¶ Avoiding Fraud in Retirement Finance
Welcome to a Wiser Retirement Podcast . Before we get started with the episode , I want to tell you about a new e-book available on our website called Buyer Beware . Why do they keep trying to sell you that annuity ? This e-book covers the various types of annuities , negatives to owning annuities, and better investment alternatives to annuities .
To download this e-book , you can click the link in the episode notes or go to wiser investor . com and you'll find it at the bottom of the page . Now on to today's episode .
Welcome to a Wiser Retirement Podcast . Where we believe the best financial advice should always be conflict-free . I'm your host , Casey Smith , guiding you to financial freedom . Today is my co-host , Michaela Dowdy . Hey , Michaela .
Hi Casey .
So , before we get started , today we're going to talk about five common financial myths , and these myths are, I'm excited about these . These are not something we just found on the internet , right . These are five myths that we have kind of uncovered in our financial planning .
Yes , they're the ones we're seeing day to day through all of our clients here lately .
So , before we get started , though , there's a bonus feature here . Actually , it's kind of sad . This made me very angry when I went through this article .
It was published back on July 20th by CNBC , referring to a former , now Morgan Stanley Broker that stole over $7 million from his clients , and it was pretty close to home , I mean Wilmington North Carolina right , just a very sad situation . And this is like the public service announcement , I guess , of this you never .
Before I get in , I'll tell the story , but before you , before we get into that , just remember one thing you never write a check to your financial advisor or to the firm of the financial advisor .
If you're an independent , like us , you would never write a check to Wiser Wealth Management ever , unless you're paying for hourly financial planning or something like that , but never an investment check ever .
So basically what he did over several years is he convinced clients to leverage their portfolio so they , through a Morgan Stanley product , allows you to borrow money against your brokerage account . Hand him the money personally , so didn't write it to an entity . No audit trails , no , nothing .
Hand it to him in person and he would invest the money in different things and there were no checks and balances . I think he probably preyed on the people that were the least educated about investing , but basically just went and spent all the money and only was found out not by Morgan Stanley . Morgan Stanley had no clue this was going on .
They're in charge of the oversight of the broker . They had no clue this was going on and in the end , a client had turned to the manager and said hey , something's not right here . And they profiled in the article . They profiled a young lady , a single mom , $1.7 million and the owner's in liquid assets and basically he took it to zero .
Just heartbreaking .
It is , and I tell people all the time . I said the barrier to entry to be a financial advisor is very , very low . Anybody can go do it and therefore we have a lot of people in this business that are crooks , and some of them are legally crooks , the ones that are selling annuities . We have a new client recently .
He probably in his 30s when he was sold an annuity .
If not his 20s . I think we had actually back dated it and he was like 27 when he got put into an annuity .
That's crazy . And we find out the lady that sold an annuity is no longer allowed to practice, exactly, lost her license . So it's such hard . I have lost prospects , not so much in the last couple of years but especially when I was just starting out .
That said , well , we really like your concepts and what you're offering , but if we go with a big firm then we feel like we have more protection to something bad were to happen . I mean , I guess they're alleging fraud or something like that , but in the end Morgan Stanley is one of the biggest advisory firms or stock brokers out there .
Exactly .
And they're refusing to have any ownership in this , and so the victims of this Ponzi scheme are suing Morgan Stanley , but they were they're refusing to really cooperate in working with the victims .
It did say further down in the article that there are a couple of victims that they had settled with , so my only guess is those victims are probably saying that's not even my signature on the loan or something along those lines . Right , but yeah , it's a real sad situation and it is certainly avoidable .
And it's avoidable by having checks and balances between TD Ameritrade and Schwab and Wiser Wealth Management . There's a wall .
And then even when , in cases where I'm a trustee for a family , there are still audits that happen on an annual basis and there's audit reports returned over to the families , and so even when we were in private equity many , many years ago , those were audited and audit reports were turned over . Every single penny is accounted for .
So there's checks and balances that have to go into place , but you don't ever write a check directly to a financial advisor . That's dangerous and illegal for the advisor to take . No , exactly .
It's all bad all around , and it's a wonder that it didn't get caught throughout the auditing process in some way , shape or form .
Yeah , I guess the sneaky part was it was a Morgan Stanley loan product and so once the money left , morgan Stanley doesn't track where it goes . So , in their defense , how are they supposed to know that it was all fraudulent ?
Although they did interview one of , I guess , his coworkers and they were like his lifestyle didn't add up to the size of business he had , saying he was taking on these worldwide trips really lavish trips and he always wondered why , how he was able to do it , because, because they probably made about the same amount of money .
And there you go , that's how that happens . Okay , so let's hop into our . Our list here . Surprise me . So we're gonna go with . We're gonna go with five .
Yes .
And this a lot of these . You came up with these on your own . These are ones that you've seen with Missy , as you guys do financial planning .
Yes , exactly . So these are the ones that we're seeing day in , day out clients as we talk to them for consultations or whether they're coming in for the entire financial planning process , and we're walking through that with them .
It ends up that a lot of these are the questions and the misconceptions that a lot of our clients have and , with our broad range of a client base , if we're having four or five clients with these same thoughts , then it's pretty widespread out
¶ Misconceptions About 401k and HSA Contributions
there . And so the biggest one we've had here lately is people thinking that they're meeting their max on their 401k by matching their employer match , which is great . We love an employer match .
It's great to make sure you're maximizing that benefit , and that's always your baseline is you really want to meet that employer match , but that's not the maximum you can contribute to a 401k .
And so that's been the crazy thing here lately that we're seeing a lot of people come in with is they're like yeah , I max out my 401k and you're like great , that's phenomenal , we love that .
And then we get to the design meeting when we're actually looking at the plan , and they're like I don't contribute that much and we're like okay , like let's go back then , and they're like , yeah , I match the employer match and we're like , okay , so you can actually contribute 22,500 for the 2023 year and then if you're over 50 , you can contribute an additional
7,500 , you know , bringing that up to 30,000 a year . So it is a great benefit to have and we love to see those employer matches , but that's not the max you can contribute .
Yeah , I've seen that too over the years . Is they they max it out and you always have to ask like a clarifying question . But you know there are a lot of people who do actually max it out , so you kind of go through a string of those and you think that you're on the same page .
But sometimes with income , you know someone making just starting out making 50,000 a year , probably not maxing out their 401k at 22,500 .
But you never know .
Okay , that's a . That's a good . Another good public service announcement yes , you can put more in than the match percentage . I have seen a few 401k plans that limit you to 50% of your income , but most of them do not . You can put in as much as you want to as much money as you have in your in your paycheck . No , definitely up into the max .
Yes , yes . So definitely a great benefit there to make sure that we're , you know , encouraging our clients to contribute as much as they can to that benefit .
Okay , what's next ?
So next one is really going into your HSA , so another thing that employers are really on top of , and so that can not only just be used for your current medical expenses , but that's also a great retirement tool as well , and so that's one of those things where you actually have a maximum to contribute there of the 3850 if you're an individual or the 7750 if
you're with a family and contributing , and so that's a great spot to really be putting away retirement savings , because we're just seeing healthcare expenses go skyrocket through the roof , so as those continue to increase , we really want to see clients use that more of a tool for retirement .
So the myth here is that if you have an HSA and you're contributing to it , you have to use that money . I guess they get confused , probably , with FSAs factual spending accounts which are more focused on , like PPO's or HMO's . So the idea is , if you have plenty of cashflow , you would pay for that out of pocket .
You allow the HSA to build it's kind of like a Roth for healthcare . So if its , building and then , once you hit retirement , you can use that HSA money towards your Medicare premiums .
Yes , yes , which is a great tool to have , especially .
I mean I think we have it right now projecting out , and what we've seen with our Moneyguide Pro software and just the statistics here lately is healthcare is growing at a four and a half percent on average a year for cost , and so that's just a major expense for anyone to be taking on if you're doing privatized healthcare and retirement .
Yeah , actually , with a new model update inside our software . I think it's like 5.3 now . I saw that yesterday . So yeah , it's kind of running away from you . It's almost as bad as education it is yes yeah . And for 20 year olds people in their 20s when you do planning for them , you know they're they're healthcare expense in the future is horrendous .
It's a problem that has to get solved , but right now , as planners , all we can do is just plan for the worst and hopefully that becomes spending money instead of medical money .
Right , exactly , exactly .
Okay .
And so our next thing talking about high expenses is renting is throwing your money away . As we all know , renting is going through the roof here lately .
That's interesting comment , so explain please .
Yes . So a lot of people feel like , and it's out there , and I've even been guilty of this thought of myself at different points of that renting, if you're renting , you're not building equity and so you're just throwing your money away .
There's no benefit to renting , and at the end of the day , especially right here and now , for 20 somethings or even 30 somethings that are really living in this renting environment , and it's really a struggle to get into a home ownership here lately , especially now with the interest rates being so high , it is something that it can feel like renting , throwing your
money away , and that you're just kind of not building up your own equity .
You're just giving it to , you know , the next person , and they're getting to get rich off of your rent , and so I think that's where people get kind of stuck in that rent cycle of oh no , I'm stuck renting , but in reality , if that's the season of life you're in , then that's a great benefit , and to think you're not having those overhead household expenses ,
that so many people like don't even factor in when they're buying a house .
¶ Renting vs Buying
I don't think any , any young person probably does . We've had some conversations with some older people that are trying to buy way too much house , for what they need . But you know , you figure , you know , a refrigerator goes out today that's like $3,500 . And I guess if one goes out in your apartment you're still replacing it .
But roof , lawn care , caring for the house , exactly . It's like if you , you know , at my house I have not , they're not so good citing , but it's fine as long as you have it cleaned and caulked every year . Gotcha right , most people wouldn't do that .
And so their house , the , the siding , deteriorates , and then they have to spend $50,000 to reside their entire entire house . Those are things that people don't think about . So I can see that . I mean I would have a hard time .
Maybe this is the age difference between you and me , but I think I would have a hard time renting now , partially because I want to make sure that I have homes that are paid off by the time I retire . So it is a point at some which , at some time , you want to make that leap .
Exactly .
But what your point is ? Is that what you're thinking ? That people would change jobs , they wouldn't stay in the same location , or why ? Why is it better to rent now than it is to buy ?
Yes . So I think right now you're seeing a lot of people are doing a different lifestyle .
I think , especially in the 25 to 30 somethings , you're seeing a lot of people that are either working from home part of the time , and so they're traveling a lot , or it's even that they're even kind of doing the digital nomad lifestyle a little bit , or it's one of those things , too , where people are doing , I think , loyalty is no longer as rewarded as it
used to be in the workforce , and so I think you're seeing a lot of people that are jumping positions at different points , and so they're no longer staying in one place long , and I think that's part of you know , social media , I think too , is the grass always seems greener somewhere else , you know , and so I think that's where you kind of have that , where
a lot of people that are working at corporate firms or those kinds of things are like well , you know , I've been here two years , I'm going to go get my pay bump and move on somewhere else , and so I think that's where you have this almost unsettling spot where people aren't really settling down yet , and so I think if you're not in that settling down part of
your lifestyle . Yet then renting can be a great opportunity for you to just kind of keep living life and not have to take on those additional expenses , so that you know when your you know , HVAC unit goes out , that's not on you , yeah , that's on someone else . Or , if the roof needs a repair , then you just call maintenance and they fix it for you .
Or it's even if you're trying to , I think , save . I think that that can be a great space to also kind of help . If you're doing renting cause I think the big thing is is where you're seeing these huge skyrocketing rent prices really aren't in a majority of areas .
I mean , that's your New York , that's your San Francisco , that's your , like London , UK those are the places where you're really seeing these astronomical rent , and that's just because they don't have the housing for it anymore .
And so I think that's where , if you're living your day to day life in a normal city like Marietta, Georgia , you're , you're really not struggling with that renting cost as much .
Okay , I think I might be able to buy that a little bit . I think what it take away is , I think , for our older listeners , if your grandkids are renting don't be ashamed . Yes , exactly , it's a little . It's a little different time now . Yes , Because you know the down payment on a house now is going to be at least $50,000 . Oh , definitely .
And I know like and you're probably going to have to , that you're going to have to move pretty far north away from your job . Yes , yeah .
And I know like it's very different , especially when I'm just even talking to my parents or grandparents . They're like , yeah , I bought a house as soon as I graduated high school . And it's like how did you buy a house ?
Right .
You know . So it definitely is a different world in a different time . I know if you look at the statistics on housing prices , which is a whole other conversation , it's astronomical compared to the growth in wages . So definitely different ballgame than it used to be .
Yeah , that's part of the thing I think about like legacy planning for families . So for families or ultra high net worth families is , you know , that's another great place to have like seed money for the next generation . It could be seen as an entitlement , possibly , but it's , you know .
When you think about families that have excess capital , so they have enough , plenty for them , and maybe they have brothers or sisters that have plenty for them and they basically form like their own bank , so they have this pool of money that's put in equally by the family members and you can borrow from things like that , right .
Exactly .
So that's another reason to keep building wealth and look for ways to help the next generation with it .
¶ Rental Properties and Retirement Expenses
Yes , and while we're on renting , a huge thing that's come up in our client meetings is that rental properties are passive income , that you can just buy a rental property .
Yeah .
And all of a sudden , you're going to be rich .
We're never going to have to work .
Yes , in a way .
Yes , it's kind of a sub point , I guess I think more so but that's another debunking .
I guess that has to take place in our client meetings is helping them understand that rental properties are great and they are a great way to diversify your portfolio , but it is something that they're not purely passive income .
Like a lot of things make it seem . No , well , so you know there's the . There's the rental that you just buy and you put someone rents it from you the full time , and they sign a one year or two year lease , right .
And then there's the vacation rentals , which require more work , but theoretically you could drive more revenue from the property and be able to use it yourself . But yes , what people don't take into account there is you usually get a loan so you can get a mortgage . You buy the house and then you rent it out .
Well , it's cash free income , and CNBC is really guilty of this too . They talk about oh , this young person built this , you know one million dollar company and drives one million revenue . Never tell you what the net is . You can be moving a million dollars worth of product , but what are that product costs of manufacturing ? They never cover any of that .
But the see why you put money down . You buy the house and you depreciate that house over 29 and a half years . So the good part is you have the depreciable value of the home . So that means any income you get probably is not going to overcome the depreciation in most cases .
So it's really tax free income , but then that income has to turn back around to pay for the note . So the interest becomes deductible . So it really ends up being a loss . But most people in this situation are not going to be able to claim the loss anywhere . The loss just goes back to the basis of the home . The value of the home hopefully increases .
So that's really what it's a long game . So the value of the home goes up . Someone else is paying the mortgage . It goes down . But you don't just buy a house and then you start collecting rent . Now we do have a few clients who have done that and they paid two million dollars for a beautiful beach home and paid cash and now it's it's .
It rents positive cash flow . But that's typically not how most people do it . But if you're in your late thirties , early forties , that's really the time to start doing it , because you can get . You know they have this long runway that by the time you hit retirement , that all that should be paid off .
So it's not that it's a bad idea , but when something breaks or you know . Exactly . It's , it's , it's work . It's work especially , you know , making sure that the home home for vacation , make sure the home is cleaned and ready to go for the next person . Not that I'm cleaning it . But you have to coordinate people . And what if they don't show up ?
Then what are you going to do ? Yes , right , so you're you kind of turn into a hotel or some sort for the short term rentals and then long term rentals ? I just worry that are they really caring for my home ? Or , if they leave , was , what am I going to find ? If they stop paying ? That's a whole process now .
That's very different than it was maybe 10 years ago . But yeah , it's not a walk in the park , but it's not a bad idea . But you have to set your expectations , and I have . I have worked with counsel , you very , very young people who think I'm just going to buy a bunch of rental properties . Okay , you can do that , but it's , it's not .
You're not working a full-time job and doing that at the same time most likely .
Exactly . When you own 10 of them .
No , it becomes its own job at that point . And so unless you're hiring , I guess , one of those management companies , then it helps . But then you're cutting into your bottom line .
Oh , as I say , you're giving up 30 to 40% of your revenue , gross revenue , which is even worse , for someone else to manage the property . Now you can get away with that in , I think , larger properties that are renting out for 12 , 13,000 , 15,000 a week , but the smaller properties , it's harder because you have higher fixed costs that go along with that .
Where there's fixed cost , and a larger home , that has a bigger rental rate , it's , it's not as noticeable on the bottom line , but yeah , I hear that all the time .
Yes , which hopefully , when people are buying those houses and wanting to do rentals , the best long game I feel like , in my opinion , would be to get a house somewhere that is where you potentially want to like live in retirement , if you're wanting to do a move cause , then it's fully paid for , and then you sell your house where you're currently living with
your job and then move down to your beach house .
Or or even think about this , what if ? If you were a young person and you're renting in the city where you worked , then when you bought your first house , you actually buy the vacation rental as your first house and you rent that out , so you're paying that mortgage but , someone else is paying it .
Yeah , so you want to have like a first time home buyer loan on it too . Is that well , you got
to convince them that you're going to live there . That's true never mind that didn't work . But you might be able to swing it , just don't tell the real estate agent or or the closing people and you might be able to swing that , I don't know , but yeah , so it that , yeah , that's a lot of , that's a lot of good advice there .
Yes . And then , speaking of retirement , I think our last little note here is that your expenses decrease in retirement .
Yeah , I think it just depends . I'd say that we have a lot of clients . You say , well , we have clients all across the spectrum . We have people that they didn't have 250,000 a year the sky's falling . And we have very nice people that live on about 35 to 40,000 year . They're as happy as can be , and so it just depends on what your lifestyle is .
Obviously , I think when you're not going back and forth to work , you're not being as tempted to make purchases or buy things that that you , you , you do spend less in retirement , but for people who were , you know , gotta keep moving .
Yes .
Or have grandkids that they're spending more time with . Yeah , it definitely goes back up , or stays the same , at least .
Yes , no , and I think that's what we're seeing with a lot of clients when they come in . It's a lot of getting the realistic , thought process on what your expenses are in retirement . So it's a lot of . We've had some clients lately that came in and they're like we can live on 2,500 to 3,000 a month .
And you're like , okay , no , you make you know 250,000 , like let's , let's be honest , that would not work .
Or sometimes people think what do I need ? And they only calculate their utilities . Exactly yes , and some basic basic food . They don't ever . For some reason they don't price in the lifestyle stuff .
Yes , and that's the part , the lifestyle part , as I believe what really goes up in retirement is that you're you know , hopefully you're you know getting to take full advantage of your go-go years if you want to , and , that's where a lot of our clients are wanting to do travel , or , you know , go and see the grandkids if they live far away and just those
kinds of things . Or even , you know , get more involved in the community , and then that takes some of their money as well or adds an additional expense to their lifestyle .
So definitely something there of just making sure you're having the realistic mindset , because , while your expenses probably do decrease in retirement and we aren't necessarily debunking this myth , it is something that , it's likely that your lifestyle expenses are going up .
Yeah , yeah . Well , there's a saying that you have your go-go years , your slow go years and your no-go years . So it's going to definitely change .
And then sometimes in our planning what we can do is give a larger travel budget at the beginning and then , we , we back that off because you're probably not moving around as much , you know , when you're 75 or 80 , necessarily , so we can plan for that in the in the cash flow of the of the plan .
But yeah , I think it's honing in to what is it you're going to be doing and what is the real cost of that ? And there are some people acknowledging that . There are some people who their whole thing is to sit and do nothing .
You know , yes , hey , I you know , after you've worked , that long you know that would be , that'd be nice .
Maybe a year of that all right , sitting and doing nothing , I feel like a lot of our pilot families , tend to be more stationary , especially the pilots themselves , because they've been moving around so much , surprisingly , actually . Okay .
Well , those are our five things that you and Missy team , Missy and Mikaela have seen through our planning processes , over the last , over the last year . We have some other things you can listen to . Episode 170 . How much money do you need to retire ? It's a good episode for that . We also have some videos out there on our YouTube channel .
It's called a Wiser Retirement . Is financial planning different than wealth management ? And then our annuities a good retirement strategy ? Those are also available , in our show notes here . Thanks for listening to today's episode .
If you're interested in learning more about wiser wealth management or want to schedule a consultation and meet with one of our fiduciary financial advisors , you can do so by going to wiserinvestorcom or you can click the link in the episode notes . Thanks , Michaela .
Thank you .
See you next time .
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