Behind the Book “Keep It Simple, Make it Big: Money Management for a Meaningful Life”
Q: Why did you write this book?
A: My mission is to bring top-tier financial advice and attention typically enjoyed by America’s wealthiest families to America’s middle-class. Too often financial advice is thinly veiled sales pitches for a sponsoring company’s products that may or may not benefit the consumer. I’ve been educating consumers for nearly two decades in seminars and a radio show and I wanted to create an accessible book that would provide basic, unbiased information that would empower people to take control of their finances. It’s my strong view, born out by experience, that in these United States of America each of us can make smart choices and enjoy financial success.
Q: What inspired the title, Keep It Simple, Make It Big?
A: I’ve always been an adherent to the KISS principal, first explained to me by Mr Vermasin, my baseball coach in 7th grade. He said Keep It Simple Stupid. There is an inherent complexity to personal finance in America, due to our progressive tax code, self-reliant culture, and diversity of both public and private benefit and insurance systems. So there will always be some complexity that must be embraced, understood, and dominated. Hence the book is nearly 200 pages. That said, if people bring it back to the basics—spend less than you earn, invest in diversified investments that put the power of compounding on your side, minimize taxes, insure those things that you can’t afford to lose, mostly your income through disability and life insurance—they will create financial independence in America.
The direct quote comes from Jerry Garcia, the legendary leader of the Grateful Dead. It comes to me from a client and I found it very insightful. Growing up in Northern California in the 1980s, I spent some time at Dead shows.
Q: In one of the simple steps at the end of Chapter One, you write, “Big goals motivate. Don’t’ ask ‘Why?’ Ask, ‘Why not?” What do you mean by this?
A: I’ve noticed many people live lives constrained by what is expected and normal and what others might think. If someone said they wanted to retire to Mexico, for example, and start a fishing charter, they would think why would they do this? I like to flip the question and ask, Why Not? Getting one’s finances right early in life allows for a lot of “why nots?” I personally was able to change careers, with a brand-new baby, in my early 30s for this reason. Most regrets in life come from things people regret not doing not for the things they do. Ask why not, go hard at it, and minimize regrets.
Q: One of your roadblocks is taxes. With all the options for accounts, pre-tax, Roth, pay as you go, are there any general rules to which accounts people should use to select accounts to minimize taxes?
A: One of the great ironies of pre-tax retirement plans is people love them while working but find them frustrating in retirement, when taxes are owed with each withdrawal. The solution is tax diversification, best accomplished by funding Roth accounts in early earning years when income and income taxes are lower, moving to pre-tax accounts in peak earning years, and supplementing both with taxable accounts that allow for liquidity and access. The key is to have low-tax options when it’s time to use the money.
Q: What is the greatest risk you see facing retirees?
A: The first is underestimating inflation and, correspondingly, misunderstanding which types of investments are conservative and which are aggressive. Inflation is the carbon monoxide of personal finance: it creeps up undetected until it’s too late, prices have doubled, income has not increased, and the only option people face is to cut living standards or consume principal. Bank assets and government bonds are obviously safe for short term needs, as they are backed by the U.S. government. But for financing a 30-year retirement, diversified baskets of equities, i.e stock mutual funds and exchange traded funds, provide far more safety. I like to say termites do more damage than hurricanes, even though the latter get all the press. Inflation is the financial version of termites.
The second, and it’s a close second, is what I call paying rent in the wrong kind of hotel. Long-term custodial care is extremely expensive in the United States, at least $10,000 a month in the Northeast where most of my clients reside, and I see this turning middle class Americans into wards of the state. It’s frustrating. Years ago, we had affordable insurance to address this risk. That is no longer the case, so we deploy a variety of other strategies.
Q: What’s the largest conceptual mistake you see people making?
A: Misjudging their investment time horizon. It’s common for people five years out from retirement to say their time horizon is five years so they need to get conservative. I ask, “when do you plan on dying?” They laugh and understand that they still have 20 to 30-year time horizon and over this time there will be many ups and down and inflation will be relentless. Therefore, they need short, intermediate and long-term money. In fact, I think if they do it right, they may have 100-year money. My great-grandfather still has not spent all his money, even though he’s been dead for nearly 50 years. 16 years ago, I inherited $200K from him when my grandmother, his daughter passed. I used this money to support my special needs daughter, spending nearly $150K of it on therapists, lawyers and other necessities of a young family. Today the account value is north of $225K. This is only possible because it’s in equity not cash or bonds. It’s my intent never to deplete this account and send it down to my son to do the same. The reality is, most of us will not outlive our money and therefore we should keep a good portion of it invested.
Q: Have you seen the Covid pandemic altering your cleint’s retirement plans?
A: In a word, No. Our asset management and income generation systems are designed to get clients through tough time so they can benefit in the good times. Neither the timing nor the cause of severe market declines can be reliability predicted. That they will occur with some frequency, can be expected. We put robust simple plans in place to generate reliable income.
Q: Can you be more specific?
A: Most people require three things in retirement. 1. Stability of principal. 2. Reliability of income. 3. Growth of that income over time. Each of these needs’ conflicts with the others. Things such as bank accounts and government bonds that provide stability of principal, for example, provide neither reliable income nor growth of income. Things that provide reliable income, Social Security and privately owned income annuities, don’t provide safety of principal nor much growth of income. And things that provide growth of income, equity dividends and principal growth that can be sold and turned into income, don’t provide safety of principal nor completely reliable income. Therefore we use a combination. When markets drop, like they did, our clients simply move their withdrawals to the safety of principal bucket and allow the market to bring back the growth bucket. Fortunately, this time the initial rebound was quick.
Q: What’s the most unexpected result of COVID that you have seen in your practice?
A: Hands down, it’s the reduction in spending and therefore withdrawals on their accounts. Client after client is pausing systematic withdrawals, as big-ticket items such as travel and dining out are either eliminated or drastically reduced. There are always natural buffers in recessions as people worry about the future and therefore conserve resources. But in this instance, it’s been an enforced austerity and coupled with the government waiving the Required Minimum Distributions for 2020, it’s vey noticeable.
Q: You refer to the roadblock of the three D’s: Disability, Death and Divorce. What’s the significance of this?
A: One of my favorite rules is do these three things and you will be financially successful: Stay employed, stay married and invest at least 10 percent of one’s income. Most of us violate at least one of these at least once. Financial plans work on time and money. They more time has, the less money they need to devote to the future as the power of compounding is on their side. It’s important to use insurance to provide money if we either can’t work due to disability or we die prematurely. The smart use of disability income insurance and life insurance is key to financial success. When I work with people, I bring up the concept of the money machine. I ask a couple if they had a machine in the basement printing $75,000 a year in money, how much they would insure it for? They say for as much as possible. To that I retort, think of yourself and your spouse as that machine and get the proper insurance. I’ve seen it make a big difference in people’s lives. Huge.
Q: It’s becoming common wisdom that people should wait to collect Social Security to get a larger benefit as it grows at 8 percent a year. Do you agree?
A: Sometimes, but certainly not always. First, it’s not a real 8 percent, as its income increase not a lump sum. For example, if I could take $2,000 a month and wait a year, I will be entitled to $2,160 or $160 a moth more. That is good, but I gave up $24,000 in income to get that increase. The question is how long until I break even? It’s roughly 12 years. So, there are many cases in which I think it’s optimal for people to collect Social Security prior to their maximum benefit. This is an area where people need to do the math and consider a lot of factors, not just the eventual larger check. This is the basis of most family’s retirement. It’s important to get it right.
Q: What’s your best personal finance ‘hack?’
A: It used to be Roth IRAs, as they could be used for retirement, college financing and even emergency reserves since contributions could be withdrawn at any time tax free. That is still a good one.
It then moved to Back-Door Roths for high earners, a strategy that allows people to invest in Roths annually by converting after-tax IRAs to Roth IRAs.
Now I have to say it’s Health Savings Accounts, the triple tax-free vehicles. I write it up in my book how they can be used for things other than health care if done properly. I stress that the health insurance that accompanies the account must be right for you for this to be a smart move.
Q: It’s often asserted that there is a retirement crisis in America, do you agree?
A: Definitely not. I wrote an article based on a study that tracked real retirees and found that most Americans die with more money than they retired with. It’s a myth that most Americans once had a pension. This was never the case. There are fewer pensions now for sure. But Americans have an amazing array of options to save and invest for retirement, options that our parents and grandparents didn’t have. A fully funded 401k or Roth IRA will provide far more income than a corporate pension ever did. It will transfer to the next generation rather than die with the pensioner and, if a person wants the certainty of a pension, they can always use some of the funds to purchase an immediate annuity. That they rarely do so is telling. The key is that they system is self-service: just like it’s easy to be physically fit provided a person behaves in an certain way, the same is true with financial success.
Q: Do retirees need life insurance?
A: The answer is yes more often than one’d expect. The reason is to protect Social Security payments. The number one reason people use life insurance is to protect against a loss of income. In modern America, in married couples both people are collecting substantial Social Security benefits. If one dies, it could mean a loss of $30,000 plus a shift into single tax brackets. This is a risk that is not really on most people’s radar screens and it should be. Life insurance is one solution.
Q: Can retirees purchase life insurance? Isn’t it for the young?
A: The good news is that people are living longer and longer and as a result they are able to purchase life insurance well into their 60s. It costs more of course, but that’s because the likelihood of using it is higher!
Q: Do people really need to go the trouble of getting a will?
A: Absolutely and be sure to get health care directives and durable powers of attorney—appointing someone to act on your behalf as well. It’s important not to blow it at the end and have family fighting and lawyers getting paid with your money. Most of our assets can be transferred with beneficiary designations so these forms must be scrutinized. Its no fun to contemplate our dismemberment and death but alas, we must all do so as it’s inevitable.
Q: Can people do their own financial planning, or do they need a professional?
A: Yes and yes. People can certainly do their own, if they want to invest the time. That’s in fact how I got into this career—I am a hobbyist who did my own and helped friends turned professional. That said, if it’s not one’s passion, they ought to consider partnering with someone who is passionate about it. One must master the complexity to get to the simplicity and one or two good insights will pay for the entire relationship. Many people who do it themselves will also hire professionals at some point for specialized consultations.
CRN202209-272216