WTM Retirement Blind Spots Part 2 of 3

[Applause] [Music] Hey everyone, welcome to another edition of We're Talking Money. I'm Phil Clark with OmniStar Financial Group. Looking forward to spending a little bit of time with you sharing some more of our 10 most common mistakes or blind spots when it comes to retirement mistakes or retirement planning. We got a new face on set today, Mr. Bryce said. Mr. Bryce, welcome to the show.

Thanks Phil, happy to be here. Looking forward to talking to you all.

Hey, we're gonna have a good time today. Stay tuned, got a lot to learn.

Wealth can be measured in many ways. As it grows, life can quickly become complex, creating the need for more focused planning. Welcome to We're Talking Money with OmniStar Financial Group. OmniStar's been helping clients achieve financial success for more than 20 years in a client-centric and stress-free environment, with a reputation built on a long track record of working with people who want to grow and protect their assets. OmniStar illuminates the blind spots, provides actionable strategies to help you achieve what's most important. This is where you can count on straightforward and unbiased advice from a team of professionals that are passionate about your success.

All right, welcome to We're Talking Money again. Looking forward to sharing some more of our most common mistakes or blind spots, ten of them to be exact. We covered three last week. We're gonna hit number four, five and six today, and then we'll follow up next week with one more show and we'll bring it to the finish line. Let's get started.

Tonight we're going to start off point number four, or mistake number four, and that's accumulating credit card debt. Now, I know a lot of you are thinking, well, that's not a big deal for me, I pay it off at the end of every month. Well, a lot of people say that, but occasionally folks will get used to carrying the balance a little bit. Listen, credit card debt doesn't have to be bad, but in general it is if you're carrying a balance. It is instant gratification's best friend. Why do I say that? Well, you can buy things, it doesn't feel painful at all to go swipe that card, you take home the goods and you're happy. Well, the instant gratification is complete, but now comes the hard part. Either you got to pay it off at the end of the month, or if things get a little tight, or maybe another expense came up, you got to delay it a little bit. So now all of a sudden you're carrying a balance at an average of 10 percent on credit cards, with rates reaching as much as 30 percent. That purchase can get expensive really quickly.

Now, these credit card issuers, they're not bad people, they're just doing what they do. They have the right to run a business, they have the right to charge you those rates, and if you're willing to pay them, they are happy to take them. Now, here's why this is such a big problem. When you buy those things, whatever that purchase is, on credit and you carry that balance for more than a month, you are now paying much more for that set of goods or that item than you ordinarily would pay. So not only are you financing the tax on that item, huge mistake, you're also now paying huge interest, that's a mistake, and you're doing it with after-tax dollars. Bryce, that gets really, really costly.

Now I'm going to flip a little bit here. I'm going to flip to a positive way to use a credit card. Bryce has a little different take on credit cards. He believes everything that I just said, but he also knows how to use a credit card to his advantage. So Bryce, tell us why it's not all bad to use a credit card. And by the way, the reason for my comments about why it's so bad is it takes away the consumer's ability to save for retirement, which is why it's such a big mistake, but it doesn't have to be. So Bryce, why is it okay to use a credit card?

Yeah, I think in certain scenarios using a credit card responsibly is perfectly okay. Lots of companies will offer you incentives or cash back rewards for swiping and then when you pay for those purchases, so. And sometimes they'll give you zero interest rate introduction, or introductory rate, and that can be pretty attractive as long as you get it paid off before that rate spikes.

Exactly. They give you enough time to get used to it, and then before you know it, it's up to 10 or 12 or 15.

That's right.

That's how they sucker you in.

Yeah, for sure. But if you do use the credit card responsibly and pay it off every month, then you are actually the credit card company's worst customer then, because you're leveraging their rewards and their incentives to your advantage.

Good news is that you still get the points, you still got all the benefits as long as you're using it. But if you're disciplined enough to pay it off every month, you can collect some nice points, perks, and still not pay all that interest. So that is a pretty darn good way to do it. In fact, we teach a lot of our clients to do that very thing. And so you can take trips, you can buy goods and merchandise, and at least in this case you've allowed yourself to stay disciplined and you benefit. And best of all, all that extra interest, all that expensive interest, is not going out of your pocket with after-tax dollars. It can go into your retirement savings programs, which will make you more successful. Any more we want to talk about on that topic, Bryce?

I think you briefly just touched on it, but a much better use of those funds, instead of using them to pay off credit cards at on the balance that you're carrying, is to then reallocate those funds to a pre-tax retirement plan contribution.

Absolutely. The blind spot here is easy to miss in the early years, since credit cards are easy to get and they allow you to live beyond your means, at least temporarily. You know, Bryce, before we move on to the next mistake, in America credit card debt, it has always been a major issue. And now it, since the 2008 Great Recession, it slowed for a little while, for a couple of years, but by around 2011, 2012 we saw it starting to rise, and it started getting more and more and more, and now we're over a trillion dollars. It's a real problem. But get disciplined, don't make that mistake, and you will be better off when it comes to being prepared for retirement.

Let's go to mistake number five: counting on an inheritance. Bryce, this is a big deal, because over the next 10 to 15 years the authorities, if you will, or the experts, are predicting trillions of dollars being transitioned or transferred from one generation to the next. Folks, this is so important, because as this transition happens from the boomers, so the baby boomers beginning to transition all this wealth, it's a tremendous amount of money, trillions of dollars. As it starts coming down, it can make you think, well, gosh, I don't need to save for retirement, I've got this huge windfall coming my way.

Here's the thing that you really need to remember. First, that money belongs to your mom and dad. It belongs to them, it's not yours, and they can spend that money any way they want. Don't get caught up in the idea that your retirement is already funded, because if lifestyle changes, if their health changes, if things happen that cause them to have significant drawdown of those assets, your inheritance may not look or feel quite the way you were expecting.

A better plan is prepare for yourself. That's our responsibility. Everyone has this responsibility. Save, prepared, do the right things, understand how much you need for retirement and plan for that. If you do those things, you will be set at retirement. Failing to do those things, well, it's just simply not being a prudent person. But do those things, and then if the windfall happens, you have a tremendous amount of flexibility. You can do great things with the money and even live a better retirement if you choose. But don't get stuck with this idea or this notion that inheritances will fix this gap, if you will. Make sure that you cover your own gap. So big, big blind spot, counting on that inheritance.

Bryce, you've seen this with clients. I mean, counting on an inheritance, gosh, it's a big deal. We're talking about that a lot with clients these days, particularly with tax regulations, tax laws about to change potentially. This is a big, big blind spot. But even though we see lots of wealth about to transfer, we also see clients who are very wealthy spending through a lot of their money because they have new motivations: things like charitable planning, things like wanting to travel more, things like gifting while they're living. Lots of things are, or maybe taking their attention off of just worrying about an inheritance. And we even have some saying, you know what, I'm not worried about my kids. If something's left, great; if not, so be it. But my wife and I, or my husband and I, want to live great while we're alive. So we see that a lot. Yeah, what are your thoughts around that, and did we miss anything?

Yeah, I think it's important to note that there are so many variables to planning on an inheritance, right? There's a long-term care event that could occur that would drastically draw down one's assets, and those prices are going up every year, much faster than inflation, I might add.

Significantly, yeah.

And so keeping all of those in mind, all of the variables that one cannot necessarily predict. Certainly we do this every day in our line of work, but it's very tough to predict, and we model it to the best of our ability. And then also, one piece is think about the lessons that you can teach your children, or another generation, of planning for your retirement. So doing that in a responsible manner could impact someone's life much greater on the flip side of counting on your parents' hard work.

It's a great point. So we might have listeners who are the boomers right now, and so maybe you're thinking about your retirement planning, and maybe you're in retirement, maybe you're thinking about the inheritance now. Well, governance is a huge thing. We'll do a show on governance. But just teaching your children what this money's all about, what it means to you, and how you believe it should be used, those are valuable lessons. Right now, get those in while you can. It's very important. It will absolutely change how your children receive the money and then how they handle the money. So very, very important.

Bryce, we got one more mistake to cover on this show, and that is number six. Folks, this one is probably about as perfectly timed as we could get: that's buying more house than you can afford. Now, on the surface this one's hard to recognize, because right now interest rates are low and banks are lending. They are lending like nobody's business, more than ever, and so it's easy to get caught up in that trap. But listen, you've heard the old saying that your eyes are bigger than your stomach. We've all heard it. Well, that's how people are buying homes these days. Interest rates are low, they can afford more house because the payment's lower, but that may not necessarily be a good thing.

If you can buy up to this limit, if you will, of a payment, and yes, you get more house, once you do that you've restricted your cash flow. And if things get just a little bit dicey in your personal situation, you all of a sudden have to make decisions. Well, you can't easily sell the house necessarily, so you got to keep making that payment. This means that your retirement funds will suffer yet again. Everything that we talk about, it's a mistake because it generally takes you away from being able to plan for retirement.

So, Bryce, right now we've got low interest rate, people are buying larger, more expensive homes. Great, we're happy for you and proud that you can do it. But banks are not approving financing based on your ability to retire, or based on the amount that you're saving for retirement. Banks aren't asking that question. Bryce, you just bought another home in the last few months. Did your banker ask you about retirement savings and if you're going to be able to retire?

Nope. Not a concern of theirs, never came up.

Right. That's problematic, because if the banker's not telling you that, and you're not working with a financial advisor or wealth manager, you might be in this blind spot and you don't realize it. This is a major blind spot.

So why is it such a bad idea? Well, we just said it can take away from your ability. We also think it's a bad idea because if rates were to start to rise, and all of a sudden the economy settles a little bit, you could be upside down, and with rates going up, potentially you'd be hard-pressed to get that home refinanced. Could end up maybe a little bit like what we saw back in 0708. Those were pretty difficult times.

So a better decision from our perspective, and Bryce, you may want to add to this, but maybe buying something that is really more about what you can afford, that's appropriate for you and your needs. But before you do it, understand what you will need at retirement. Know what that number is, and then understand what you need to save to get there. And if you know those things, much easier for you to make the decision on what kind of a home you should buy, or what kind of home you can really afford, and be able to continue funding for your retirement.

Yeah, right.

Yeah, and I

think it's important not to misinterpret here. A house does have some tax advantages, right, but not nearly as good as the tax advantages of a 401k plan or an IRA.

That's so true. And then also, if we take that a step further, getting money to fund your retirement out of the house would require you selling the house.

That's a very important point. It's one that people miss so often. They don't really think about that. In fact, we have someone that we've worked with recently, and they're putting a lot into a home, more than we recommended, well above what we recommended. And their thought was, well, when it's time to retire, I'll sell the home, get my equity, and I'll retire. But for the next 15 years, that person will get used to living in that home. They're going to love it. It is a beautiful setting, and they're not going to want to sell that home. And so then what do you do?

But if you're strapped and you're not allowing your money to work for you, chances are retirement could be a little more difficult. And if you're forced to turn your home equity into retirement income, that means that the buyers have the advantage and you, the seller, may not. You don't want to have to sell your home to create equity, or rather to create a retirement account or fund.

Yeah, that just doesn't make sense. It's a bit counterintuitive, and rethink that. To Bryce's point, much better to be a little more prudent with your money. Buy the right kind of home. Get a nicer home if that's what you want, but make sure that you're not buying so much home with the excitement and euphoria of this low interest rate environment that you end up with a payment that is restrictive. In other words, you don't have enough left over to truly fund at a level that you should be funding.

So folks, that's everything for the three points tonight, numbers four, five and six. We talked about credit card accumulation: bad move, unless you do it like Bryce is doing it. And then we said counting on an inheritance: don't let that one put you in a bad position. Be prepared for the inheritance, but understand that you are responsible for filling the gap. And then lastly, in this low interest rate environment, take advantage of it, to be sure, but make sure that you understand what you should be buying and how it's going to affect your retirement savings.

So I hope you learned a lot. Bryce, thanks so much for being on the show. Looking forward to having you on more.

We had a good time.

We'll see you next week with the final mistakes in retirement planning, so we'll see you then. Take care.

Thanks for joining us on We're Talking Money. Be sure to visit us at omnistarfinancial.com, where you can learn more about how we provide value to our clients. Subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

This podcast is a publication of OmniStar Financial Group. The content is developed from sources believed to be reliable and accurate with all information. The information in this material is not intended as tax or legal advice, may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security or service provided by OmniStar. All expressions of opinion reflect that of the authors and are subject to change. Any distribution, use or copying of this podcast other than the intended recipients is prohibited.

[Music] you