that sale. In this example, it might be a meal, but sales occur at all levels of the economy. Therefore, they don’t have the profits. That goes on too long. Guess what? They’re out of business.

Eric: That’s an example of the service business, but we can look at evidence of inventory ratios, and this is common sense. You can observe this with your own eyes when you go around – inventory of housing, inventory of autos, inventory at retail stores.

There is a metric called the inventory to sales ratio that you can look at. Normally, what you want to see is a low inventory number, right? You don’t want too much cash tied up in inventory because that’s money that’s inefficient.

You want to try to keep balance, but what we see now is you have inventory to sales ratios that are rock bottom. They’ve never been so low. That’s not a sign that businesses suddenly became magically efficient in the last 12 months. It’s a sign that they don’t have a product.

If you don’t have a product or there’s very little of it, what happens? The price goes up, or you can’t record sales because you don’t have the stuff to sell. To me, that’s an interesting way to see another thing that feeds into that demand-pull inflation story that there’s not enough supply to satiate demand.

Patti: That’s a metric that the Federal Reserve looks at. That’s an important thing for everybody listening and watching today. They’re not making this stuff up. That’s a ratio easily obtained when you go on the Federal Reserve’s website. Another important statistic that delves even…

Eric: If you’re like us, it’s easy because we’re on there all the time. We know what to look for.

Patti: That’s true. We’re nerding out again. Sorry about that. Good point.

Eric: It’s not as easy you think.

Patti: OK, guys. Do you think that one was bad? Wait till you hear this next one.

It’s called the Baltic Dry Index. Don’t I know you want to turn off your phone and run to your computer to look this up because it’s so fascinating. However, it does give us a very good idea of what might come in the future. Eric, why don’t you explain to everybody what it’s really measuring?

Eric: Gosh, it’s a term that I don’t know ever gets worked into very many meetings, but it seems relevant today.

Patti: Fire away.

Eric: I tried this one on my family. “Baltic Dry Index, what are you talking about, Dad?” Basically, what the Baltic Dry Index is, when you think about this supply and demand story, if retailers don’t have inventories, keep working your way back to the origin of the supply chain.

Where is the genesis of the supply chain? It starts with raw materials like copper, iron ore, grains, whatever it is, that’s the beginning. All those goods, those raw materials that eventually are turned into intermediate to finished goods that we end up buying, have to be sourced and shipped from all different parts of the globe.

The Baltic Dry Index looks at 20 different major global shipping routes and four different classes of shipping containers from ones that can go through the Panama Canal to ones that can’t. It is a very clear leading indicator of the global demand picture, which will eventually unfold because if there’s a great demand for shipping containers, the price of those containers will go up.

What you’ve seen is an almost eightfold increase in the cost of shipping containers since probably May of last year. The price of the ship things has skyrocketed. That is a sign of this unfolding conspicuous demand story that people don’t order raw materials unless they have orders to fill.

Again, retracing the supply chain back to the original point of origin continues to paint that interesting picture that, again, supports this notion of more of a demand type inflation than a cost type inflation.

Patti: Let me play devil’s advocate here because what I’m hearing from you is this is probably not going to be another 1970s. I’m going to reveal my generational difference here, but wait a minute, Eric.

The ’70s rampant inflation was really fueled by – no pun intended – the oil crisis and the rising prices of oil. Why is this different? Isn’t it true that it’s the same thing all over again, we can’t get a hold of the raw materials quickly enough, and so, therefore, prices are going up?

Eric: Nothing is ever clear cut in the world. There is no you can point to this and say, “It is exactly this and this is the cause.” We’re talking about decisions that are made by billions of people and businesses all across the world.

We’re just trying to think of a framework to understand it. There’s no doubt that resource prices are rising, oil’s going up. Months ago, lumber was skyrocketing and hitting all-time highs.

There is some of that there that supports this other notion, but what we’re trying to define and boil it down into its most basic components, what are the real primary drivers? Are those costs of raw materials, copper, and things like that going up?

Yes. You can look at a chart, and you can clearly see that those things are going up. What are the reasons? What are the main drivers?

Patti: How permanent is that going to be?

Eric: Exactly. It’s more of a situation where the entire globe shut down in unison and it is opening up in unison.

A lot of people have money to spend. They want to spend it. Supply is nowhere to be found because people weren’t producing for so long.

Patti: It’s a perfect storm.

Eric: It’s just going to take time to catch up.

Patti: I got it. What I think is interesting is, look at what’s happened to lumber. It skyrocketed, and now it’s come back down again. It does support that theory, certainly in that example.

Let’s go forward. Let’s focus now on what’s going to solve this problem? We talk about the government and the Federal Reserve and their role as we’ve spoken in prior podcasts, is really to issue policies that are countercyclical.

When things are really bad, they both step in to save the day, if you will. We’ve seen that in terms of the money supply, and lowering interest rates, and issuing checks, and it really did work.

Let’s go back a little bit in history, OK? That’s fine and dandy now, but we still have inflation. We’re still worried about this. Why don’t we just slay this dragon once and for all? For example, can we go back to the gold standard? Won’t that solve it? Because there’s only so much gold in the world.

Eric: I think its interesting people would say, “We’ve got to go back to sound money, hard money, and that will solve the problem.” If you look at history, all types of things have served as a store of value.

Gold just happens to be the one that human beings, for one reason or another, just – I’m trying to think of the right word here – fascinated by its golden luster. It’s got visual appeal and so forth.

Patti: That, too, is also cultural because as you brought up last night, China, their gold standard was actually not gold. It was the rice standard because that’s what was so important to the people of China.

Eric: I think at some point it was back in the 16th century or something like that, but yeah.

Patti: I’m dating myself again, guys, OK?

Eric: Oh my goodness, yeah.

I think there’s a notion that you could return to that, but the history there, the United States had a binding metallic standard of gold and silver. Then about 1871, gold basically supplanted silver. We were on a hard gold standard from 1871 to 1914, somewhere around when World War I broke out.

I think the founding of our country and most democratic governments, people have this natural distrust of government-controlled money.

When you think about the history of monarchs and so forth, how did monarchs attain wealth? It was by ex appropriation and transfers, devaluation when they spent too much money. Just the monetary affairs were usually completely mismanaged at the expense of the population.

I think the gold standard is really a way where the government cannot intervene and engage in some of these things that essentially rob the population of wealth.

The issue that you have with the gold standard is that – we use this example of Rip van Winkle – if you fell asleep in 1871 when we adopted the gold standard and woke up in 1914, the price level was virtually unchanged. The gold standard was successful in keeping inflation contained, but that doesn’t mean there wasn’t inflation or deflation during that period.

What you have is if you’re trying to maintain the value of the currency, the price level now swings fairly wildly up and down because it’s reacting because there’s a difference between how much money there is and how much we’re producing at any given time, and that causes a change in price.

That oscillation creates dramatic swings in the business cycle. When you look back historically on a gold standard, you had some very deep but very, very frequent recessions. There was basically an even distribution of recession and expansion, recession and expansion all over again.

That’s part of the problem of the gold standard is it makes the business cycle unpredictable and unstable. Again, if you look at it during that period of time, it was a