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welcome to the best interest podcast
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where we believe Benjamin Franklin's
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advice that an investment in knowledge
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pays the best interest both in finances
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and in your life every episode teaches
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you personal finance and investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to episode 90
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of the best interest podcast my name is
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Jesse Kramer and today we are bringing
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you another ask me anything or AMA
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episode epis as with the first two AMA
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episodes which were episodes 81 and 86
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all of these questions come from you the
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listeners or the readers of the best
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interest blog as always you can send in
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your questions to Jesse bestter
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interest. blog I try to read every
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single question sometimes I will just
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shoot off a quick reply sometimes I will
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save the questions for podcast episodes
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like this but first as always we will
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start with a customary review of the
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week this one comes from RV guy Ed and
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then a whole bunch of letters after that
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Ed writes in he says I listen to a lot
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of personal finance and retirement
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podcasts and I was blown away by the
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best interest Jesse has a really solid
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understanding of finance and investing
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principles he's thus able to explain
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issues in full rather than taking a
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position and presenting as the only
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truth the best interest has helped me to
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understand issues that I never had
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really felt I understood before keep up
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the good work Jesse your podcast has
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made a big difference in my financial
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Journey well RV guy Ed I'm I'm really
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happy about that thank you I'm I'm glad
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it's made a big difference in your
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financial Journey thank you for those
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kind words Ed if you hear this write to
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me Jesse bestter interest. blog and
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we'll get you hooked up with a super
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soft bestest t-shirt and with that let's
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begin the AMA episode the first question
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comes from Lynn Lynn's question in short
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is when should I take Social Security
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Lynn assumed that she and her husband
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would wait until age 70 to maximize
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their benefits but they aren't sure if
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that's the right strategy both of their
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families tend to live a long time with
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grandparents and parents who have passed
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away at ripe old ages but I think Lynn's
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question really opens up a broader
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question which is when should I take
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Social Security in fact when Lynn
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originally wrote in I decided to write a
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pretty comprehensive article which I
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titled when should I take Social
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Security we will link to that article in
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the show notes but I'm going to read
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some of the highlights to answer Lynn's
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question today so now the background for
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any of you listening who are either not
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super familiar with the social security
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system or or maybe you've just you
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haven't had to go into the details
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yourself yet Social Security is a
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government program that provides
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financial support to individuals who are
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retired disabled survivors of deceased
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workers and it's funded primarily
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through payroll taxes Social Security
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aims to ensure Financial stability
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economic stability and security for
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eligible participants by offering them
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benefits to mitigate income loss right
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due to either retirement leaving the
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workforce disability or death and today
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we're talking about retirees for the
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most part in the financial planning
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World we're talking about retiree
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benefits for Social Security American
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retirees each have an eligible benefit
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from Social Security which is based on
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the following factors they must be 62
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years old or older to begin collecting
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they must have worked and paid into the
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social security system for at least 10
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years and that's measured quarterly for
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a total of 40 quarterly credits they
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could be eligible for additional Credits
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based on their spouse's work history too
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which is important right not every
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family has two working parents or two
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working adults I should say and just
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because one adult or parent chooses to
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say stay home with the kids doesn't mean
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that they should be excluded from the
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social security system and then the
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eligible benefit is determined by an
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individual's highest 35 years worth of
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earnings with each year of earnings
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being adjusted for inflation that's
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called indexing they'll say it's indexed
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for inflation so the higher someone's
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overall earnings the greater their
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social security benefit will be there
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are a couple important terms that we do
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need to Define here when it comes to
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Social Security the first term is aim or
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aimim which is the average indexed
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monthly earnings and as the name
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probably describes aim is when we we
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look at someone's work history and we
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take all those 35 years of earnings
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which if they don't have 35 years well
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then some of those years are counted as
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a zero we adjust each year by inflation
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find the average divide it by 12 and
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that's how we get the average indexed
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monthly earnings for an individual and
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then there's this other term P Pia or
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the primary Insurance amount and that is
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essentially what someone will actually
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receive from Social Security if they
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retire at full retirement age or F so
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Pia is the real deal an individual's
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Social Security benefits or Pia are
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based on a specific percentage of that
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individual's aim or their average
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indexed monthly earnings now there's a
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pretty interesting relationship between
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aim and Pia that is much easier to
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understand if you can see the numbers on
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a screen if you can see the graph on a
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screen and I'm not going to dive into
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the specific numbers here but what I am
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going to say is that not all of your aim
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dollars count the same the first dollars
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matter a lot the latter dollars matter
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very little and for very high earners in
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fact their lad dollars don't count at
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all so this concept is called the Social
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Security Bend points and for what it's
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worth if you go to this article with the
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link in the show notes you can see these
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numbers you can see the graph of the
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Social Security Bend points and
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essentially what it means is that lower
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income earners or middleclass income
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earners they still get a pretty
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significant social security benefit
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because their aim dollars their average
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indexed monthly earnings still counts
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quite a bit toward their eventual Pia PA
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social security benefit but very very
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high income earn earners well sure they
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still fill up those lower buckets just
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like the the lower income earners do but
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the higher buckets don't really matter
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much when it comes to Social Security
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and that's why really high income
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earners it's not like they're collecting
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millions of dollars of Social Security
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benefits they're capped at a pretty uh
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reasonable low amount of social security
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so anyway it's it's just worth
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understanding we already talked about
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this concept full retirement age or F
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full retirement age it depends on what
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year you were born but for most of
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today's retirees people who are either
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just entering retirement or will be
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entering retirement soon their full
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retirement age is either 66 or 67 years
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old or potentially 66 and 2 months or 66
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and 4 months that kind of thing depends
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on what year they were born and if
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anything the government potentially will
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continue to increase full retirement age
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as time goes on and again as a reminder
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full retirement age is the age at which
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you can start collecting your Social
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Security benefits in full if you decide
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to start collecting Social Security
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benefits early there's a penalty to pay
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you're only going to collect 70 or 75 or
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80% of your benefits and it depends on
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the age if you wait until after a full
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retirement age so you can wait until
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after you're 66 or after you're 67 you
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get a bonus you actually start to
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collect 108 or 116 or
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124% of your uh Social Security benefits
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and that brings up an important question
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which is is is there a break even point
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of course there is but when is the break
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even point so the break even point for
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collecting Social Security it's about
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age 78 79 80 the lines all kind of
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intersect around there so the idea there
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is if you die before age 77 collecting
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as early as possible would have been
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best if you die after age 80 then
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waiting until as long as possible
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waiting till age 70 to start collecting
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would have been best of course the
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problem is is when you're sitting there
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at age 62 or 63 or 64 you don't really
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know when you're going to die we don't
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have a crystal ball and the joke of
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course is you you tell me when you're
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going to die I'll tell you when to start
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collecting Social Security well we don't
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know that so we have to make some
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educated guesses this is hard to get
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right Annie Duke's quote which I love to
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repeat the the the two things that
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determine the outcomes in our life are
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the quality of our decisions and luck
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well we can't control luck but we can
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try to control the quality of our
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decisions and whatever decision you make
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regarding social sec you have to accept
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the fact that bad luck might strike and
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your decision in hindsight will not have
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been an optimal one it's not because you
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made a bad decision it's just because
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you you had some bad luck so anyway we
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have to accept that in Social Security
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you do want to try to get this right
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Social Security is close to a one-way
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gate now technically speaking once you
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start collecting you actually do have up
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to 12 months to either change your mind
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well I shouldn't say either change your
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mind you you can change your mind in
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which case you'll have to rep pay the
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benefits that you've received so far you
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get one of these uh
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takebackspace ages in the late 70s to
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early 80s that's the break even point so
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you should ask does anything in your
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personal or family history point you
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toward an early or late death if you're
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healthy and all your relatives live to
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100 well postponing Social Security as
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long as possible makes sense if you're
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chronically ill if your relatives have
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all passed away early again you can
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reasonably assume that you might have a
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similar fate and collecting Social
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Security as early as possible makes
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sense granted I'm not a doctor I'm not a
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medical professional and there's this
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one Health phrase that like and I think
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is worth remembering here which is that
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genetics loads the gun but environment
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pulls the trigger in other words you
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aren't condemned you aren't destined to
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repeat your family history you do have
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dials to control so so don't forget that
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another question to ask on the Social
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Security do you need Social Security it
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does act as longevity insurance if you
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wait the extra income can bridge the gap
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between living a pretty bad life and and
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living an okay life so if you don't need
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social security at age 62 why take take
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it early the longer you wait the higher
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your benefit will be and the better your
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long-term outcomes will be another
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question to ask are you still planning
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to work if you are planning to work
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while also collecting Social Security
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tread carefully your work income could
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actively eat away at your Social
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Security benefits specifically if you
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start collecting Social Security before
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your full retirement age and during
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those years before full retirement age
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you continue to work your W2 income the
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paid income that you receive will
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actually reduce the amount of social
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security benefit that you'll receive
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during those years another important
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question consider spousal benefits this
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one we've talked about this before here
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on the podcast the summary is that your
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decision to collect Social Security not
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only affects you but could affect your
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current spouse your ex spouse or even a
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future spouse or future Widow so make
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sure you understand spousal benefits and
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we did talk about spousal benefits quite
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in detail in a previous AMA episode 86
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we we answered a question
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about a widow who was considering
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remarrying uh we talked about survivor
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benefits and we went really in depth
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there so I i' point you to 86 if you
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want to learn more about spousal
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benefits another question what about the
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overall financial plan and sequence of
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returns risk so the question to ask is
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how does Social Security fit into your
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overall financial plan your presumed
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retirement uh income and cash flow and
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specifically in the early years of
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retirement uh where you're most at risk
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for the sequence of returns risk which
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we talked about in- depth both in
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episode 88 with Tyler from portfolio
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charts and in episode 89 with Rob Berger
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so if you want to learn about sequence
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of returns risk go check out episodes 88
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or 89 you should ask yourself so
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taxability questions Social Security is
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taxable for many retirees and it's worth
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considering if your decision to collect
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Social Security especially early will
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have taxation impacts on what your net
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of tax benefits actually are what do
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your trusted advisers have to say every
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single retirement is a unique Adventure
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but those Adventures often rhyme with
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one another so your advisers whether
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it's an accountant an attorney a cfp
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someone like that have probably seen
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dozens or hundreds of successful
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retirements before which all might rhyme
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with what's going on in your plan so
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their counil might sway you in an
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optimal Direction so Lynn good luck with
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your Social Security Adventure hopefully
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those tips and tricks will help you out
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the next question comes from Yogi Yogi
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thank you for the excellent question and
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Yogi's sent in a bunch of fantastic
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questions and I just decided to pick one
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that I thought was interesting and
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unique and and we haven't talked about
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it too much before so Yogi's question
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has to do with an espp plan an employee
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stock purchase plan espp and Yogi says
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my employer offers an ESP for 5% which
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has no look back period and don't worry
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everybody we will Define these things
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with an enrollment option of up to 15%
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of my paycheck the company's not been
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doing very well since it's all-time high
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in March of 2019 I had heard a friend
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told me that the 5% discount well not
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huge would be free money but I also
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worry about the opportunity cost when I
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could be investing in my long-term
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portfolio so Jesse what are the main
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things that need to be considered when
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deciding if and how much I should be
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enrolling okay so let's first before we
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really answer Yogi's question we need to
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define a bit of Yogi's question for all
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of you listening an ESP an employee
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stock purchase plan is a company-run
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program in which employees uh can choose
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to participate but participating
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employees can purchase Company stock
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directly typically at a discounted price
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the discount rate on company shares
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depends on the plan but it can be as
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much as 15% lower than the market price
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and some esps have this thing called a
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look back provision which Yogi said his
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doesn't have a look back provision but
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what the lookback provision allows is it
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allows for the plan to use a previous
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historical closing price of the stock
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the price used is typically either the
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price of the stock on the offering date
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itself or sometime in the last quarter
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and so okay so really what what are we
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talking about here can we apply some
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maybe a real world example sure what
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might a a typical ESP look like I think
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that might help apply some of these
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definitions into a real world situation
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so a typical ESP would say well at the
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end of every quarter our employees are
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allowed to take a certain percentage of
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their quarterly income that they've
00:15:02
earned and they can buy our company
00:15:04
stock with it what is the price that we
00:15:07
use for the company stock well it's
00:15:09
either the price today here on this day
00:15:12
at the end of the quarter or quite often
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there's a look back period where the
00:15:15
company says we're actually going to
00:15:16
pick the lowest price from the past 90
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days from the past quarter and that's
00:15:21
the price that you get to to pay that
00:15:23
you get to buy our stock at in fact
00:15:26
sometimes a company will say we're even
00:15:28
going to disc shares further below that
00:15:31
I think in in Yogi's case he was saying
00:15:33
that there is a 5% discount in Yogi
00:15:36
specific case there is no look back
00:15:37
period so simply what they say is we're
00:15:39
going to take the price here at the last
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day of the quarter and we're going to
00:15:43
chop off 5% and we're going to allow you
00:15:46
Yogi and all your co-workers to buy our
00:15:48
stock at a 5% discount today and in
00:15:51
Yogi's case he can uh divert up to 15%
00:15:55
of his income to buy that stock so the
00:15:59
the rough that's roughly how esps work
00:16:01
some esps are qualified meaning they
00:16:04
have terrific tax treatment just like a
00:16:06
401k might others are non-qualified
00:16:09
which is more like a typical taxable
00:16:11
brokerage account where there are
00:16:13
capital gains and and dividend taxes to
00:16:15
pay if you hold the the the assets there
00:16:18
over the long period of time that said
00:16:20
the taxation rules for esps can be kind
00:16:23
of complex and in general a person will
00:16:27
be taxed on any stock they purchase
00:16:29
through an ESP during the year that they
00:16:31
sell that stock and that can be counted
00:16:33
either as some form of taxable income or
00:16:36
if the stock price has gone down from
00:16:38
the time of purchase it could be counted
00:16:40
as a deductible Capital loss and of
00:16:42
course the difference between what you
00:16:43
paid for the stock and what you received
00:16:45
when you sell the stock is that capital
00:16:47
gain or Capital loss another important
00:16:50
small tax factor is that any discount
00:16:53
offered to the original stock price that
00:16:55
is taxed as a ordinary income in yoga
00:16:59
case right he has this 5% discount so
00:17:01
let's say the stock is trading at $100
00:17:03
today Yogi has the opportunity to buy
00:17:05
the stock at
00:17:06
$95 let's say he does that 10 times he
00:17:09
got $5 off on each one so he got a $50
00:17:12
discount well he's going to be taxed as
00:17:15
if he just earned $50 of ordinary income
00:17:18
the discount itself is taxed if Yogi
00:17:20
chooses to sell his stocks after he buys
00:17:22
them right he can buy them at a discount
00:17:24
if he wants to he can immediately turn
00:17:25
around and sell them he can wait a
00:17:26
little while to sell them he can hold
00:17:28
them forever and eventually sell them
00:17:30
the entire gain will be taxed in some
00:17:33
way shape or form so in Yogi's case you
00:17:35
know he could buy the stock today he
00:17:37
does have to pay income tax on the
00:17:39
discount that he receives but ostensibly
00:17:42
he could take today's $95 purchase he
00:17:45
could turn around and sell it at
00:17:47
$100 and he can pocket the 5% difference
00:17:50
less the taxes that he owes otherwise
00:17:53
the value of the stock can go up which
00:17:55
would increase his profits or it might
00:17:56
go down which would cause Yogi entially
00:17:59
to lose money however if Yogi does wait
00:18:02
for at least a year then he'll receive a
00:18:05
more beneficial tax treatment so the
00:18:07
main considerations here I I don't have
00:18:09
an ESP plan but if I did or or for
00:18:11
clients who do is what's really more
00:18:13
important or for people I work with who
00:18:15
do the main considerations are does our
00:18:17
individual have a holding period in mind
00:18:20
are they subjecting themselves to Too
00:18:22
Much Market risk or concentration Risk
00:18:25
by holding one stock in their portfolio
00:18:28
too much of one stock in their portfolio
00:18:29
for too long not to mention it's the one
00:18:32
stock that also is cutting their
00:18:34
paycheck and it's a very common thing
00:18:35
you see with concentrated portfolio
00:18:37
Holdings it's very common in especially
00:18:39
today's kind of tech heavy world where
00:18:42
options rsus ESP plans all these things
00:18:46
will will cause an employee to have a
00:18:50
pretty high position a pretty
00:18:52
concentrated position in their employer
00:18:55
and the kind of things that could affect
00:18:56
the employer's stock price are exactly
00:18:59
the kind of things that might affect the
00:19:01
employees paycheck so now you have two
00:19:04
vital components of their overall
00:19:06
financial plan which are both tied to
00:19:08
the fate of this one company so that
00:19:10
right there that is concentration risk
00:19:12
right that is correlation we have two
00:19:15
important things in the person's life
00:19:17
that are very correlated to one another
00:19:19
and ideally in financial planning we
00:19:21
want to break up correlations as best we
00:19:24
can another question is is quite simply
00:19:27
can can a persons can yogis could an
00:19:29
individual's balance sheet and cash flow
00:19:32
handle the ESP plan meaning sure if you
00:19:36
divert 10% of your paycheck into buying
00:19:39
Company stock and you plan on holding it
00:19:41
for a while well can you afford to get
00:19:44
rid of 10% of your paycheck every month
00:19:45
maybe maybe not are you going to face
00:19:47
any sort of liquidity needs in the
00:19:49
meantime are there any sort of selling
00:19:51
restrictions that you need to be aware
00:19:52
of some ESP plans aren't quite as
00:19:55
flexible as others so anyway most of the
00:19:58
time an ESP is uh an interesting benefit
00:20:01
because in most cases the the simplest
00:20:05
way to to benefit from an ESP is to buy
00:20:09
the stock at a discount today
00:20:11
immediately turn around and sell it sure
00:20:13
you're sacrificing a little bit of your
00:20:15
benefit because you immediately have to
00:20:16
pay taxes or one way or another you're
00:20:18
going to pay taxes on the benefit you've
00:20:20
received but you're still going to get
00:20:21
to to pocket some of the difference it's
00:20:23
a good way to to get a little bit of an
00:20:25
Arbitrage and it's a nice little bonus
00:20:26
from your employer so you good question
00:20:29
thanks for sending it in here's a quick
00:20:31
ad and then we'll get back to the show
00:20:33
every week I send a quick free email to
00:20:36
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at bestter interest. blog again that's a
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free no strings attached subscription at
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bestter interest. Blog the next question
00:21:22
comes from Jacob Jacob's question in
00:21:25
short is how diverse do one's
00:21:27
Investments need to
00:21:29
Jacob describes he and his wife's
00:21:31
scenario they have money in in Roth IRA
00:21:33
and 403bs in the Roth IRA Jacob owns an
00:21:37
oil and gas ETF he owns a healthc Care
00:21:39
mutual fund and he owns an AI Tech
00:21:42
mutual fund whereas some of his other
00:21:45
accounts his HSA and his Roth 403b are
00:21:48
more Diversified across say Vanguard S&P
00:21:51
500 Index Fund Target date retirement
00:21:54
funds a balance of us companies a US
00:21:58
mutual fund funds and international
00:21:59
mutual funds and so Jacob's question in
00:22:02
short is you know how diverse do I
00:22:05
consider his particular portfolio to be
00:22:07
uh is he relatively safe is there
00:22:09
anything he should consider adding or
00:22:11
changing to have more diversification
00:22:13
excellent question excellent question so
00:22:15
I I read through Jacob's situation and
00:22:16
there's a few thoughts that come to mind
00:22:18
so first off for a younger couple I
00:22:20
believe Jacob and his wife are 32 years
00:22:22
old uh and they're thinking of
00:22:24
retirement you know in most likely in 20
00:22:26
plus years they should be thinking long
00:22:28
term and having 80 or 90 or even 100% of
00:22:32
their money in the stock market can make
00:22:34
sense there's a bit of personal
00:22:35
preference there right about how much
00:22:36
risk they want to take and how much
00:22:38
volatility they can handle but in short
00:22:41
they definitely want to have a large
00:22:42
proportion of their assets uh growing
00:22:45
for the long term and the stock market
00:22:46
likely makes sense now the devil's in
00:22:49
the details a little bit because when I
00:22:51
hear things like a third of his account
00:22:54
I believe it's his Roth IRA a third is
00:22:55
in an oil and gas ETF a third is in a
00:22:58
health Care mutual fund and a third is
00:23:00
in a tech AI mutual fund while it's
00:23:04
helpful understanding what types of
00:23:06
assets those are there are many many
00:23:08
different healthc Care mutual funds out
00:23:10
there there are even many many different
00:23:12
us large cap growth funds out there the
00:23:16
devil's really in the details so my
00:23:18
initial recommendation would be rather
00:23:20
than focus on sector specifics to choose
00:23:23
a more broadly Diversified lowcost
00:23:25
solution since Jacob mentioned Vanguard
00:23:28
in his question a good example of what
00:23:30
I'm talking about there would be
00:23:31
something like vti or VT which are two
00:23:34
very lowcost very broad Diversified
00:23:37
Vanguard index ETFs so if someone came
00:23:39
to me and they said Jesse I'm 35 I have
00:23:41
a million dollars and it's all invested
00:23:43
in VT are there any problems there I'd
00:23:46
say well well not really right there
00:23:49
might be some small ways to make
00:23:50
improvements there might be some
00:23:52
diversification recommendations that I
00:23:54
certainly would have in my portfolio and
00:23:56
I would recommend to others but but one
00:23:59
thing I really don't want to do is make
00:24:00
perfect the enemy of good and being
00:24:03
invested in an index ETF like VT or
00:24:06
similar that's a very good thing when I
00:24:08
look back at Jacob's situation his Roth
00:24:10
IAS likely have infinite investment
00:24:13
flexibility so I think a fund an ETF
00:24:16
like vti or VT would be available for
00:24:18
him in his Roth IRA and for those of you
00:24:20
listening quick aside something to be
00:24:23
careful of here is that depending on
00:24:26
where your asset are custodi certain
00:24:30
funds might have fees associated with
00:24:34
them that you really don't want to pay
00:24:35
and an example would be the FI Community
00:24:38
is very it's a bit of a cliche this idea
00:24:41
of it's called
00:24:43
vtsax right it's the Vanguard Total
00:24:45
market index fund it's a mutual fund not
00:24:48
an ETF and if I tried to purchase vtsax
00:24:53
at Schwab or at Fidelity instead of at
00:24:56
Vanguard Schwab or fidelity are going to
00:24:58
say yeah that's no problem Jesse but we
00:25:00
have to charge you a a fee because
00:25:02
Vanguard charges us a fee to to make
00:25:04
that transaction here and instead I mean
00:25:06
Schwab and Fidelity have their own
00:25:08
versions of vtsax that are ostensibly
00:25:11
exactly the same except when you buy
00:25:13
them on the home platform there's no
00:25:16
extra fees charged so one thing to be
00:25:19
just a little bit careful or wary of is
00:25:22
try to hold the home team's funds at the
00:25:25
home team's brokerage just to avoid
00:25:28
little fees that might be eating away at
00:25:30
your uh proceeds in a way that you
00:25:31
aren't expecting Jacob your HSA might
00:25:35
have the kind of flexibility that your
00:25:36
Roth IAS have I'm not sure now my
00:25:39
personal HSA is through Fidelity which
00:25:42
from what I've read there's a great I
00:25:43
think it's a Morning Star report that
00:25:45
talks about all the different HSA
00:25:46
providers out there Fidelity is the top
00:25:49
they get great grades every single year
00:25:52
and the nice thing is that Fidelity
00:25:53
provides infinite investing flexibility
00:25:56
to me so I invest my HSA
00:25:59
in Fidelity's version of uh the vti in
00:26:02
Fidelity's version of the the vti index
00:26:05
Jacob your 403b likely does not have
00:26:08
that much flexibility 403b is similar to
00:26:10
a 401k it's a retirement account quite
00:26:13
often in these retirement accounts the
00:26:14
investing options are quite limited 15
00:26:17
20 funds something like that which on
00:26:20
net is probably a good thing because we
00:26:22
a lot of people out there the average
00:26:24
person just think about the average
00:26:25
person and if you showed them 500
00:26:27
different Mutual funds to invest in what
00:26:29
are the odds that they make a good
00:26:30
decision probably not great but if you
00:26:33
limit it to 5 or 10 or 15 at least they
00:26:37
have a better probability of of making a
00:26:39
good decision so Jacob depending on the
00:26:41
403b plan you might be able to transfer
00:26:44
that 403b to a Vanguard or Fidelity
00:26:47
there are a lot of different custodians
00:26:49
or administrators who work with 403bs if
00:26:51
you can I would recommend you consider
00:26:53
that 403bs aren't necessarily made in
00:26:57
the best interest of the employees
00:26:59
themselves it's a real shame having a
00:27:01
43b account at Vanguard or Fidelity is
00:27:04
is about as good as you can get and this
00:27:07
just brings me to a slightly broader
00:27:08
conversation because Jacob's question is
00:27:11
about diversification and then the real
00:27:12
question is what does diversification
00:27:14
look like so to me diversification looks
00:27:17
like exposure to many different asset
00:27:18
classes to different sectors within
00:27:20
those asset classes and to different
00:27:22
geographies within those asset classes
00:27:24
so again an asset class might be stocks
00:27:26
versus bonds but then a sect within
00:27:28
those asset classes might be well is it
00:27:30
are we talking about high tech growth
00:27:32
are we talking about dirty value stocks
00:27:35
are we talking about the momentum factor
00:27:37
in stocks are we talking about big
00:27:38
companies small companies us companies
00:27:40
European companies if we're talking
00:27:42
about bonds are we talking about
00:27:44
high-grade Federal you know US
00:27:46
government bonds are we talking about
00:27:47
corporate bonds are we talking about
00:27:48
municipal bonds everything so that's
00:27:50
what diversification looks like to me to
00:27:52
achieve that kind of diversification I
00:27:54
don't think we need to seek out
00:27:56
individual sector ETFs like the oil and
00:27:58
gas ETF the tech the medical ETF that
00:28:01
Jacob holds instead I think we can get
00:28:03
away with the broadest of funds funds
00:28:05
that hold everything and do so at a very
00:28:07
low cost and are pretty simple to
00:28:09
conceptualize and the answer there is
00:28:11
something like an index fund again I do
00:28:14
believe that there are helpful ways to
00:28:15
improve upon a a purely Index Fund
00:28:18
portfolio and as I've written about
00:28:20
before on the blog I can't remember if
00:28:22
I've talked about it here on the podcast
00:28:24
not every Index Fund portfolio is built
00:28:26
the same I could sit here and say yeah
00:28:28
yeah I own nothing but index funds I'm
00:28:30
100% invested in the triple Q's which is
00:28:33
a NASDAQ index fund well that's pretty
00:28:35
concentrated in Tech us growth stocks
00:28:39
there's no International diversification
00:28:40
there there's isn't even really a US
00:28:42
diversification there but it is all an
00:28:44
index fund so again index funds in and
00:28:47
of themselves don't necessarily make a
00:28:50
portfolio but if someone were to come to
00:28:52
me with a 100% of their money in VT or a
00:28:55
similar very broad Index Fund I'm not
00:28:58
gonna look at them and say oh my God
00:29:00
you're doing it all wrong no no no no
00:29:03
you're doing it pretty darn right it's a
00:29:05
good solution question number four today
00:29:07
comes from Maple Leaf writing in from
00:29:10
Vermont and Maple Leaf said I'm turning
00:29:12
65 this year and will be applying for
00:29:14
Medicare there's a 2-year look back
00:29:16
period of income to determine Medicare
00:29:19
tax rates I have large equity in my
00:29:21
house and I want to sell I was advised
00:29:23
to wait until I fully retire so my
00:29:25
income is lower and won't have to pay
00:29:28
extra Irma taxes is the 2-year look back
00:29:31
period only a one-time event when you
00:29:33
apply for Medicare or is your annual
00:29:35
income reviewed every year for Medicare
00:29:38
Irma taxes thank you first off I mean
00:29:41
one thing to keep in mind here is that
00:29:44
some transactions especially when we're
00:29:46
talking about home sales aren't
00:29:48
reportable to the IRS they're excluded
00:29:50
from gross income if an individual sells
00:29:53
their home the first
00:29:55
$250,000 of capital gains is excluded
00:29:59
from gross income and for a married
00:30:01
couple the first $500,000 of capital
00:30:04
gains from the sale of a home is
00:30:06
excluded from their gross income
00:30:08
something to be aware of there Maple
00:30:10
Leaf when we're talking about the
00:30:12
specific question here of selling your
00:30:13
home but we have to do something else we
00:30:16
have to Define some of these terms here
00:30:18
because what are we talking about Irma
00:30:19
what Irma taxes Medicare taxes what's
00:30:21
going on so yes Irma used to be the name
00:30:23
of the great grandmother character in
00:30:25
your you know B minus fiction story from
00:30:27
11 great English but no longer today
00:30:29
Irma has been given new life that was
00:30:31
probably covered by Medicare IR MAA
00:30:35
income related monthly adjustment amount
00:30:38
it's a Medicare premium sear charge
00:30:40
imposed on higher income Medicare
00:30:44
beneficiaries in addition to their
00:30:46
standard Medicare Part B and Part D
00:30:49
premiums in other words everybody pays
00:30:52
uh into Medicare if they're collecting
00:30:53
it right everybody 65 and older who's on
00:30:55
Medicare has to pay premiums on their
00:30:57
part D and Part B that's b as in boy d
00:31:00
as in dog those parts of the Medicare
00:31:02
plan so everybody pays premiums there
00:31:04
but if you earn enough if you're higher
00:31:07
income you essentially are there's a
00:31:10
sear charge you pay even more and that
00:31:12
amount is called Irma it's determined
00:31:14
based on an individual's modified
00:31:16
adjusted gross income M AI which is a
00:31:20
federal income tax term and yeah it can
00:31:22
result in higher healthcare costs for
00:31:24
people with higher incomes so in plain
00:31:26
English higher earners pay more for
00:31:28
Medicare now a good question I mean how
00:31:31
painful are these Irma surch charges in
00:31:33
the first place well there's a article
00:31:35
that we'll throw in the show notes that
00:31:36
article contains a table and the table
00:31:38
describes what the Irma surch charge is
00:31:41
based on how much income you you've
00:31:42
earned so for 2023 the normal Part B
00:31:46
premium was about $165 a month and then
00:31:50
there's five tiers of Irma above that
00:31:52
goes from 165 the next level up is $231
00:31:56
a month then it's 3 30 a month and it
00:31:58
goes all the way up to about $560 a
00:32:01
month so yes if someone earned $500,000
00:32:04
or more as a single tax filer or
00:32:07
$750,000 or more as a joint filer
00:32:11
instead of paying 165 a month for
00:32:13
Medicare they're now paying $500 a month
00:32:16
and when I see something like this I'm
00:32:17
of two minds because yes I believe in
00:32:19
frugality the best interest is you know
00:32:21
a penny saved is a penny earned and why
00:32:23
pay
00:32:25
$1,500 a year $3,000 a year year $5,000
00:32:29
a year extra if you can try to plan
00:32:31
around that at the same time if you're
00:32:34
earning 200 or 300 or $400,000 a year in
00:32:38
retirement again this is income you're
00:32:40
earning in retirement which can be
00:32:43
realized income from say an IRA or from
00:32:46
Social Security so we have to think
00:32:47
about where retirement income comes from
00:32:49
but still if you're living off of that
00:32:51
much income in retirement do you need to
00:32:53
stress over a $1,500 annual line item or
00:32:56
a $3,000 annual line item personally I'd
00:32:59
be pretty stoked if my retirement
00:33:01
modified adjusted gross income was 200
00:33:03
or 300 or $400,000 right it's a sign
00:33:06
that my financial life turned out to be
00:33:08
pretty darn good I I don't think I'll
00:33:10
mind the Irma and you know the people
00:33:13
who are most likely to suffer Irma are
00:33:15
also the best positions to deal with it
00:33:18
so it's just good to keep that in mind
00:33:20
now as Maple Leaf alluded to there's a
00:33:23
2-year delay in the Irma math so in 2023
00:33:27
to determine who owed Irma sir charges
00:33:31
they looked at 2021s income here in 2024
00:33:35
in order to see who's paying Irma here
00:33:37
in 2024 the IRS and and and and the
00:33:40
Medicare Administration they're looking
00:33:41
at your 2022 income so for retirees
00:33:45
there's this look back period and right
00:33:46
now in 2024 the question is well what
00:33:49
will the
00:33:50
2026 Irma brackets look like and how do
00:33:54
we avoid paying Irma in general the Irma
00:33:57
brackets have increased steadily
00:33:59
year-over-year adjusted by inflation
00:34:02
similar to the way that other things in
00:34:03
the tax code increase steadily
00:34:05
year-over-year now that all being said
00:34:07
the 2-year delay in Irma maath means
00:34:09
that you might get Irma early on in your
00:34:11
retirement so imagine retiring at the
00:34:13
end of 2023 it's the peak of your career
00:34:16
you and your spouse earned a combined
00:34:18
$300,000 that year and now you're just
00:34:20
settling down grooving into retirement
00:34:23
and so like all US citizens you end up
00:34:25
signing up for Medicare just before you
00:34:26
turn 65 come 2025 Uncle Sam and Aunt
00:34:30
Irma they're going to look back at that
00:34:32
2023 income when you are working in full
00:34:35
they're going to see that you earned
00:34:36
$300,000 of combined income and they
00:34:39
will put an Irma sarch charge on you but
00:34:42
the good news is that most likely once
00:34:44
you're in retirement 2024 income is
00:34:48
probably going to be quite low in
00:34:50
comparison to what 2023 is was in fact
00:34:52
most of your retirement years you're
00:34:54
going to have pretty low income compared
00:34:56
to what your highest earning working
00:34:58
years were so the Irma premiums will
00:35:01
decrease or maybe drop off completely
00:35:04
once the 2-year look back window is
00:35:06
looking at your retirement years instead
00:35:08
of your working years so going back to
00:35:10
Maple Leaf's question the 2-year look
00:35:12
back period is not a one-time event when
00:35:15
you apply for Medicare instead it's an
00:35:18
annual event it's reviewed every single
00:35:20
year with a 2-year look back window and
00:35:23
so there will be some years where you
00:35:24
pay Irma premiums maybe there will be
00:35:27
other years where you probably won't pay
00:35:29
Irma premiums or at the very least if
00:35:32
you are paying Irma premiums every
00:35:33
single year the amounts are likely to
00:35:35
change if you're looking back on a very
00:35:38
high earning year just like you know the
00:35:40
last year that you worked you're
00:35:41
probably going to pay a relatively High
00:35:43
Irma premium but once the look back
00:35:45
period is looking at your lower earning
00:35:47
years like your retirement years you're
00:35:50
probably going to have a lower Irma
00:35:51
premium and one more note this is after
00:35:54
all a financial planning podcast Roth
00:35:56
conversions and rmds are important to
00:35:58
remember here right rmds required
00:36:00
minimum distributions they're forced and
00:36:03
they count as income and that has the
00:36:05
potential of forcing Irma upon retirees
00:36:09
as they age so to answer a previous
00:36:12
terrific reader question Roth
00:36:14
conversions can help here you can use
00:36:16
Roth conversions to potentially shift
00:36:18
the realization of income from high
00:36:21
income years into lower earning years
00:36:24
that either will prevent or mitigate
00:36:27
Irma in the process but once more you
00:36:29
want to make sure the juice is worth the
00:36:31
squeeze if a 75-year-old has a $200,000
00:36:34
rmd and that you know hurts them on Irma
00:36:37
you have to ask yourself where does a
00:36:39
$200,000 rmd come from and the answer is
00:36:42
it's coming from an IRA that has over $5
00:36:45
million in it so should someone with a
00:36:47
$5 million Ira be losing sleep over Irma
00:36:51
probably not here's a quick ad and then
00:36:54
we'll get back to the show a few of you
00:36:56
occasionally inquire about two different
00:36:58
topics that are actually related the
00:37:00
first type of question seeks out details
00:37:02
about my professional life and the
00:37:04
wealth management firm that I work for
00:37:06
here in Rochester New York the second
00:37:08
type of question involves the best
00:37:09
interest which operates with no
00:37:11
advertising no pushy sales no pay walls
00:37:14
and the question is how can the best
00:37:15
interest stay afloat well to answer both
00:37:18
of those questions I want to point you
00:37:20
to episode 78 of the best interest
00:37:23
podcast I intentionally recorded episode
00:37:26
78 to shine light on on those topics and
00:37:28
inform you how you can actually help the
00:37:30
best interest if you're so inclined so
00:37:33
if you've ever been curious about the
00:37:35
business of the best interest please go
00:37:37
listen or download episode 78 and let me
00:37:40
know what you think the next question
00:37:42
comes from Jimbo Jimbo writes in from
00:37:45
Alabama and says Jesse I want to ask you
00:37:47
about the term fiduciary and how it
00:37:48
applies to interviewing financial
00:37:50
planners I understand that you are a
00:37:51
fiduciary and I know I should ask
00:37:53
prospective planners or advisers if they
00:37:56
are a fiduciary but the more I read the
00:37:58
more it seems like the fiduciary
00:38:00
question is a very coarse filter and I
00:38:02
need to dig deeper do you agree or do
00:38:04
you disagree and can you add some of
00:38:06
your color or unique thoughts PS the
00:38:08
best interest podcast is wonderful I
00:38:10
know you're busy with your professional
00:38:11
clients and a new baby but if you had
00:38:13
time and resources to create more
00:38:15
episodes more frequently than every
00:38:17
other week you would 1,00% have my vote
00:38:20
I'm sure others agree with me well Jimbo
00:38:23
thank you for the the question the kind
00:38:24
words and listeners that actually brings
00:38:26
up an interesting point if you'd prefer
00:38:28
to hear my voice every single week let
00:38:30
me know I certainly see the way that
00:38:32
this podcast is growing and I'm very
00:38:34
thankful for you listening sending in
00:38:36
feedback asking these questions and it
00:38:38
is a ton of fun but yes it does take
00:38:41
quite a bit of time and effort on my end
00:38:43
I want to keep the quality as high as I
00:38:44
can and so to produce an episode every
00:38:47
single week would certainly mean that I
00:38:49
have to use time that is I'm currently
00:38:51
using elsewhere in life and something
00:38:53
else in life has to be sacrificed to put
00:38:54
out an episode every single week but
00:38:57
that the nature of life right we all get
00:38:58
to choose what to do with our hours and
00:39:01
this podcast is tons of fun and it is
00:39:03
growing really fast so if you're
00:39:05
interested in in hearing episodes every
00:39:07
single week I will certainly consider it
00:39:09
so please write me an email and let me
00:39:10
know what you think about that now as
00:39:13
for Jimbo's question about that word
00:39:15
fiduciary yeah what a great question
00:39:17
fiduciary duty refers to a legal or an
00:39:20
ethical relationship of trust between
00:39:22
two or more people or parties typically
00:39:25
it involves one person or part acting as
00:39:28
a fiduciary that could be financial
00:39:29
adviser it could be an attorney an
00:39:32
accountant a corporate board member
00:39:34
something like that and then the
00:39:35
beneficiary of the fiduciary duty which
00:39:38
might be a client or in the case of a
00:39:40
corporate board it might be a
00:39:41
shareholder of the company who receives
00:39:44
the benefits of someone acting as a
00:39:45
fiduciary fiduciary duties are
00:39:47
considered amongst the highest standards
00:39:49
of care in law there's some divisions
00:39:51
depending on where you ask and what you
00:39:53
look up there are different kind of
00:39:54
Duties that fall under the the fiduciary
00:39:56
relationship there's the duty of loyalty
00:39:59
which says that a fiduciary must act in
00:40:00
the best interests of the beneficiary
00:40:03
avoiding any conflicts of interest the
00:40:05
fiduciary must prioritize the
00:40:06
beneficiary's interests over their own
00:40:09
there's a duty of care which says that a
00:40:11
fiary must act with a certain level of
00:40:12
competence and diligence and must make
00:40:14
decisions with a care that a reasonably
00:40:16
prudent person would take in similar
00:40:19
circumstances the duty of good faith the
00:40:21
fiary must act honestly and with
00:40:23
Integrity in all dealings with the
00:40:25
beneficiary ensuring that all actions
00:40:27
are made in good faith the duty of
00:40:29
confidentiality the fiduciary is
00:40:31
required to keep the beneficiary's
00:40:32
information confidential and not
00:40:34
disclose or misuse it without the
00:40:36
beneficiary's consent the duty of
00:40:38
disclosure the fiduciary must disclose
00:40:40
all relevant information to the
00:40:42
beneficiary particularly anything that
00:40:45
could affect the beneficiary's interests
00:40:47
the duty to act within a scope of
00:40:49
authority the fiduciary must act within
00:40:51
the powers and Authority granted to them
00:40:53
by the beneficiary or under the law and
00:40:56
then lastly the duty to void conflicts
00:40:57
of interests the fiduciary must avoid
00:40:59
situations where their interests May
00:41:01
conflict with those of the beneficiary
00:41:03
or they must fully disclose and manage
00:41:06
any potential conflicts as they arise so
00:41:09
yes the firm I work for here in
00:41:11
Rochester in Upstate New York were
00:41:13
federally registered with the SEC part
00:41:15
of the relationship that we opted into
00:41:17
is that all of our client facing
00:41:19
Financial professionals so that's our
00:41:21
cfp planning team CFA portfolio managers
00:41:25
our relationship managers who act as the
00:41:26
quarterback of the client relationship
00:41:28
everyone who's providing Financial
00:41:30
advice to clients we all must uphold the
00:41:33
fiduciary relationship with our clients
00:41:35
going back to Jimbo's question asking if
00:41:37
your potential adviser is a fiduciary is
00:41:39
an important filter it's a great
00:41:41
question to ask I think you need to ask
00:41:44
that question and hear a good answer
00:41:46
when someone is not a fiduciary you
00:41:48
should you know what might be going on
00:41:50
well in my opinion the biggest issue
00:41:52
there is that they might not have to
00:41:53
disclose some obvious conflicts of
00:41:56
interest with you and typically those
00:41:57
conflicts are related to how the adviser
00:41:59
is getting paid or how that potential
00:42:02
Revenue might affect the advice that
00:42:03
they give you some examples is the
00:42:06
adviser collecting commissions on trades
00:42:08
so they are they making trade
00:42:09
recommendations to you because it's
00:42:10
what's best for you or because that's
00:42:13
how they collect their commissions they
00:42:14
collect commissions on specific mutual
00:42:16
funds again is that what's best for you
00:42:18
or is that just the way that they end up
00:42:20
getting paid they could collect 12 B1
00:42:23
fees from specific mutual funds again
00:42:25
are they going to make recommendations
00:42:27
because that's the right fund for you or
00:42:29
because it's how they get paid they
00:42:30
might collect commissions from insurance
00:42:32
products or from annuities is a very
00:42:34
common one they might collect referral
00:42:36
fees by sending you and your business to
00:42:39
specific professionals Insurance
00:42:40
professionals accounting professionals
00:42:42
etc etc again the the fiduciary
00:42:45
shouldn't be doing any of these things
00:42:46
in the first place it violates the duty
00:42:48
of loyalty the duty to avoid conflicts
00:42:50
of interest but if someone isn't a
00:42:52
fiduciary technically speaking they
00:42:54
could get away with saying well sure I I
00:42:56
collect a Fe here I'm also I also think
00:42:58
it's right for you well it's certainly a
00:43:01
conflict of interest it might be true
00:43:03
but it's definitely a conflict of
00:43:04
interest and ought to be talked about
00:43:06
but even then and this is where I really
00:43:08
think the rubber hits the road with
00:43:10
Jimbo's question even if you are working
00:43:12
with a fiduciary Jimbo's right it's a
00:43:15
bit of a coarse filter there's a murky
00:43:18
territory here and here's an example if
00:43:20
you've listen to this podcast for a
00:43:22
while you've heard me talk about the
00:43:24
fact that I find annuity products to be
00:43:28
numerically indefensible I can't make
00:43:30
the math work I've never been able to
00:43:32
make the math work I've never
00:43:34
recommended an annuity to a client the
00:43:36
fees are typically atrocious and the
00:43:39
returns just don't meet the mark there
00:43:41
there's no way that I can justify the
00:43:44
math but what if another adviser out
00:43:46
there truly and honestly believes that
00:43:49
the the safety net or the security
00:43:51
blanket aspect of an annuity is so
00:43:53
beneficial to a client's mental health
00:43:56
that it's worth pushing the client in
00:43:58
that particular direction now that
00:44:00
adviser might look at what I say here
00:44:02
and they might say something like well
00:44:04
Jesse's hardheadedness is preventing him
00:44:06
from recommending annuities his Devotion
00:44:08
to math his refusal to look at the soft
00:44:11
side of things he's preventing good
00:44:13
advice to his clients is he acting as a
00:44:15
fiduciary someone could convince
00:44:17
themselves to say that and sure I would
00:44:20
look back at them saying and I might say
00:44:21
to them well are you sure that the fat
00:44:23
annuity commission isn't clouding your
00:44:25
judgment but the point being
00:44:27
is I know I've had a conversation with
00:44:30
someone who is a fiduciary who I know
00:44:33
who recommended what in my opinion is
00:44:35
straight up bad and conflicted advice
00:44:38
around annuities now I would say I'm
00:44:41
coming to it from an objective argument
00:44:43
point of view they would say there's a
00:44:45
subjective aspect to this particular
00:44:48
topic but the real Point here is that
00:44:51
going back to Jimbo's question the
00:44:52
fiduciary question alone isn't a perfect
00:44:55
or complete filter you still have to
00:44:57
figure out a way to dig a little bit
00:44:58
deeper in my opinion you should still
00:45:00
ask an adviser questions about their
00:45:02
investment philosophy you need to ask
00:45:05
them questions very very specifically
00:45:06
about how they get paid and feel free I
00:45:09
mean see what the adviser says but I've
00:45:11
had people ask me questions about how my
00:45:14
firm gets paid what is the relationship
00:45:16
what is the fee relationship between the
00:45:18
firm and the client I've also asked
00:45:21
people about how I get paid what's the
00:45:23
pay relationship between the firm and
00:45:24
Jesse how are those incentives aligned
00:45:27
CU I think that's an important one too
00:45:29
you should ask your adviser about all
00:45:31
the types of non-investment services
00:45:32
that you might receive you know detailed
00:45:34
financial planning is one really good
00:45:36
example because again if and if advisor
00:45:38
is only getting paid based on the trades
00:45:42
or the mutual funds that they push you
00:45:43
toward they might not have an incentive
00:45:46
to actually provide you any other
00:45:47
ancillary financial planning services so
00:45:50
it's a bit of a rabbit hole the
00:45:51
fiduciary question but Jimbo great great
00:45:53
question thanks for listening anyone
00:45:55
listening let me know what you think
00:45:56
about the whole iary situation and we
00:45:58
end with a great question from Eric the
00:46:01
last question of the day Eric's got a
00:46:03
cool one Eric and his wife are both 38
00:46:06
Eric would like to retire at 55 but his
00:46:08
wife really enjoys her job and she
00:46:10
probably isn't going to want to retire
00:46:12
until 65 so the whole idea here is when
00:46:14
you have two people who are retiring at
00:46:16
very different times in their life how
00:46:18
do you untangle that what do you have to
00:46:20
deal with and a couple examples Eric
00:46:22
mentions the Roth conversion ladder
00:46:24
which sounds great for an early retiree
00:46:27
but it's complicated by the fact that
00:46:28
his wife will continue earning that
00:46:30
she's going to be a high earner and
00:46:32
that's going to keep them in a high tax
00:46:33
bracket which messes with the ability to
00:46:35
do rth conversions but on the flip side
00:46:38
uh a lot of early retirees have issues
00:46:41
paying for Health Care before Medicare
00:46:43
kicks in well in Eric's case his wife is
00:46:46
continuing to work he can essentially
00:46:48
mooch on her health plan well that's
00:46:51
terrific so Eric's question is what else
00:46:53
should he be thinking about this pit
00:46:55
these potential pitfalls should say
00:46:57
where he's retiring early his wife might
00:47:00
not be are there any benefits or
00:47:02
opportunities that he should take
00:47:03
advantage of and what are some of the
00:47:04
conversations he should be having with
00:47:06
his wife to plan this out so Eric I
00:47:08
think you need to start with a cash flow
00:47:09
analysis if you plan on retiring at 55
00:47:12
and your wife is planning on retiring at
00:47:14
65 why don't you try to project all the
00:47:16
inflows and outflows of money that will
00:47:18
happen in your life between ages 50 and
00:47:21
age 70 so that's starts with 5 years of
00:47:24
you both working and then it's 10 years
00:47:26
where you're not working and your wife
00:47:28
is and then it ends with 5 years where
00:47:30
neither of you are working and the
00:47:32
question is during those periods where
00:47:34
maybe where your wife's working and
00:47:35
you're not how much are you going to
00:47:37
need to draw on your portfolio
00:47:38
specifically I mean I think you can
00:47:40
actually run the numbers and do the math
00:47:42
and with her still working I'd wager
00:47:44
that your withdrawals are going to be
00:47:46
less than you think they need to be
00:47:48
especially if she's willing to share her
00:47:50
income with you to support your
00:47:52
lifestyle so long as once you're both
00:47:54
retired you're going to share your
00:47:56
retirement accounts with with her to
00:47:57
support your retired lifestyle I think
00:47:58
it'll work out that way looking into
00:48:00
Social Security strategies I'd say use
00:48:03
some of the ideas I shared here earlier
00:48:04
in this episode it's quite likely that
00:48:07
it could make sense for you Eric to
00:48:08
start collecting Social Security early
00:48:10
and for your wife to wait until age 70
00:48:13
although it is worth understanding the
00:48:15
interactions here CU you collecting
00:48:17
early it might end up getting in the way
00:48:19
of potential Roth conversions that
00:48:21
you'll want to do the Roth conversion
00:48:23
ladder that you mentioned and speaking
00:48:24
of Roth conversions yes if your wife
00:48:26
continues to work and that you're
00:48:29
married and filing taxes jointly then
00:48:32
it's not going to be ideal for you to do
00:48:33
any Roth conversions or a Roth
00:48:35
conversion ladder for those of you who
00:48:37
don't know Roth conversions make the
00:48:38
most sense when you're not earning much
00:48:40
income which for Eric it's true he won't
00:48:43
be earning much income but if his wife
00:48:44
is really a high earner and they're
00:48:46
filing taxes jointly then their joint
00:48:48
tax return might show a lot of income on
00:48:50
it from her which does mitigate Eric's
00:48:54
opportunity to make Roth conversions but
00:48:56
that's not the end of the world right we
00:48:57
we we kind of talked about this before
00:48:59
with the whole Irma math you know if
00:49:01
you're earning half a million dollars a
00:49:02
year and because of that you have to pay
00:49:05
Irma taxes it's like well you're still
00:49:07
earning half a million dollars a year
00:49:09
and essentially the problem here would
00:49:10
be for you Eric well I can't perfectly
00:49:13
execute this particular tax loophole
00:49:15
strategy because we're earning too much
00:49:16
money right most people would trade
00:49:18
places with you I know it's not ideal
00:49:21
it's not ideal but it's also certainly
00:49:23
better than some other scenarios but I
00:49:25
do think there's something really really
00:49:26
important for Eric to keep in mind now
00:49:28
Eric perhaps you can look ahead and
00:49:30
start to think about certain years and
00:49:32
this is where the cash flow analysis I
00:49:33
think is going to be really helpful
00:49:34
hopefully you will see that there are
00:49:36
certain years where perhaps neither of
00:49:38
you are working perhaps neither of you
00:49:41
are collecting Social Security yet or if
00:49:43
you are maybe it's you Eric and it's a
00:49:44
relatively small amount and there will
00:49:46
be some years where you can probably
00:49:48
squeeze in a lot of Roth conversions
00:49:51
onto your federal tax return at a
00:49:52
relatively low tax rate I would look
00:49:54
into that and yeah being on your wife's
00:49:57
health insurance is a huge Plus for your
00:49:59
years right you're going to save a lot
00:50:00
of money in your early retirement by
00:50:02
doing that from a strictly Financial
00:50:04
standpoint I think there are far more
00:50:05
benefits to you Eric than there are
00:50:07
downsides you'll essentially be living a
00:50:09
fire lifestyle while also earning half
00:50:12
income as a couple which is certainly
00:50:14
going to be good for decreasing any
00:50:16
needed withdrawal rate from your
00:50:18
portfolio Eric but okay I do think
00:50:21
there's one important vital conversation
00:50:24
or consideration Eric that you and your
00:50:26
wife need to make and it is it's a joint
00:50:28
consideration there's the question of
00:50:31
what is it like to have the freedom and
00:50:33
flexibility of early retirement while
00:50:35
your spouse is still working a 9 to5 or
00:50:38
from your wife's point of view what is
00:50:39
it like to be working a 9 to5 while my
00:50:43
husband is retired and he's going to do
00:50:46
his retirement thing all day and this
00:50:49
idea it comes from a cool study that
00:50:51
Fritz Gilbert and another gentleman did
00:50:52
Fritz Gilbert from the retirement
00:50:54
Manifesto where they interviewed a whole
00:50:56
bunch of of pre-retirees and post
00:50:58
retirees and they found that the the
00:51:00
number one concern for pre-retirees had
00:51:02
to do with had to do with finances the
00:51:05
number one concern for pre-retirees had
00:51:06
to do with finances but that finances
00:51:08
aren't even close to the number one
00:51:10
concern for post retirees other things
00:51:13
like how am I going to find fulfillment
00:51:15
what am I going to do all day how is my
00:51:16
health doing those are the kind of
00:51:18
things that post retirees think about
00:51:20
how are my relationships how am I doing
00:51:22
socially how's my relationship with my
00:51:24
spouse and I think retirement is this
00:51:26
jolt to the system it it's a big change
00:51:29
and of course there's a ton of positives
00:51:31
but there also might be some negatives
00:51:32
associated with it and I think it's
00:51:34
going to be really important to have
00:51:35
some clear communication with your wife
00:51:37
Eric about how might that look and how's
00:51:40
it just going to change the daily Rhythm
00:51:41
where sure right now you're both working
00:51:43
the 9 to 5 and you see each other in the
00:51:45
morning and then you have dinner
00:51:46
together at night and you walk the dog
00:51:48
or you know whatever your rhythms of
00:51:49
Life are and now all of a sudden it's
00:51:52
really going to change where you're it's
00:51:53
not that you're not doing anything of
00:51:55
course you're you're living your
00:51:57
retirement dreams but from her point of
00:51:59
view it's going to be that you're kind
00:52:00
of putting around all day you're
00:52:02
puttering here puttering there maybe
00:52:03
you're going on trips maybe you're going
00:52:04
on adventures you're pursuing some of
00:52:06
your passions but you're not working and
00:52:08
it's going to alter some sort of Rhythm
00:52:10
that you've kind of fallen into as a
00:52:12
couple and there are a lot of stories
00:52:14
out there where people say yeah like I
00:52:15
thought retirement would be this I was
00:52:17
dead wrong it wasn't one what I expected
00:52:20
in some ways it was better in some ways
00:52:21
it was worse than I expected either way
00:52:23
I had to make some big changes or we as
00:52:25
a couple had to make some big Chang
00:52:26
changes and so Eric from some of the
00:52:28
details that you shared I'd be surprised
00:52:30
if finances end up being an issue for
00:52:32
you in retirement as I talked about on
00:52:34
episode 89 I'm sure there are some ways
00:52:36
where you can tweak and optimize your
00:52:38
finances the question is going to be is
00:52:39
it worth time and effort and the
00:52:41
resources that you'll have to to to put
00:52:42
in to do so it might be right everyone
00:52:45
can benefit from some optimization but I
00:52:47
think a much bigger question mark is the
00:52:51
relationship question mark of just
00:52:52
saying are you and your wife going to be
00:52:54
on the same page how are you going to
00:52:55
execute it what's it going to look like
00:52:57
over that 10year period 10 years is is a
00:53:00
long period of time but either way good
00:53:03
for you Eric sounds like you're you're
00:53:04
doing really well it's a cool problem to
00:53:07
deal with right it's a good problem to
00:53:08
deal with and good for you for thinking
00:53:10
about it 17 years in advance so
00:53:13
everybody thank you for listening to
00:53:15
this episode 90 this third AMA episode
00:53:17
of the best interest podcast if you have
00:53:20
questions that you want to contribute to
00:53:21
a future episode just email me Jesse
00:53:24
bestin interest. blog
00:53:28
thanks for tuning in to this episode of
00:53:29
the best interest podcast if you have a
00:53:32
question for Jesse to answer on a future
00:53:34
episode send him an email at Jesse
00:53:36
bestin interest. blog again that's Jesse
00:53:40
bestter interest. blog did you enjoy the
00:53:43
show subscribe rate and review the
00:53:45
podcast wherever you listen this helps
00:53:48
others find the show and invest in
00:53:50
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00:53:51
appreciate it we'll catch you on the
00:53:53
next episode of the best interest
00:53:55
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00:53:59
the best interest podcast is a personal
00:54:01
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00:54:03
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00:54:05
Financial advice and is not prescriptive
00:54:07
of your financial situation