2021 EP0220 PETER RICHON - MONEY MOVING

If you fail to plan, plan to fail. We want you to plan for success. Welcome to Planning Matters Radio. Hi everyone, welcome to the show. Today we're here with Peter Rochon of Rochon Planning.

He's a master registered financial consultant and fiduciary advisor and also the author of a great informative book, Understanding Your Investment Options. Today we'll be discussing eight times when you really should consider moving your money and the three biggest expenses in retirement and how you can plan to control them. Welcome to the show, Peter. Hey, thanks Kim. Appreciate it. Good to have you here.

I'm excited and this is going to be some important topics. I mean, people think about their money and a lot of times they say, oh, there's a problem or there's something I should do with it. And then it sort of just goes to the back burner and nothing gets done. Sits and sits and sits and gets forgotten about and then... That problem festers and never gets improved. And then you look back and you say, gosh, I wish I should have done something 10 years ago because I would have been in so much better situation now.

Well, these are the moments to identify that, hey, you're right. You know, let's confirm that feeling that you've got that now is sort of a time to think about moving some money around. So, you know, when should I consider and why and also, you know, what's the first thing you would recommend in moving money? Before you move your money, understand where you're moving it to. Okay. So that's the first thing is if you've identified that, yes, there is a reason to move your money, well, where is it going to go to?

Don't just have it out there in limbo. Identify the destination and also consider both where it's at currently and what that destination is and weigh pros and cons of both. Is the destination going to show you a measurable benefit?

Great. And so once I know where I'm going to bring it to, what's some other things that I need to consider as when I when I decide to move it to that new place that I identified? Well, generally, it's not really a difficult process to move money, but you don't want to make any mistakes while you're doing it.

Right. So that can cause more problems in the long run or in the short term to those retirement accounts, especially anything that's got tax implications. It's been tax deferred. You don't want to make any mistakes because you've got the tax implications.

You got the potential penalties plus whatever has happened and transpired in between the source and the destination. OK, that's good to know. And so when you know, one of the steps is rebalancing.

Yeah. So when should I decide to rebalance or how do I rebalance? And is it all the accounts at the same time or just the ones that I'm moving my money to? You know, it can be all of the accounts at the same time. Rebalancing is a fundamental financial principle. And basically this boils down to maintaining the proper risk tolerance and the proper asset allocation. So this actually is the only one on this list that doesn't necessarily mean you're moving your money from one account to another. This can actually be done within the same account and most often is within the same account. It's not moving your money to a completely different destination. It is moving your money within the current account.

And the reason why you want to do this is because the markets move and your positions within your account, therefore, are going to change over time. So, for instance, if we wanted a balanced portfolio that was 50% in equities and 50% conservative in bonds or fixed income, and we started with that mix back in 2010, where would we be today? That'd be a big difference. It'd be a big difference because the equity side of the market has done so well that as we've been putting more money in, that side has grown and grown and grown, and now we might be 80% in equities and only 20% in the more conservative fixed income side. Well, we are way off of what we decided 10 years ago was our proper risk tolerance. And so that needs rebalancing as you go.

Also, let's take a smaller example. Let's say during 2020, in the midst of the onset of COVID, when the market went down 30%, well, now the equity side is lower. That's an opportunity to buy in at a lower price. The side of your portfolio that was conservative that didn't lose so much value, now you've got a higher weight on that side. It's time to rebalance again and buy in when the prices are low so that when the markets do recover, you can make more profit.

So rebalancing, Kim, is the process of capturing gains when they're there and available and making sure you're not overexposed to risk along the way. Based on your risk tolerance and what you want going forward. Your time horizon, your expectations return, and your balance should change over time too. So maybe as a 20-year-old, I'm balancing to 80% equities and 20% bonds or fixed income.

But as a 50-year-old, I'm closer to 50-50. And as I get to 60 or 65, I'm closer to 60% in bonds and more conservative and only 40% in equities. Because it becomes more important as we get closer to not earning new money not to lose the money that we have. So not only does this need regular monitoring, you should be rebalancing your account every quarter, every three months at least. So look at it more often than just once a year just to make sure.

But then the mix that you are targeting should also change over time. And here's the thing, most people are saving for their retirement in 401ks. Why are 401ks so great? Because they're automatic.

They happen without us having to do anything and they're out of sight, out of mind. So guess what? People forget to rebalance. Exactly. The last time a lot of people looked at their 401ks was when they signed up for the 401k and they added the lines up to 100%.

Yes, I've had some experience with some family members that have done things like that and it was all in cash. And I was like, oh no, what'd you do? Right, for years and years because they didn't look at it and pay attention. So rebalancing, just the discipline of doing this at least on a quarterly basis forces us into a routine of actually paying attention to what's going on with our money. Oh, that's good to know.

Very important. And I've heard a lot about the next thing which is Roth conversions. A huge one. I know there's a Roth IRA, but once you start making a certain amount of money, you can't contribute to a Roth IRA anymore. But you can take some of that traditional 401k money and convert it to a Roth.

Yep. Still opportunity. No matter how much you're making, there's opportunity. There's opportunity there. And this would help with tax purposes down the road.

So how do we do that and what do you have to do to be able to do that? Yeah. So this one does involve moving money to a different account. Although, maybe not necessarily like a different institution. If you're happy with where your money is and who's managing it, it doesn't necessarily involve moving it out from that institution's control or that advisor's oversight. But what it does involve is changing tax status.

And there's a little bit of pain here for the benefit, right? Because when you move money from an IRA or a traditional tax-deferred 401k over to Roth, guess what? Uncle Sam wants his slice. He wants his money now.

Yep. And that's okay because the reason you would consider doing this is not to save money this year. It's to save money in all the years down the road.

Albert Einstein said the most powerful force on the planet was the power of compounding interest. And when the IRS decided to let us defer and delay paying taxes, it's like they were paying attention and nobody else was. They understood that if an account grows that's tax-deferred, I'd rather have $200,000, but I'd rather pay tax on $100,000. And the IRS said, well, why don't we let them keep the $100,000 now and charge the tax on the $200,000 down the road?

The act of converting to Roth is taking what you have in tax-deferred accounts and changing it over, switching pockets, and putting it in a pocket where all the growth is yours, you've already paid your tax bill. And we are in a historically low tax environment. I don't believe that we will see a lower tax environment in our lifetimes. So this is definitely something you want to look at and consider to do now if you have that extra cash to go ahead and pay the taxes on that money now.

Yep. Debt deficit, all the spending that we're doing, that money has to be paid for from somewhere. And it will be collected at some point in time. Current spending is future taxes. Did you know that after World War II, the highest tax bracket was 96%? Oh my goodness.

Federal 96%. Ronald Reagan got into politics because he made $100,000 per movie that he made. And he realized that if he made a third movie, he only got $6,000 out of his $100,000. Oh my goodness, I never knew that.

He said something's wrong with this, I'm going to do something to change it. And so he got into politics, he was governor of California, and then eventually made it to the White House where he was famous for trickle-down economics. Trickle-down economics was let's lower the tax rates and more money will flow through the economy. Well, today we are in a very low tax environment. In 1984, in the early 80s, you could be in a 38% tax bracket if you made $68,000. Today, to be in a 38% tax bracket, you have to be making over $600,000.

Oh wow, that's a huge difference. Taxes are way, way lower than they have been. They're going back up. But if I'm wrong about that, here's the thing, that is an assumption. If I'm wrong about that and we go ahead and prepay our taxes now and we're done with them and then taxes stay the same or are lower into the future, guess what? We have more money than we thought we were going to have. Yeah, and you're not losing any and you can prepare for both scenarios because you just, unfortunately, we can't predict the future and we have to hope for the best.

And hopefully, you know, the best is where it is right now and you'll be good to go. Yep, go ahead and take advantage. We take advantage of it. Taxes are on sale. Exactly.

Everybody likes something on sale. Exactly. Again, we're here with Peter Rashawn from Rashawn Planning. You can reach him at 919-300-5886 or on rashawnplanning.com.

Give him a call and he'll help you figure this all out. I know it sounds, sometimes sounds like overwhelming and you just don't know where to start, but that's where Peter comes in and helps you get that plan in place. So what age should we start looking at all this or is there a certain age that we should move money into certain accounts to make sure that we are set up for retirement? So I think that everybody hopefully knows about age 59 and a half, right? That's when you can...

They've heard that age often, over and over again. You can start touching your retirement money without the 10% penalty. You can start withdrawing it without the 10% penalty, which is good.

That may be a reason why you want to consider moving your money is that, hey, I can get my hands on it without penalty. But more importantly, a lot of people don't actually need their money yet at 59 and a half and a lot of people are still working and saving in those 401K plans well beyond 59 and a half. Maybe they're going to 65, maybe they're going to 70 years old, but being in the 401K plan might not offer you the best options that are available. So most 401K plans actually offer you the opportunity to do what's called an in-service distribution. That is, if I've got my life savings inside of my 401K plan, I can actually take that out, take personal control over it, roll it to an IRA, but then continue contributing to the 401K plan. If I keep working and the company's matching, I can keep putting new money away, but with the old money that I've already built up, I can take it out and take personal control over it and begin to do things like better position it for retirement, maybe consider those Roth conversions we just talked about. A lot more choice, a lot more option, a lot more control.

I never knew that. I didn't know that you could take it out of that account when you turn 59 and a half and do what you want with it. I like the idea of having choice and be able to control it more because sometimes in those 401Ks, it's very limited as to what investments you can invest in.

Yeah. A lot of times these days, the 401K has a bunch of these target date funds or these life cycle funds. To me, those are not the best option. They do the job to some extent, but they don't react to conditions in the world. When a tidal wave is coming, they're not getting out of the way. They're not going to cash.

They're not being actively managed. They're just a preconceived formula for how to get closer and closer to a date and reduce the risk. The analogy I give for that is in North Carolina on a bright, sunny day, I'm pretty comfortable going the posted speed limit. On a day where we've got our quarter inch sheet of ice storm, our winter storm, a target date fund is still going the posted speed limit. It's not safe in those conditions. It's like having your automatic speed limit on and then you hit the rain. It keeps going.

It doesn't break for you. So 59 and a half is a big opportunity and a lot of people don't know about it. But more and more companies are offering the opportunity to take control of your money because they are technically fiduciaries for your money. When you are part of a group plan, you are a participant in their plan and it is their responsibility to offer you the best options. The reason why more and more companies are letting people take their money out of the plan at 59 and a half is because typically their plan doesn't offer the best options. Interesting. And then they reduce their risk of you getting upset with them as well. Well, there have been a number of lawsuits where employees have turned around and sued their employer for not offering the best options in the 401k. And to my knowledge, not a single one of those lawsuits has been lost by that group of employees. Wow. So yeah, it would be in their best interest to let you have your money and do what you want with it.

Do what you want with it then. Yeah, that's right. And talking about companies and, you know, sometimes and more and more people over the years don't stay at the same job year after year. And most companies do have some kind of retirement plan. So there is an account with that company's name on it in your name.

And when you leave that job, what do you need to do? Well, about ninety five times out of 100, you should take that money with you. You should roll it not into your new employer's 401k plan, but you should take personal control and roll it over to an IRA for all of those same reasons that we listed before.

More choice, more options, more control. If you roll it from from one employer just to the next, you're trapped back in a just a different 401k jail. But you want to roll it to an IRA and you can even if you've had, you know, five or six previous employers, you can consolidate them, make things easier to track and keep track of.

But also, there are some exceptions to that. So if you plan on retiring before age fifty nine and a half, there's a provision that does allow you to pull money out of a 401k starting at age fifty five without the 10 percent penalty. And so that may be a reason why to not roll the money over, why to leave it in an old 401k. Also, if you have company stock inside of your 401k, that's another one of those exceptions that you need to look at very carefully before just rolling money over. So almost every time you're going to hear, oh, take your money with you, take your money with you, take your money with you. Take your money with you. And most of the time, that's correct.

But there are few exceptions there. You just need to be careful. And again, someone like you or you could help these people look at all their accounts and decide what to do.

I'm leaving a job and I have all these four other accounts. What do I do? Should I leave it where it is? Should I take it with me? And if you need help like that, you can give Peter a call.

Nine one nine three hundred five eight eight six and look them up online, which on planning dot com. So there was an old commercial around here for a mental health facility. And the tagline on it was, if you don't get help here, please get help somewhere. And so I sort of feel like that in the financial world. Like I feel like I do a very good job. I am a fiduciary. I look out for my client's best interest. But there are a lot of good financial advisors out there. I mean, just bottom line, you've got to go with your gut. You've got to make sure that you're dealing with somebody who you do believe has your best interest in mind. But if these matters are things that are on your mind or you have concern, talk to a professional about them somewhere.

Right. I'm happy to help. I offer a free consultation. We can do it virtually wherever you are in the world.

We can get it done. But if you've got questions that are lingering on your mind, if you've got concerns about your financial future, talk to someone about them. And it doesn't take long, you know, take a couple hours out of your day and make an appointment.

And we can look at it real quick and figure it out. And I don't have account minimums. I don't require that somebody has a million dollars or five hundred thousand dollars to work with me. I am willing to help anyone who wants to improve their financial outlook. Now, we'll decide if it makes sense to work together thereafter.

But I can get anybody headed in the right direction and tell them what I would want to know or what I would think they need to know if I was in their shoes. And really, it's never too early or too late to do this plan or have a look at all of your accounts or have someone else look at it with you and help you come up with a future plan. So we've talked about the rebalancing, Roth conversions, what age you need to look at it when moving your money, leaving a job.

And now I did this a few years back when I finally looked at this. But the fees of the account that you're using right now, it might be the brokerage that you're using. It could be the accounts, the investments that you're invested in. But fees can be high.

Yeah. And fees eat away at progress. Fees matter. I heard an analogy for this one. I like analogies because a lot of people, when you talk about money, the eyes glaze over. They tend to ignore it.

But if you can give a good story that gives the example or teaches the lesson. So if there's a plane taking off from LAX and it's one degree off of its flight path, when it's passing over Nevada, it's not too far off of its destination. But if it was headed for New York City and it was one degree off of its flight path, by the time it got to the East Coast, it would end up in Washington, D.C.

Right? It's a big difference the longer you let fees eat away. One degree difference, one percent difference in fees can make a big difference over time. And so, yeah, if the fees are too high, a lot of times people really don't know this either until they get a review or an in-detail evaluation.

It's not like it's printed in red right on the front cover. You're paying two percent in fees. No, you have to search for those fees and know what you're looking for. And even then, a lot of times, I mean, 60 Minutes did a long expose a number of years ago about how 401ks are laced with hidden fees.

And a lot of people don't realize that. They're like, oh, no, my company's offering this to me for free. I promise you that there are fees in there. The financial institution that's holding those funds is not doing that out of the goodness of their heart.

They have to pay their employees, too. So fees are hidden. They're like layers of the onion.

You know, you find one and you peel it back and then there's another one inside. And they do make a difference. So if you've discovered fees are too high or you feel like fees are too high, or you want to check your fees, we're happy to do that. And I commonly find where people have been investing in a mutual fund account and for every hundred dollars they put in, only 95 actually gets invested. There's an upfront commission fee. And they're not aware of it at all.

They're not aware of it. Variable annuities in particular, sometimes the fees on those can be three, four, five percent or more. So there's a lot of vehicles out there that have high fees. That's good to know when talking about investments. But sometimes investments and your accounts aren't really doing what you want them to do for you. Right. Underperformance.

That's another big one. If you're like, well, I should have gained five percent, 10 percent, 15 percent, whatever it is this year, but I only got two. Or I ended up losing money.

That's underperformance. Likewise, a lot of people have money in the market, but maybe it's in bonds or bond funds or fixed income. Right now the interest rates are so low that you're not making a whole lot on that side.

There are alternatives that can help give you a little bit more horsepower, a little bit more growth on that, and still be on the conservative end of the spectrum. So, yeah, I dig into portfolios. I do what I call the portfolio analysis. I pull back every piece, every investment and say, is this performing based on the amount of risk that it's exposed to? And I find a lot of times, mutual funds, that we could look back for the last 10, 15, 20 years and the value of the fund is no higher than when it started. If somebody had invested $100,000 back in the year 2000 and just let it ride, they would have the same amount of money today. And yet during that period of time, this fund may have lost at times 30 or 40 or 50 percent. That's a huge amount of risk that you're taking not to get a reward. Yes, yes, especially with, you know, time means money and if you're not making money in that time, you really should relook at that account or that investment. And other things happen in life.

Again, we're talking about when you should consider moving your money from one account to the other or rebalancing in your accounts. But just talking about moving your money in your investments, you know, sometimes things change in life. Yeah. Life is change, right? The only thing constant.

Right. It can be good or bad, but yeah, it changes. I saw this a lot in 2020, actually.

I saw it one of two ways. I saw where people got notice from their employer that, hey, your services are no longer needed. And they had planned on working for another five or 10 years.

Your time horizon has changed, right? And now your money should reflect that change. If you were planning on working another 10 years and now you're prematurely retired, you don't need to be taking as much risk with your money. The paycheck was what gave you the ability to take the risk with your investment.

And when you don't have that paycheck, at least temporarily pull back on that risk a little bit. I also saw people that decided that they weren't as ready as they thought and so they're going to work longer. I was planning on retiring at 60, but you know what?

I think I'm going to go to 65 or 70. Well, your time horizon has changed. Let's make the adjustment because if you're going out longer, maybe we should shoot for a little bit more growth and be a little bit more aggressive with your funds. It makes sense. It makes sense. And then the last thing is possibly consolidating those accounts. So when you do hit retirement, like I was thinking, there'd be fewer username and passwords to have to remember.

If you have fewer accounts, there's less accounts and you have to log into. So what's your recommendations when it comes to consolidating accounts? You know, a lot of people say, well, I want diversity, so I don't want to keep all my eggs in one basket.

And I totally get that. But that doesn't mean that you have to have five different IRAs. You can have diversity within one IRA.

You can spread out the investments inside of that and make it so much easier to track. Also, I see people that have their brokerage account over here, their IRA over there, their Roths somewhere else, and they're getting statements from four or five different places. You can have all of those accounts at one institution and on one statement it will break out, here's your non-qualified money, here's your IRA money, here's your Roth money. So there's no law that says you only have to have one IRA. But there's also nothing that says that five IRAs offer you more protection.

And a lot of times I find that they don't actually. You're duplicating the investments or you've got some investments in two of them that are actually working against each other. It seems like it would simplify things for you so you could see all your money, or most of your money in one spot and know exactly what my risk is showing or what my balances are looking like. And a lot of times toward retirement people want to simplify, right?

We're downsizing our houses maybe. And likewise do a little spring cleaning of your financial affairs and if you've got five different banks that you've been squirreling money away at, that's another one I see a lot of. I've had that bank ever since I was 20 and that's why I keep it. Is it sentimental?

Is it like a Christmas ornament that you've got to pull out and put on the tree every year? Is it providing you love when you go in there? Maybe it is, so use that one. But there's no other reason to have the four or five others, right? You find the one with the best rates, the best offerings, the best services, where they know your name when you walk in. Those are the things to look at when considering what bank to keep. But don't have five of them for no reason.

And here's another one though. I do see people who say, well I've got five bank accounts because I have over the FDIC limit in them. Oh, wouldn't that be nice?

It would be nice. It's a very nice situation. I've run into this before. But why is that money all in bank accounts? Ding, ding, ding. Correct, right.

Okay, I get it. You have enjoyed the safety of banks. And you've been wise enough not to overexpose yourself above that FDIC limit. But why do you have so much sitting in cash? In this day and age, with low, low interest rates, you're making absolutely nothing. I actually ran into a situation where day one, I was able to earn more for an account holder by repositioning that excess money than she was going to make in the next two years. Oh yeah, I can't even imagine having five accounts with 250K. I mean, it looks probably good on paper, but again, to know that could have been two million or more.

Absolutely, absolutely. Well, if you've reached any of these points, or need help identifying if you have, you know, give Peter a call, reach out to him. Again, it's Peter Rashawn at Rashawn Planning, and you can find him online, rashawnplanning.com, or via phone at 919-300-5886. It looks like richonplanning.com, by the way. Isn't that a great last name for a financial planner, right? My last name, Rashawn, but it looks like richonplanning.com. And if you go to the website, actually, there's a popup that'll come up. It's not spam or anything, it just says, would you like a free copy of my book, Understanding Your Investment Options? And if you want to get a better handle on what those options are, what they can do for you, when you should or should not consider them, feel free, go there, request a copy. We'll get you out a digital copy almost immediately, and if you'd like a physical copy, we can send that out to you. Thanks for watching.