More Than Just Investing

Welcome once again, it is Mr. Stillman's Opus. John Stillman joined this week by a special guest. This week we're heading to Chicagoland, and we're talking today with Jim Dishert, founder and CEO of 360 Financial Group. Jimmy D, always good to talk with you.

Thanks for joining us. Yeah, absolutely. I'm honored that you asked me to do this with you today. I know this is a bucket list item for you to be on Mr. Stillman's Opus.

My bucket is now full, Johnny. Yep. Well, as you know, I spend a lot of time talking with you on your radio show, which airs in the Chicagoland area. WLS, one of the bigger radio stations, one of the bigger talk radio stations in this country, in fact. Yeah, absolutely. In fact, WLS stands for World's Largest Station. Yeah, that's exactly what it is.

It was the world's largest station. There you go. Good to know. So let's talk about something that's right in your wheelhouse, which is, you say this on the show, if not every week, almost every week, you're stressing the importance of retirement planning is so much more than picking the right stocks, bonds, or mutual funds. And so often I feel like people are in this securities picking mindset, but that's not planning. That's picking investments. Right.

That's exactly right. And that's a small component of the planning process, you know, especially with the area of focus that we have for our firm, as well as the focus that you have within your own firm. You know, when we talk about the planning process, most of our clients, 95% of our clients, are approaching retirement within a three to five year window of retirement, or they're currently retired. So the things that you need to take into consideration go to greater detail than what is going to get me the best return for my dollar. That's important.

Don't get me wrong. It's important to have good returns, a good solid foundation within your investment portfolio, but that's not the only thing that's going to help you determine a successful retirement. You need to take into consideration how you're going to position your assets for income. How are you going to generate the cash flow?

So that's a component. You need to look at the tax implications. You know, there are certain types of investments that you want to hold in your retirement accounts, and there are certain types of investments that you want to hold in your non-retirement accounts. That's a simple issue of looking at the turnover ratio within the mutual funds that you own or the tax implications of taking distributions from specific accounts. So there's all kinds of different facets that you need to look at from a tax side of things.

Well, let's look at a couple of specific examples in that topic right there. Having the right investment in the right types of accounts. If you have a mutual fund in an after-tax account, well, you're creating a tax bill for yourself every year.

That's completely out of your control, right? That's exactly right. Because depending on what happens with that mutual fund, what's bought and sold, it's creating short or long-term capital gains for you that you're going to have to worry about.

Yep, absolutely. And when you look at, you know, especially if you own mutual funds in those types of accounts, you want to do a detailed report on the turnover ratio. And the turnover ratio is how many new positions within that mutual fund or the number of transactions that you're going to have within that mutual fund and what is going to be the implication. You know, in some mutual funds, you can have a direct correlation of a higher turnover ratio to a higher expense ratio because it's not free to have those transactions.

And then ultimately, the tax implication on that, you know, the tax implication on that can be as much as one and a half to 2% that it reduces your performance by because of the tax that you have to pay. You know, so because a prospectus shows you that it's returned 8% doesn't mean you keep 8%. And so it's key. And for a lot of the listeners and a lot of your clients, the key is to understand the fact that you don't necessarily have to go to the whiteboard and erase everything.

A lot of times, it's a matter of cleaning things up and making sure that attention is paid to the details because the real key is that when you go through and you clean these types of things up, it can have a significant impact where they may seem small and irrelevant at times. It can have a significant positive impact if it's done right. So that's not to say you should never have mutual funds in an after-tax account, but at least be aware of the tax situation you might be creating for yourself there.

Let's look at something in that same vein, but the other way. So tax-free bonds or municipal bonds as many people would know them, the idea of tax-free bonds sounds great, right? But usually there's a trade-off there, right? Usually the yield on those bonds, what they're paying out is not as great as corporate bonds that you might be able to invest in.

So here's what drives me crazy. That's with the tax-free bonds, you do want, if you own those, you do want those in your after-tax account because all that interest isn't taxable. The problem is so many people have tax-free bonds, but then they have them in an IRA or a tax-deferred account. And so you're getting a lower return than you could get with other bonds, but it's already tax-free because it's already in a tax-deferred account. So you're not getting any tax-free benefit. That's a pet peeve.

Yeah. And that's one of those mortal sins that we talk about in the investment world that, look, you spend 30 years in an accumulation and sometimes you make decisions and you forget about the decisions that you made, or you don't realize the full impact of those decisions. And it takes going through a review with somebody who has had the experience of the retirement planning side of things to help get you on the right path.

And again, it doesn't mean that you have to change everything that you're doing. It means that in most cases there are things that you need to clean up. I equate it to having a fire in your home.

If there are things that are going to create a fire, you want to eliminate those so you can reduce that risk. And, you know, when we look at the tax implications of our investing, far too often when we're making a decision by ourselves for investing, you're typically making that decision with a growth mentality and not looking at the ramifications of everything else that, you know, is taken into consideration. So take the time to have everything reviewed properly so you can understand what corrective actions that you need to take in order to put yourself in a better position. I'm curious to hear your take on how to integrate things like pensions and Social Security, because I know you sort of have the same viewpoint that I do, that we can't just look at those things in a vacuum. We have to look at how those income streams affect the totality of our overall income plan. Right.

Well, and there are some things that you can control and can't control. Number one, Social Security, it's not an asset that you can necessarily control from a lump sum distribution standpoint, right? You're not, the government isn't going to give you a lump sum distribution on Social Security. So it has to be, it's one of the first things that have to be planned for, especially if you're a high income earner. You need to plan for Social Security appropriately.

And that really is for just anybody in general, not just the high income earners, but everybody needs to plan for Social Security appropriately. The next is, is if you are one of the lucky ones to still have a pension, how do you take that pension and what is the best way? What are your options that you have available to you? Do you have a lump sum that's available to you for that pension? Are you going to take it based upon a single life?

Are you married? Are you going to take it based upon a spousal benefit? If you are going to take a spousal benefit, what spousal benefit are you going to take? Because there's typically multiple options. So you start with the base of your income, the foundation of your income, and then you build from there. But you also have to establish what your goal is for income in retirement. You can't just get to retirement and say, okay, I want, I'm just going to take whatever I need whenever I need it. You can't do that.

It doesn't work like that at this point. Last thing I wanted to ask you about, because I know in Chicago you have a lot of really high income clients, like people making more than half a million dollars a year. Certainly more than we have in this area here in the triangle.

And while we do have some of those folks here, Chicago has a lot more people just in that world. What are some of the unique challenges that you see for folks with incomes like that, with pretty huge nest eggs that they put away, and what are some of the things we can learn from the ultra wealthy, if we want to call them that? Well what I would tell you first and foremost is that they have the same fears that everybody else have.

Number one, their biggest fear is that they're going to run out of money. So planning appropriately, the principles of planning for somebody who has more money than maybe somebody who doesn't. The principles are the same. The difference is maybe some of the advanced strategies that are available that maybe aren't necessarily applicable to an individual with a different set of circumstances.

But the principles of planning are constant for everybody. And it's one of the primary reasons that I focused on the individuals that we do focus, because you need to have a sound income plan in place. You need to know where your sources of income are going to be coming from. If we're going to have social security, if we're going to have pensions, if there's a shortfall, what are the tax implications of those accounts that you have saved for retirement?

What are the tax implications of those non-retirement accounts? How are you going to systematically shift risk from seeking growth all the time to now start seeking income more consistently? In the interest rate environment that we're in, everybody faces the same challenge in order to produce yield, right? So the key is that the balance is maybe higher, the principles are still the same.

And it takes working with an individual who understands that type of planning, like yourself, John, where you have the foundation and the principles intact, and that you can build a plan unique and specific to that individual. Very interesting. And I always enjoy your feedback and your perspective. By the way, I should have mentioned that you are one of how many St. Louis Cardinals fans living in Chicago Cubs country? I think nine. There's not very many of us up here, that's for sure. Yeah. Well, what a time to be alive if you're a Cardinals fan living in Cubs country. And vice versa. Yeah. No kidding. Well, Jimmy, always good talking with you, buddy. Appreciate it.

Yeah. Hey, you bet. I appreciate the opportunity and look forward to the next time that we do it. We'll see you again very soon right here on Mr. Stillman's Opus. Thanks for tuning in.