Transcript:
Easan Arulanantham:
So, this is a planning question: “do you examples of poor financial decisions made by clients that by changing their plans, changed their plan’s success rate?”
Tom Vaughan:
Yeah, this question came in. So I’ve been thinking about, it’s kind of interesting…We have 270 households that we are helping, and it’s amazing actually, how infrequently, they do something wrong. Partly because they ask us for our opinion, but even when they don’t, they still tend to do pretty well. And that’s why they’re our clients. That’s why they have money. You know, because really, the people that aren’t our clients, the number one financial piece that people mess up on, throughout their lifetime, is the inability to save. Almost all my clients have a very similar story is that, you know, my dad or whatever told me to make sure I save 10% or more, and then just pretend like it’s not there. And so those people that can’t do that, right, there aren’t our clients. Because, the average person here in the US does not have a lot of money. And so sometimes there’s no way to save, because you don’t have enough revenue, you know, and enough income and those types of things. But that’s a big one, but that’s not within our clients. When I look within our clientele, and look at some of the things that have happened, I would say one of the things is just a lot of people have almost all of their assets in their house and an IRA, maybe that used to be a 401k at work. And nothing particularly wrong with that. That works quite well, but it does kind of create a little bit of a restriction. And so then they want to do something big, with the money. And it’s really hard to get big money out of an IRA, because it pushes you up in the tax brackets, and you can end up spending an awful lot of money on tax as far as that goes. So I would say continuing to develop money outside, not just emergency account money, that’s important, but money in stocks and bonds or what have you, that’s in a taxable account that’s outside of IRA is important.
So sometimes, that’s something I’ve seen that that could be improved. Then the sequence of withdrawal. So somebody gets into retirement, where do you withdraw the money from? You know, when do you take Social Security? Okay, that’s a big issue, but even ignoring Social Security for a minute, or do you take the money from to live off of? And so I see a lot of people who just automatically go to start taking money out of their IRA accounts. And the comment I hear all the time is, “Hey, these are my retirement accounts. And now I’m retired. So I’m going to start taking money out of those accounts.” But if you run the numbers, that’s not as good as taking money out of your taxable accounts first, because the capital gains or are lower tax. Some of that you’ve already paid taxes on so you can get some of that money back without any tax and allows the IRAs to grow, continue to grow tax deferred, which can be quite powerful. You definitely don’t want to be taking money out of your Roth type of accounts until the very end, because those are going to be tax free. So, the sequence of withdrawal is another area where there seems to be a lot of confusion, you know, as far as when to take what. So that’s something I think that, you know, is another area to focus on as far as that goes to, but for the most part is kind of amazing how well, people have, you know, made their decisions and kind of move through their financial life. And again, that’s why they’re our clients.
Yeah, that’s a good point. Because you could be onto something. I mean, if it’s already doubled in a fairly short period of time, whatever it is, or, or even gone up, 20%, you know, whatever it is, you could be on to something that could be huge. And, you know, got a client that that bought $14,000 worth of Apple in ’96, you know, when it was not looking good for Apple, honestly, at that time. And it’s worth millions now, but that client never sold any. They could have. Maybe when it turned into $28,000, I doubled my money, you know, take it as be pretty happy, that’s a good rate of return. But man, it letting it go and turning it into millions, is a much better option. So yeah, I’m a big proponent of trying to keep some of these things just keep going, you know, with Adobe, or whatever it is, they’re really well run and they keep on moving. One strategy that you know, we employ is what I call the ‘fruit tree strategy.’ So in other words, we’ll pick some dollar amounts, when that thing gets to a million dollars or something will start to take money off and just to diversify. So when it gets to a $1,200,000, take $200,000 off. And so the next year, it turns into $1,100,000, I’ll take $100,000 off. So it’s I call it the “fruit tree,” because it just keeps kind of producing. And that way we can diversify. And so it’s a sort of splitting the difference, instead of selling the whole thing, just because it’s up a lot. I have had clients that kind of panic is like, oh, my gosh, this is up so much. And then they sell a big chunk of it. And it keeps on going. You know, so anyway that strategy, letting the winners run is that’s a difficult one to employ. But there are some ways to look at it, and some ways to maybe do it that do help, you know, at least mentally so yeah, it’s a good point. Good point.