Making Smart Decisions During Major Life Events

Glad to have you back on Mr. Stillman's Opus. I'm Ben George alongside John Stillman. John, we've got a good show today on major life events.

I know that you always work on it. That's one of the beauties of an advisor, right, is you get to kind of share in those major life events with a lot of people, good and bad, right? There's a lot of a lot on each side of the aisle, but having someone I think that you can rely on during this time is crucial and I'm sure you enjoy being a part of that process, right? Well, I've heard it said that when done right, being a financial advisor is among the most honorable professions because if you think about it, like if you go through a divorce, you spend a lot of time with your attorney. If you go through the death of a spouse, you might spend a lot of time with your family or your pastor. If you have like a big time medical diagnosis, you might spend a lot of time with your doctor or your medical team. Well, in all those life situations like that, guess who's involved in each and every one of those and that's the financial advisor, right, because all these things have financial implications. So, you really do develop relationships and you end up being there for people in a way that all these other professionals might be there in one of those situations, but not in all of them. So, yeah, that's what we're there for. Yeah, I really thought of it that way and that an advisor kind of covers all of your aspects of life.

Not really, you know, you specialize in something, but when it comes to that relationship, you kind of cover all bases. So, that's very interesting, but this episode today is going to focus on that. So, when you face these major life events as a listener, you have these big things pop up in your life.

A few of them you touched on already. I want to kind of get an idea of how you work with clients on these, but also what can someone do if you're not properly prepared for these things, right, because not everybody has sat down and built a plan. Not everybody has an advisor that they work with yet or have built that relationship with.

So, I want to kind of get an idea of what you can do there, but then also, you know, how can you also get ahead of these things as well? We're not, most of these are unexpected. We don't know when they're going to happen. We don't know in some cases if they will happen for us, but you want to be prepared, which is a lot of what the planning process is all about is trying to get ahead just in case the worst case does happen. So, we'll do that today on the podcast and we appreciate you joining us as always.

Make sure you subscribe to the show too if you haven't done that just yet. All right, one thing that's happened a lot recently, John, through this COVID age that we're in are job changes, right? So, people are leaving work or they're getting laid off or whatever the reasons are happening for it. Bottom line is job changes are happening a lot. So, this is obviously a big life event, right, because it does impact your finances, it impacts your savings, it impacts your preparing for retirement, but when the job change does happen, what are some things that you're working with people on?

So, a few things we need to think about if your job changes. Are you moving to a job with higher income? Well, if so, what kind of implications might this have for your tax bracket? Are you making so much more with a new job that you're in a higher tax bracket? You know, obviously, it's a good thing to make more money. You certainly would not want to say to your new employer, actually, why don't you pay me a little bit less so I'm not in a higher tax bracket?

You pay taxes when you make money. So, being in the higher tax bracket from that standpoint is a good thing, but there might be some planning implications there that we want to think about in terms of maybe how we're deferring some taxes. If, let's say, you move from the 12% bracket to the 22% bracket, we might want to defer more income than we would have before. And also, if you're moving to a job with a higher income, like, how are we preventing lifestyle creep from becoming part of your life? So, lifestyle creep is when your income goes up and then your lifestyle expenses go up right along with that increased income. And you never really see any crew progress in terms of building wealth because you just improve your lifestyle to meet your new income. So, obviously, it's fine if you do get a job with a nice raise or maybe just get a raise at your current job. That's great, you know, enjoy it a little bit, but let's figure out a way to take some of that additional income and put it toward increased wealth building instead of just spending more money. So, if you have a higher income at the new job, that's one thing we want to think about.

Maybe you have a lower income, like, maybe you're changing jobs because you've been so stressed out at your current job that you need to move to something where you say, look, I'm going to make a little bit more, but it's going to be better for my health, it's going to be better for my stress level, it probably will elongate my working career by being in this lower stress job. So, if that's the case, you know, what are we giving up? Does this mean that you're not going to be able to save as much as you could before? Okay, well, if so, what are the implications of that? Is it just that, all right, well, we can cut out a couple of lifestyle things that weren't really that necessary anyway and be okay?

Is that a realistic approach? So, whether your income is higher or lower, there are things we need to think about. If you're leaving a job, moving to a new job, you probably have a 401k at the old job that needs to be dealt with somehow. Do you leave it where it is? Do you roll it into an IRA? Do you roll it into the plan at your new job?

You know, more often than not, by several multiples, probably 90% of the time, you're going to be better off to roll that to an IRA. There are, of course, exceptions to that and that other, let's call it 10%, but a lot of things we need to think of if your job has changed or is about to change. Yeah, hopefully it's for the better, but to your point, I think a lot of people do change career paths, right? And right now, a lot of people evaluate it. Do I actually enjoy what I'm doing right now?

Maybe I'd take a little bit of a pay cut and find something I enjoy to go to day to day a little bit more. So, whatever the event is, there are some things to be thinking about there. All right, what about an inheritance? And I'll even kind of tie this in right now too, Jon, because Powerball's at what, $1.9 billion right now. And I'm sure your inheritance won't be anywhere near that if you get one.

But I think it's kind of a similar conversation, right? If you get this influx of money out of kind of nowhere, you need to be prepared. Yeah, so usually if somebody gets an inheritance, we want to be thinking about a couple of things. First of all, what are the taxable implications of that money you've inherited? Most people are pleasantly surprised to find out that most of the money that they inherit isn't taxable, or at least isn't as taxable as maybe they were anticipating. So, as an example, you know, life insurance proceeds, that's not going to be taxed at all. That is tax-free. If you're inheriting investments outside of an IRA, or if you're inheriting a house property of some sort, you'll only be taxed on that money or taxed on those assets by how much they grow from the time that you inherit them until the time that you liquidate them.

So, you know, if you inherit your mom's house and you sell it six months after she dies, well, it probably didn't grow in value that much from the day she died to the day you sold it. So, you're going to have little to no tax implication there. If you're inheriting IRA money, then that is all taxable.

It doesn't mean it's taxable the day you get it, but it's going to be taxable when you take it out of the account and you have to get it all out of the account within 10 years. So, that's something that has to be planned for. So, we want to be thinking about tax implications. The other thing we want to think about when you inherit money is just not being paralyzed. And I wish more families would have these generational conversations about, you know, here's what kind of money we have, here's what kind of wealth is in the family, here's what, you know, within this range of likelihood, this is probably what will be coming to you. And so, let's have you be prepared for this money that you're going to get so you can be planning as opposed to just, well, you know, dad had all these stocks that he never talked about and I inherited them and now I'm saying, well, you know, I guess dad really wanted me to have AT&T stock, so I don't want to sell it, I'm just going to sit on it for 30 years. Well, did dad really want you to have AT&T stock specifically or did he just want to take care of you financially? And that happened to be the stock that he invested in because it was a good pick in his mind at the time that he picked it, but what he really wants more than likely is for you to make the best financial decision you can for yourself with this asset that he's left to you. So, I see a lot of people kind of get paralyzed by saying, well, this was mama's money or this was daddy's money and I don't want to change it. Well, no, after you have inherited it, it's your money. And so, stop and think about, okay, whoever left me this money, what would they want me to do with it? The AT&T stock being just one example, do they really want me to have this particular stock? Did they really want me to have this particular house in the family?

Maybe so. I mean, there are situations where, yes, very intentionally mom and dad were thinking, yes, let's keep this property in the family. But if it's just property that doesn't really mean anything to the family, you don't have to keep it just because it belonged to mom or dad. So, again, it's easier to not be paralyzed if the conversation has happened on the front end and you're not surprised by what you inherit. But even if that conversation didn't happen, let's do our best to not sit around for too long and say, well, I'll deal with this later.

And then five years go down the road. Then you say, all right, well, maybe I need to do something with all this stuff I inherited. That's a good point. I mean, I know that I love attaching sentimental value on stuff. And it's just so hard to let something go because it does feel like, you know, you're letting go a piece of that person that maybe left you that stuff. So, I never really thought about the paralysis that could come along with it. But that could be a real challenge for a lot of people, I'm sure.

All right. Becoming an empty nester. Jon, we're still a few years away from this. We probably haven't given it much thought personally, but I know you probably have plenty of clients that are getting in that position where their children are leaving and all of a sudden they have a little extra money at their disposal and maybe don't have as much they have to spend month to month on their kids. So, I guess this is a good situation to be in, right?

Yeah. And in a lot of cases, it can feel like you got that new job with the higher salary or you got a raise at work just because your expenses have now gone down. Now, if it's empty nester in the sense that the kids are gone to college, okay, well, maybe this is actually, you have now more expenses on your plate if you're paying for college.

But if it's empty nester from the standpoint that they're done with college and all their stuff has moved out, they don't even have a room that they're coming home to at this point, you just see them on the holidays and it's true empty nester status. In a lot of cases, this does put you in a place where you probably are seeing a reduction in your monthly expenses and for a lot of people, this happens to be coming at a time where you're in your prime earning years. So, you're making more than you've ever made and suddenly your expenses are less than they've ever been in a lot of ways. So, it's really an opportunity to pour gas on the fire from a retirement savings standpoint and a lot of people who feel like they're behind on retirement savings when they get into their 50s will find, well, you know what, we actually have the opportunity to catch up, kids are gone, income is higher, maybe some of our debt is paid off, maybe your mortgage is paid off at that standpoint.

It's really a chance to be very intentional with the money that you put away for retirement during that stage. All right, last one here again, we're talking about major life events where you need to have some proper planning in place or at least know kind of what to be thinking about if these things ever affect you. And the last one is the death of a spouse, one that you kind of touched on earlier about how you build these relationships with your advisor and this is one I know that's tough for anyone and it's got to be a difficult situation for you, John, but what are some things from a financial standpoint people need to be thinking about here? Well, a lot like the receiving of the inheritance that we talked about a minute ago. It's inevitable, if you get an inheritance, it's a double-edged sword, right? That means somebody that you loved and cared about or at the very least somebody that cared about you has died.

And so, it's kind of a bittersweet thing. Well, with the death of a spouse, it's only the bitter without the sweet, but we still have financial implications that we need to think about. So again, just like with the inheritance, if these conversations can happen before the person dies, it's so much better because then you're not surprised, then you're not trying to navigate maybe some complex financial issues while you're in the middle of grief. So, to the extent that husbands and wives can talk about, all right, well what happens to the other one of us when the other person is gone?

The more you can have those conversations ahead of time, the better. So, let's think about just from a nuts and bolts perspective, some of the things that are going to happen when one spouse dies. Well, the remaining spouse is going to lose the smaller of the two social security benefits. So, let's suppose that husband was getting $2,000 a month and wife was getting $1,500 a month as her benefit and the husband dies. Well, she's going to switch to his $2,000 a month benefit.

She will drop her own $1,500 a month. So, there's going to be a reduced income there. If we have any pensions that don't have a spousal continuation option, we're going to see reduced income there or maybe it's a pension where you took the 50% option. So, first spouse dies, remaining spouse gets half of what they were getting before. We're also now moving into a world where you're filing as a single individual tax filer instead of married filing jointly.

Even if your income remains the same, that puts you now in a higher tax bracket. So, that's something we have to think about. There are things then that get a little bit easier though like from a long-term care planning perspective. If we have two spouses, both of which are at potential risk down the road of needing nursing home care. Well, if one of them goes into the nursing home, we have to be able to pay for it without selling the house out from under the other one, without taking all the income from the other one. So, we have to have a plan for that. If one spouse has died and one spouse remains and that remaining spouse needs long-term care, well, now we can sell the house to pay for the care.

Now, all of the other income and assets are on the table to help pay for the care. So, you know, there are things like that that are a little bit easier once you're just one person. But for all intents and purposes, it's best if both spouses can, you know, pass on at roughly the same time, which Ben, we see that a lot. You know, one spouse is in pretty good health and the other is not in great health and the one who passes away after having not been in great health, suddenly we see a rapid decline in the other one, right?

Because the loneliness, the sort of dying of a broken heart kind of thing. So, again, like all these things, it's just better if you can plan ahead and talk about them in advance. And a lot of people don't like to talk about what happens if my husband dies or what happens if my wife dies. Now, husbands are a little more proactive, I find, in saying, well, I want to make sure that she's taken care of after I'm gone. That's not really an uncomfortable thing for husbands to say.

It is uncomfortable for wives to say, I want to make sure I'm okay after he's gone because the wife doesn't want to think about it, right? So, the more we can have these conversations proactively, the better off everybody is so that we're not trying to scramble and make decisions in the middle of grief after the fact, let's just already have a plan. And then when this life event happens, whatever it is, we can just flip the switch to say, okay, well, let's now implement the plan that we already had in place for this particular stage of life.

And you don't have to think about it. Being proactive is the key in many, many different instances for finances. And we've gone through a few of them today, these major life events.

But again, if you haven't sat down and began planning and gotten ahead of some of these things, which you can do, not in all cases, but in many cases, you can at least be prepared in the event it happens. Please reach out. You can always find John Rosewood Wealth Management online, or you can call or text.

Call or text 800-545-2991 is the number there. But John, as always, we appreciate the relationship we've built with you as well on this show. And I appreciate all the insight you give us every week. John Always a pleasure. Talk to you again soon.

Justin Very good. Please subscribe to Mr. Stillman's Opus. Look forward to talking to you again in a couple of weeks. Take care. Carolina Wealth Stores doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.