Transcript
Speaker: Did you know that some of the highest paid professionals in America are also some of the most behind when it comes to financial investments? That's not good!
Speaker: Welcome to the Future of Finance podcast, where we break down investment strategies to help you live a better financial future. I'm your host, Marissa Wood, financial advisor and one of the owners of Union Financial Services. And today's conversation is all about how to catch up if you get started investing later in life without taking too much risk.
Speaker: But before we dive into the episode, I'd ask you to please subscribe, whether you're watching on YouTube or listening on your favorite podcasting app. It really does help us. So today we're joined by 25-year chartered financial consultant and CEO of FOSS Financial Services, Daniel Foss.
Speaker: Now, Daniel is an expert in advanced retirement planning and tax efficient planning for high income professionals. So, Dan, thank you so much for being here today. Tell us a little bit about yourself, where your office is located, how you got started. Well, thank you for having me, Marissa. I'm looking forward to doing this podcast together with you. Well, out on the other side of the country in California, from you in Florida,
Speaker: um and place affectionately known as Silicon Valley. We've had a lot of people that make a lot of money fast in this. There's a different cultural mindset than other parts of the country.
Speaker: Whether you're going to get rich on real estate or you work for Facebook or Apple or somebody, there's a lot of well-heeled individuals that are doing well and professionally and successfully in their own careers.
Speaker: But it's not just the tech market, the ones that we really see where the impact is, and it goes across the country, are small business owners. And we have a lot of focus working in the physicians market. So this is a group as well that finds themselves challenged in trying to catch up, have a shorter, you could say, shorter runway to accumulate money for retirement. Absolutely. Because the career paths they chose. Now, in your experience, who are the people that are most likely to look successful on paper but quietly feel behind with their investments?
Speaker: Well, you could probably swing a dead cat around this neighborhood and hit them everywhere. So one of the biggest challenges, and I think it's not just unique to where we are, is as people get more successful in their careers, their their spending patterns match that success level.
Speaker: And so what's refreshing is when you sit down with somebody that might be making two or three X of what they need and their feet are still on the ground under what their burn rate is and what they're doing for themselves, that's one of the biggest challenges. disadvantages to people that start to become successful. They're like, my time has come, I've earned this, I deserve this.
Speaker: But then they look up over the horizon and they think, oh my God, I don't have not done enough or anything towards retirement. Whether you're building up a physician's know medical practice or you're parlaying all your chips back into your own personal private company.
Speaker: But once you get that thing going and it becomes like a money generating machine, Now you got to think about how do we take these bundles of money that I'm getting every year and and diversify these and allocate them in a way that's going to not only help me now to enjoy life because ah you deserve it, but to feather your nest for the future.
Speaker: So true. So how does someone making $300,000, $400,000, $500,000 year end up behind with their retirement savings? It's not uncommon because of what I mentioned before, just keeping up with the Joneses. that You feel that your time has come, you've you've worked your tail off, you know, let's upgrade the car, let's upgrade the house, let's upgrade the furniture.
Speaker: But that mindset can become a trap for you. And so there's different types of people that you find out when you do financial planning services for individuals. They're spenders and they're savers. And there's a thing called legacy makers, but what we're really focused on is are you a spender or a saver? And so if you get in that spending mindset, and that's a cultural thing for the United States, it's not unique if you're a dentist, you know, that can that can be your Achilles heel. You're not realizing that you'd be perfectly fined, you know, after taxes living on $20,000, $30,000 a month, but you're making a half a million and you're spending, you know, 105% of what you're making.
Speaker: And so trying to control, yourself or understand, identify who you are and people that are savers, uh, that tends to be less of an issue, but a lot of times you don't find savers, um, that are small business owners. They wouldn't do it.
Speaker: They tend to take a different career path, uh, things that are more predictable. It's not like you're gambling as a business owner. You know, they take a lot of risks that people don't realize, but, um, everything they're doing is really focused and emphasized around building a business, but then their lifestyle catches up with them and it keeps going up and up.
Speaker: Yeah. We call that lifestyle creep, right? Yeah. And it's ah it's it makes sense. I mean, you're you're sitting in your neighborhood with your other you know everybody else around you and you want to kind of feel and and and look and behave like they are.
Speaker: But it doesn't mean you necessarily have to have the the newest car the and the nicest, you know, the bling bling in the life that people are looking for. That's really a thing that happens in the Bay Area. you We live in the town of Teslas here. you know that's ah It's definitely a status symbol.
Speaker: But, you know, the car I drive, a little Acura, gets me to where I need to go. sort of So I think, of course, lifestyle is one of the reasons and they're spending too much. That could be one of the reasons. but Something that's not really in the control of these high earners, such as doctors, lawyers, dentists, business owners even, is they're starting out their career sometimes with loads of student debt.
Speaker: And so you start your career with this mountain of debt that can be overwhelming and take a lot of your surplus on a monthly basis to pay down.
Speaker: And then you might not be at that peak year of earning yet. Yeah. If you follow a typical career path, almost like a roadmap, um, you described that very accurately.
Speaker: You're working your tail off as a student. Uh, you finish up your residency, you know somewhere between 28, maybe 32 years old. They congratulate you, slap you on the back, tell you get going, do your thing. But then you realize that you're, if you're fortunate enough, family may have paid for your student loans, but there's a lot of doctors out there that are, you know, huge, huge student loan debt. And it takes them a number of years, six, eight, 10 years to pay off that debt.
Speaker: All of a sudden they're hitting their late 30s or early 40s and they're popping out on the other side saying, okay, now I'm free, But then they turn around and they only have a 20 year time frame to accumulate money. They're not starting at 25, they're starting at late 30s or early 40s.
Speaker: So um once they recover from the student loan side, we just talked about that lifestyle creep. So you've got a couple things that are opposing forces to what you want to do for yourself in the future.
Speaker: ah So it's important to understand also that as you look at that, what you can do to to catch up, how can you accelerate in that shorter timeframe to accumulate money. And a lot of things you'll find, especially in the investment arena, which is valid, is they'll have you put, you know,
Speaker: large six-figure balances into qualified retirement plans. That's a phenomenal tool to get in there, but what also happens is a lot of times people end up overweighting in one type of tax situation. They are losing what's called tax diversification.
Speaker: as far as putting money away. Tell me about that tax diversification. When we had spoke previously, you said there's three buckets for tax classifications. And most people are not aware of these three different buckets. Tell me what these buckets are and give me a couple examples of what types of accounts are in each bucket.
Speaker: Yeah, when you look at from a high level view, a lot of times people think about investment diversification, they understand that they need to have not just one stock, but multiple stocks to diversify. And that's a common understanding for people, but what they fail miss a lot of times is there's two other types of diversification. There's asset diversification, and what you're bringing up is tax diversification.
Speaker: So the tax diversification, again, because of the way the United States is set up and because of the way pension plans went away, you know, our grandparents had those, but you don't only find those in like, if you're a fireman or you work for the federal government or the city or something. so The majority of Americans have their retirement account assets in what are called tax deductible or tax deferred type of accounts.
Speaker: And so there are ones that are more, you have tax free like Roths. That's one of the people gravitate towards right away. And that's one of the hardest types of money to come by in America is tax free income.
Speaker: ah But there's other avenues, other conduits you can do. That's an area, that again, that we help clients to navigate. So Roths have limitations on how much you can put in there. but just like these pension plans I described that have huge annual contributions you could put in there, you can do this as well with after-tax dollars. And some people might gasp and say, what do you mean with after-tax dollars? Where are all these, you know, how do I get tax diversification if I'm not deducting my money on the front end?
Speaker: And so when you get into bed with the government, you need to understand that they provide incentives for you because they want people to save for retirement. And so one of the ways they can do that when the pensions went away is they created through legislature and through Congress or tax incentives.
Speaker: The first one being tax deductibility for contributions in the retirement plan. That was very attractive to a lot of Americans. What you're doing is you're getting into a contract with them where you have an unknown tax liability in the future with these accounts.
Speaker: But outside of just these tax deductible plans, you you have tax free and tax advantage. Some people think, what is a tax advantage plan? Well, one of the most obvious ones, and it's not a plan by the way, but as an asset is real estate. It's got unique tax advantages to it.
Speaker: Of course, you're giving up the growth potential that you would have in stocks, but it provides its own set of benefits. So if you can navigate taxes for an individual, whether you're in a 30%, 50% tax bracket,
Speaker: Chasing returns is important, 8%, 9% returns. But when you can manage taxes at 30 or 50 cents on dollar, that's a huge boon or a huge win to an individual. That huge. And so if you think of the three buckets, you have a tax deferred, taxable, and tax advantage.
Speaker: OK, so tax deferred would be 401k IRA, those accounts that you're funding with money you've never paid taxes on yet. It's saving you the taxes now, but then when you go to withdraw it, it will be taxable at a unknown future rate.
Speaker: Taxable. is where you're paying taxes at the end of every year. You get a 1099 from the interest you earned on your brokerage account or your CD or your high yield savings. So you're paying a little over time.
Speaker: And then the tax free slash tax advantaged would be completely tax free, including all the interest earned in the future. Roth index universal life insurance, health savings account. There's a couple. um And so to have each of those buckets is something that not only high earners, but everyone should have.
Speaker: Most definitely. And we help clients to do what um we look at both a risk allocation and a tax allocation. So we kind of cross section these. and And it's interesting when you look when you do this is has like basically nine quadrants and you'll a lot of times it's very common. So in the top left, it'll be you know, tax deferred taxable accounts and all the retirement accounts. And then the bottom right quadrant would be the safest. That would be like the residence or real estate. And there's a huge gap in between.
Speaker: There's, you know, it's, ah there's, there's no tax diversification. A lot of times there's no asset diversification. And it's because of the way that we're trained that, you know, lot of people 401k, that is like the conduit. That's the vehicle.
Speaker: But I had a client talking, a client, somebody actually, we're at the beach yesterday, but asking about loading up money now into a Roth as they're approaching retirement and trying to help them navigate that the difference between taxable money and tax-free, but you're gonna take a bigger hit on the nose. And what helped to resonate for this individual is a lot of thinking like a farmer.
Speaker: When you're talking about tax-free, a lot of times what you're doing is you're paying taxes on the seed and not the harvest. Whereas your 401k, you're funding that, funding it, funding it. And when the time comes to pick that fruit and to spend that money, 100% of it's taxable. It doesn't mean one's horrible, or ones you know you but what you'll find is a lot of people will be in that that second bucket.
Speaker: Every dollar they've got is all taxable. That's a great point. And it's something that I'm sure you see every day as well as I do. It's that the client comes in and and all of their money is qualified or taxable in retirement. And we're putting together an income plan to sustain them throughout their retirement. And I get that question nine times out of 10. Wait, I have to pay taxes on this?
Speaker: Well, yeah, you've never paid taxes on it. It's grown. The government let you defer all those taxes all those years. But now when you go to withdrawal, yes, you do have to pay taxes on it. And unfortunately, none of us like that. But you can't have it both ways unless you plan properly. Then maybe you can.
Speaker: There are some mistakes that we want to talk about. Of course, we have a lot of strategies to help catch up when you're a late income earner. You got started a little bit later, whether it's from debt or you just haven't hit the peak of your earnings until you're in your 40s or 50s. And there's the right strategies that we can put into place with asset diversification, tax diversification. But what are some of the mistakes that we need to avoid that you see some high income earners making? What are some common mistakes you see?
Speaker: I guess, well, as we mentioned, is is not understanding what their lifestyle needs are, their burn rate. um You know, that you have essential needs, you've got your needs and your wants, I guess.
Speaker: You know what mean? and And understanding what that ah is can be a great benefit to you as you're looking at financial planning for yourself. But some of the things that are missing for higher net worth people is a lot of times they are isolated, believe it or not. You know, you see them driving that great car they're doing, you know, they're they're a business owner, whatever they're doing.
Speaker: But they they build up walls probably more so than middle America. They're approached by a lot of different advisors. Everybody's got a different mouse trap. They help them to catch a you know more mice or whatever they're trying to do.
Speaker: But it's it it you need to surround yourself with a board of advisors. It's really important. Just as if you're a business, it's you know like a you know Fortune company or something. You have to have these systems and processes in place.
Speaker: So it's not just Marissa. It's not just me. You need to have an attorney. You need to have a CPA. you know Marissa on the investment side, helping out with risk management, myself for estate planning and business planning. So it takes a village to raise a financial plan.
Speaker: One of the things that came up, and I you know i was in the in the incubator of the dot-com. I was in Silicon Valley. And one of the things that came out through that was one-stop shopping, where people claim that if you come through, we've got everything you could possibly need. But just like a within a medical community, you have brain surgeons, spine surgeons, internists, whatever, and they all have their own specialty. So you want to get that group of people, that type of people around you.
Speaker: And they all speak a little bit different language. An attorney is going to be transactional. You know, they're going to help you set up a business, do your do your trust, but they're not going to come back and help. But that's an important aspect of it. That is so true. Having having the right team, no matter how successful that individual is in their own industry or in their own career, having the right team to help them manage the other aspects of their life, because oftentimes business owners and these high earning professionals, they're busy.
Speaker: very busy. Their time is extremely valuable. And so why waste the time doing something you're not an expert in when you can bring on a true expert to work in the background so you can focus on what you're good at?
Speaker: And you don't know that area. So a lot of times it can sound like just commotion and noise. But if you can picture yourself, whether you're a small business owner or or a physician or whatever may be, you're fighting your battles every day. You know, you're in business, you gotta take care of your customers, your patients, whatever it is. You know, you got your overheads, you got your staff, you got all these different things that are at play when you're doing that. but If you can picture it's like, it's so you have someone, and I like to think of myself or Marisa and other people that that you that you have on your team, is you're you're pulling your sword out like Caesar and you're going to go fight your battle, but you have someone like us in the background with, say, a Gatling machine gun. They're like...
Speaker: Before you step out on this path that you're trying to achieve, we have some tools and some things that might help you to be more successful. And not that you want a machine gun everybody down, but it's more, if it gives you get a lot more done with a machine gun than you can with with a single sword.
Speaker: And so just raising your head up and looking over the horizon and ah and embracing those advisors will actually put you in a stronger position. And you may they may say things that are painful or uncomfortable,
Speaker: That's growth. That's not always easy. But they're going to stop you as a financial conscience and say, a lot of times, a good advisor, their power's in the question. It's not what they're showing you, but they're saying, hey, slow down. This needs to be discussed.
Speaker: Yeah, the accountability, that's huge. um You know, I think a lot of misconceptions about starting later is that you need to take more risk.
Speaker: It's almost it reminds me of when someone goes to the casino and They played a couple losing hands and now, oh my gosh, I need to bet it all. I need to go all in because I need to get back to where I started and start making money and it's almost the end of the night when that's probably not the best strategy because if then you bet everything and you go all in and you lose it, then you lost it all. So when it comes to starting a little bit later in life, would you say it's more important to take more risk or to increase your savings rate? What would be first off? Everybody's got that friend at the casino. Yeah. Oh, yeah. Tell those stories.
Speaker: um It is about trying to get growth, but it it has more to do with optimizing assets. So one of the things within the financial services arena, especially if you're talking about growing money, is people will talk about getting into a better performing asset. Something that's getting going to get you higher returns.
Speaker: But it's not always about higher returns. When you do that, a lot of times you have to take on more risk in order to achieve that. But if you can look at your own balance sheet, your own area that you're working within and look at how you can be more efficient,
Speaker: that can often lead to more success than chasing a return. You can get to the same result with less risk than you initially thought you needed to if we're using the proper vehicle, have the proper tax strategy in place, um and have the right comprehensive plan.
Speaker: Give me an example for our listeners of what a few asset classes or a few different investment vehicles are that they might not have exposure to right now. The ones that people know right out of the gates are their investment accounts or retirement accounts.
Speaker: But then you have other asset classes they where you start to look for guarantees or safety. ah You don't get that in the stock market. You get those at banks and insurance companies.
Speaker: So banks and insurance companies offer a different, completely different set of asset classes. CDs, fixed indexed annuities from insurance companies.
Speaker: Life insurance is ah is a phenomenal asset class to build and compound wealth. it's A lot lot of people liken it to a super Roth IRA, but it's not always right for everybody. A lot of times life insurance missold or misunderstood.
Speaker: Individuals like to get the maximum amount of insurance possible for the lowest cost possible, but that's that's in incorrect thinking. You want to, believe it or not, get the lowest amount of insurance with the maximum premium going to that amount, and you're optimizing the tax efficiency with that asset.
Speaker: Yes, because it all comes out tax-free. And so that's a huge one, actually, for high-income earners that might not be able to fund a Roth IRA. I mean, of course, there's the backdoor Roth strategy, but there is an income threshold that a lot of these high earners have passed. And so overfunding these cash value life insurance policies can replace the Roth IRA and actually do a whole lot better in some instances because it has that legacy component.
Speaker: Yeah, and then within the Fortune 1000, and that's not my market, by the way, I work with small business owners and doctors, you know, smaller practices. But within that environment, um when you do what's called deferred compensation, so these individuals are making huge incomes and they're maxing out their 401ks, what's next? You know, here's some stock options. Okay, what's next? I need to put more money away.
Speaker: And the two avenues, the two paths you can go down are investment accounts, or life insurance. So if you look at, and those are all publicly available information because they're Fortune 1000, they're traded companies. You look in there under the hood and you'll see what the executives, they have some form of either investment, additional investment opportunities, just like their 401k and it's wrapped in deferred comp or so forth, or life insurance.
Speaker: and And those are the only two vehicles as investments or insurance within that arena for deferred comp were super successful high income earners. And so a lot of people disconnect because they think of insurance as a you know, I'm going to take care of my loved ones, but you can do a thing. What's called investment grade life insurance, where you're literally.
Speaker: bumping your head on the rules the IRS says that how much can you put into these contracts and still call it quote unquote life insurance take those tax advantages along with you. Yeah, it's true life insurance. It's not death insurance at that point. Yeah, we have but we have a unique program when you talk about catch-up provisions within a retirement. How can you do that?
Speaker: um So there's a thing called premium financing. It's not unique to life insurance. It's been used forever. You know, it's financing... literally started in the United States during the automotive industry.
Speaker: And so what happened is, you know, cars were for the ultra wealthy in the U.S. s when they started making cars. But the manufacturers like, it it'd be really cool if we can get everybody to get in a car. How can we do this?
Speaker: And within the automotive industry, they came up with this concept of financing. You know, if you give me, it's hard to think of the past dollars, but if you give me 50 bucks down and 50 bucks a month, you can drive this car away.
Speaker: So a lot of people became automobile owners. So the next wave of financing that they're talking about, you'll find this in Wall Street, you'll find it in Forbes, Fortune magazine, is is financing for retirement. So you're getting leverage involved from a bank. And this is a really cool tool they have nowadays. And they used to be only for really high net worth individuals or large, large institutional funds, you know like trust funds and so forth. But now they can bring this down more on a retail basis so that you're able to, say,
Speaker: put $100 and you would get some financing leverage that might put in $50. So if you can think about that, now you're compounding interest on a larger number, so the growth is exponential.
Speaker: but That's an amazing strategy, especially for those that need to catch up and get the maximum amount funded into these, whether it be investment accounts, retirement accounts, in a short amount of time, if you can leverage and use the power of leverage to earn interest and compound, then maybe we can get you to that retirement goal in a shorter amount of time. So there are these strategies out there that exist and Whether you're high earner or you just started later or you funded your own business and now you're 45 and saying, uh-oh, I forgot about retirement. There are strategies out there, and that's what we're just trying to shed light on, that we can get you there as long as we get started and we stay disciplined and put the right vehicles in place. It is possible.
Speaker: So if you have specific questions that you'd like answered or you want to schedule a complimentary consultation, all you have to do is go to our website, union-financial.com. Click schedule a meeting. It'll take you right to our personal calendar where you can book a phone call, Zoom call, or in-person meeting. Always complimentary.
Speaker: And if you know someone that has a great career, but they might need a little bit more guidance with their investments, please share this episode with them. There's so many people that are high earners but not rich yet, and we can help them get to that goal.
Speaker: And Dan, thank you so much again for coming on the show. It's always a privilege to share ideas with other successful advisors all over the country. You're doing great work out there, Marissa. Keep it up.
Speaker: Thank you, Dan. And for everyone watching, thank you all for tuning in to another episode of the Future of Finance podcast. I'm your host, Marissa Wood. We look forward to helping you live a better financial future.
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