Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

Hey, hey, hey, welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I’m Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

Please subscribe if you’re not subscribed already, so that you get new episodes when they drop each and every Thursday. And if you visit our website, you can sign up for our weekly newsletter where we send a link to the week’s episode, as well as provide some handy dandy show notes and things like that. It’s pretty great, so you should do that. But today we are talking about 11, not 10 …

Josh Robb:

Nice even 10 number.

Austin Wilson:

…not nine, not five…

Josh Robb:

Aw man, you’re starting to stress me out with this.

Austin Wilson:

…11, the thesis.

Josh Robb:

It’s like 10 with a bonus.

Austin Wilson:

It’s 10 with a bonus.

Josh Robb:

I’m going to look at that. In my brain, that’s what it is.

Austin Wilson:

11 pieces of popular financial advice that’s actually quite terrible.

Josh Robb:

This kind of comes to that like TikTok Finance, where people are on there that are not financial experts giving advice that is just horrible.

 

[1:16] – Bad Advice #1: Carrying a Balance to Improve Credit

Austin Wilson:

Number one, carry a balance on your credit card to improve your credit score. That’s terrible.

Josh Robb:

Horrible advice.

Austin Wilson:

Don’t do that. Stop. Why is this terrible? There’s a handful of reasons. So first of all, it does not have a positive effect on your credit score to carry a balance, instead, you’re being penalized in the form of?

Josh Robb:

Interest.

Austin Wilson:

High interest. Credit card interest rates are like 29, 30…

Josh Robb:

30%.

Austin Wilson:

… 35%, and you’re paying a 12th of that every month on the outstanding balance that’s not paid off. Don’t do that. That’s terrible advice. It does not help your credit score, but how can you help your credit score? That’d be by paying on time. So pay your full balance every single month on or before the due date. Just set it up to be automatic.

Josh Robb:

So the difference is utilizing credit, not maintaining or keeping that credit, and that’s where you build your credit score is, let’s say you have a credit card with a balance of $10,000, part of your credit score is based on how much of your allocated debt are you using, so that’s utilization. So if you have a $10,000 max limit and you use a thousand of it, that factors into the credit score.

The other thing is utilizing it, but then paying it off on time payments, keeping a balance does not help you at all. The fact that you utilize the credit and we’re actually diligent and good at paying it off is a good thing, and the credit rewards you for that.

Austin Wilson:

But not utilizing too much. Anything in the 50% plus range of utilized credit is actually going to hurt your credit score. So you actually want a lot of available credit and using a relatively low amount. You’re lower risk that way. So that’s number one. It’s popular. I hear that all the time. Yeah, don’t do that. Please don’t do that.

 

[3:05] – Bad Advice #2: Borrowing from Your 401k

Austin Wilson:

Number two, another piece of terrible financial advice is to borrow from your 401k. That is a bad thing almost all the time. And a couple reasons here is number one, it really further sets you back from your retirement goals, because when you pull that money out, that money’s not at work, it’s not compounding, it’s not growing. So that’s really losing out on earnings, which actually could have a detrimental impact to your retirement plan. It can push back retirement up to years. So that’s not good.

And another thing that some people don’t think about is that when you are doing this borrowing from your 401k, to pay it back, you’re using already taxed income to pay back a pre-tax account, and that’s a double whammy.

Josh Robb:

Yep. Because then you’re essentially double taxing that money because when you eventually pull it out.

Austin Wilson:

When you eventually pull it out. So that is not a good idea in nearly every situation ever. Would you agree?

Josh Robb:

Yes. The only times it makes more sense is if instead of pulling the money out, you do a 401K loan. That is where there’s the value there. The one time that you may consider this is if you need money, your options are take money out of your 401K, or borrow from the 401k.

Austin Wilson:

True.

Josh Robb:

Because a 401k loan saves you the early withdrawal penalty and you get to put it back into the 401k. So even though you’re taxed on it, you do get it back into your retirement savings with some interest, and so that’s where you would utilize that.

Austin Wilson:

But really that should be like a last resort. You should look elsewhere, and you should hopefully have emergency funds and things set up so you would not have to do that. It’s definitely not worth borrowing from your 401K to pay for kids college and things like that. We would totally say don’t do that.

 

[4:52] – Bad Advice #3: Cashing Out Your 401k for Job Changes

Austin Wilson:

Number three, another piece of financial advice that’s very popular is to cash out your 401k when you change jobs. Don’t do that. That’s also really dumb for a number of reasons. One of those is penalties and taxes. So if you were to just close the account, take the money and you want get it in cash before age 59 and a half, you are going to incur a 10% early withdrawal penalty in addition to income taxes on the amount withdrawn, and this is really going to decrease the amount of money you’re actually going to end up getting from it, which makes it a whole lot less worth it anyway.

Josh Robb:

Now I have a story. I actually did this a while ago.

Austin Wilson:

Less than a while, Josh.

Josh Robb:

You know what? I don’t regret it. I ended up getting a little bit of money paid to me because I was a head coach for a sports team and …

Austin Wilson:

Big major league sports team.

Josh Robb:

… then I stopped, and they said, because you have this balance, but it’s below our minimum, we have to send it to you. Now, I could have done this rollover and put it all in, I got the check and I feel like it was $70. It was about a hundred or less, something like that. And I looked at that and I said, you know what? The hassle of doing this whole thing, because at that point I didn’t have a rollover IRA to put it into. I said, you know what? I’m just going to pay $7 tax and then my wife and we can go out to dinner or something.

Austin Wilson:

That’s a cheap dinner.

Josh Robb:

Yeah. Even after tax and everything …

Austin Wilson:

Although that was a long time ago.

Josh Robb:

Yeah, it was. So long story short, there are those weird caveats where you’re like, is it worth the hassle for all this?

Austin Wilson:

It’s immaterial.

Josh Robb:

But yes, you’re right. Especially if you’d worked at a place for a while, the end result is, you’re right that that money is going to not only be taxed and potentially move you to a higher tax bracket, but you’re going to be penalized in additional tax on top of that. So yeah, do the effort, move it into an IRA, or if you have a new 401k, most of them will accept it. Keep it in that tax deferred savings as long as you can.

Austin Wilson:

Another couple reasons why that’s a bad idea is that you lose potential growth. Similar to things like borrowing from your 401k, if you pull it out while your money’s not growing. So that’s another bad thing, which can really put you behind on your long-term, like most Americans, as we’ve talked about many times, way behind on where they should be financially in terms of saving for retirement anyway. This would only hurt that further. Another one is that you have a limited time to reinvest, especially due to the amount, income limits and stuff like that, and age limits on pre-tax investing, you can’t do that forever. Especially if you can only do it when you’re working. And so if you’re doing that, you really have run into limits there. And that’s just not a good idea.

Any other closing thoughts on that one, Josh?

Josh Robb:

Always remember to go back and think about, did I leave money anywhere? It’s surprising how many people, because they changed jobs and maybe you worked a little bit in college and didn’t realize some money got saved for you potentially. There’s a lot of money that’s left at old retirement plans that people forget about. So, I always suggest you do something with that when you leave. That way you don’t have six different 401ks floating around out there that as they change companies, it gets harder to remember and get access to the money that’s really yours.

Austin Wilson:

There are services that will do that for you.

Josh Robb:

Yes.

Austin Wilson:

They’re not free, by the way.

Josh Robb:

No.

Austin Wilson:

But that will look into all …

Josh Robb:

Try to find it.

Austin Wilson:

Yeah. Well, essentially, you’ll put in your social security number, and they’ll make sure that you know where everything’s at. Again, not free. So best to just keep track of it on your own.

Josh Robb:

Or just move it as you go. Keep it with you.

 

[8:16] – Bad Advice #4: Saying YOLO with Your Money 

Austin Wilson:

Yep. Number four, another piece of financial advice that is terrible and popular and bad. Don’t do it. YOLO.

Josh Robb:

YOLO. How’s that bad advice?

Austin Wilson:

You only live once is a very popular piece of financial advice, but you know what it does? It often leads to irresponsible spending and under saving. And this is really engaging in unmoderated spending, which really can have consequences way down the road. This can leave a person in a bad financial position by taking their financial cushion away, because hey, I have this opportunity to buy this house, this car, this vacation, this whatever. It’s a great opportunity.

Josh Robb:

YOLO.

Austin Wilson:

You only live once. YOLO. I’m just going to pull out money of savings, or ooh, I could pull out money off my retirement savings. That’s even worse, and really leave you in a poor financial situation there. It can also cause you to take on high interest debt to pay for things. Like, Hey, YOLO, I’m going to go buy this new big TV I don’t need. Put it on a credit card. You end up paying multiples of that over time. So things like that, very, very unfortunate, but very popular for people to justify the additional and excessive spending over what would really be required there.

So it’s really just important to manage your money better. Focus on goals instead of focusing on living in the here and now. It takes a lot of planning to be good at finance.

Josh Robb:

I will say the caveat to that is it’s a true statement. You only live once.

Austin Wilson:

It is true.

Josh Robb:

And you don’t know how long that life is going to be.

Austin Wilson:

That’s true.

Josh Robb:

And I always talk about moderation is a balance between enjoyment now and planning to protect your future self. So it’s a balance. You do need a YOLO, but at a moderate level.

Austin Wilson:

You do YOLO. You’re going to regard …

Josh Robb:

Then it’s like MOLO, like moderately only live once.

Austin Wilson:

Moderately only live once. And that’s where just keeping your lifestyle in check and not being so prone to thinking you have to live this extravagant, lavish lifestyle. I think of places that feed on this. Think places like Vegas, Miami. I’ve been to Miami a handful of times now, and this is the YOLO capital of the East Coast.

Josh Robb:

They say YOLO, eat a Cuban sandwich.

Austin Wilson:

Oh, so delicious. There’s so much good food down there. But anyway, these touristy places that are popular to visit and vacation, they are built on YOLO. YOLO is marketing for them.

Josh Robb:

That’s where it is. Skydiving.

Austin Wilson:

I want to do that. My wife says I can’t right now because we have two little girls. Oh, I want to do that so bad.

Josh Robb:

I was listening to a good podcast on that.

Austin Wilson:

Really not that unsafe.

Josh Robb:

No, no, they talked about the rates and how much they’ve come down with all the redundancies they build into it.

Austin Wilson:

Absolutely.

Josh Robb:

Interesting.

Austin Wilson:

We should go sometime.

Josh Robb:

Ah, we’ll see.

Austin Wilson:

We’ll see. You’re not on board.

Josh Robb:

I’ve done the one where you’re in that air tunnel tube thing. Sky’s the owner, whatever they call it.

Austin Wilson:

You’re six feet off of the ground, but you feel like you’re falling.

Josh Robb:

It’s really cool. And so I could see the appeal of that free fall concept.

Austin Wilson:

The older I’ve gotten, so I like adventure. I like adrenaline, because I ride motorcycles. I know that’s kind of just the way I am. But I even rollercoaster sometimes. They’re not that exciting for me because I think they’re kind of boring. So really what it takes to get my stomach to get that feeling is the drops, the drop ones. Those are the ones that’ll really get you going woo.

Josh Robb:

I’ll tell you what, if you want some adrenaline, walk through a kid’s room in pitch black after they’re playing with Legos.

Austin Wilson:

Oh, I know.

Josh Robb:

I’ll tell you what.

Austin Wilson:

No joke.

Josh Robb:

You want some fear in your life? Every step, who knows what’s going to happen. That’s where it’s at.

Austin Wilson:

Living on the edge right there.

Josh Robb:

That’s it. That’s where it’s at.

 

[11:50] – Bad Advice #5: Putting All Your Money in a Savings Account 

Austin Wilson:

All right, number five. Terrible popular financial advice, just put your money in a savings account.

Josh Robb:

So don’t save.

Austin Wilson:

Yeah, that’s right.

Josh Robb:

That’s what you’re saying.

Austin Wilson:

No, that’s not what we’re saying. We’re talking about the vehicle. And it’s really dependent on what kind of savings we’re talking about. But if you’re thinking long-term savings, a savings account is a truly terrible place to put your money.

Josh Robb:

Cash historically does not provide the growth you need for goal meeting. It barely keeps up with inflation …

Austin Wilson:

If that.

Josh Robb:

… when it’s low. When you have higher inflation, there’s just no way. Historically, cash does not do well with inflation.

Austin Wilson:

Even today, you can get relatively decent savings rates. If you go to an online savings account.

Josh Robb:

Or even if you look at short term treasuries if you layered those.

Austin Wilson:

Yeah, but you’re still only getting four and change. 4% in change is not likely to give you the long-term returns that you’re going to need. And that’s only right now. That’s going to go down.

Josh Robb:

So right now, 4% savings, 5% inflation, you’re still 1% behind. So there’s no growth, you’re actually losing money.

Austin Wilson:

So what is our recommendation for long-term savings? It’s all about the vehicle, but you should be investing in some sort of account that allows you to hold things like equities. Equities over the long term are the way to not have purchasing power erosion. So savings accounts are very important for short term savings and good vehicles for that. And we would argue, especially ones that gave you some interest, so like an online savings account. Savings account on a bank. Very, very short term, because you don’t earn squat on those. But that’s kind of a popular advice that I would say not so good at all.

 

[13:23] – Bad Advice #6: Retirement Planning Can Wait 

Austin Wilson:

Number six, retirement planning can wait. That’s popular. So if you’re in your twenties or you’re in your thirties, but especially to people in your twenties, you’re often told you don’t need to worry about that right now. Retirement’s 40 years away. Why are you even thinking about it right now? Just spend your money and do all the stuff you want to do now and then start getting responsible in your thirties. Why is that terrible advice, Josh?

Josh Robb:

Well, there’s a thing called compound interest.

Austin Wilson:

Ooh, I love it.

Josh Robb:

Which is, if I have a dollar and then it doubles to $2, and then that doubles, it will go to $4, and then four to eight, because it’s taking not only your starting amount, but what’s there and compounding or growing off of that. And that’s an extreme example because you don’t usually double your money in those increments. But the concept there, compound interest is the growth compounds and grows exponentially …

Austin Wilson:

It’s growth on the growth.

Josh Robb:

… because there’s more on the growth. So, here’s a quick thing. If someone was to put $6,000 into a contribution, whatever it is, at age 20, and they would do that all the way until age 65, just as a retirement thing, growing 8%, they would have…

Austin Wilson:

Hypothetical the long-term average.

Josh Robb:

Just an average return, 8%. $6,000 a year until age 65. At 20, they’d have $2.5 million. If they waited till 30, guess how much they would have? Same amount, but they just waited 10 years, 1 million. They lose 1.5 million because they waited 10 years.

Austin Wilson:

So why is that? That’s because the dollars that you put to work the furthest back are the ones that compound the most, are the ones that work the hardest. My hypothetical example in my head that I always think of is that assuming an average return, if you look at 30 years at like eight-ish percent, $1 in 30 years at 8% per year is worth about $10. So, you 10-fold a dollar over 30 years with 8% return. So, every dollar you put away today is going to be worth $10 in 30 years. It’s even more if it’s over 40 years. So that’s why investing in your twenties is not just something you should do, it’s something you need to do.

Josh Robb:

Right. Absolutely.

Austin Wilson:

So, Josh, we’re going to take a little bit of a break.

Josh Robb:

Yes. There was a movie that came out a while back called Taken. Got Liam Nielsen in it. Talking about daughter gets kidnapped. He has special skills.

Austin Wilson:

Not good. I have two daughters; this is not a good movie to watch.

Josh Robb:

So, I feel like this would be a phone call he would make. Ready? To the person who stole my glasses, I promise I will find you. I have contacts.

Austin Wilson:

I have contacts. I like it. I mean, I only ever saw the second Taken.

Josh Robb:

I think there was three.

Austin Wilson:

Oh, wow. People get taken a lot. Repeats.

Josh Robb:

Yeah. Where are you going? Stay home.

 

[16:07] – Bad Advice #7: Follow Your Passion 

Austin Wilson:

I know, it’s not very common. Let’s not think of is. All right, number seven. And this is controversial probably. Popular financial advice that’s truly terrible, is to follow your passion. As in terms of your career. So if your passion is basket weaving, that’s great, but it’s unlikely you’re going to be able to make a good living at basket weaving today. It rarely does pay the bills and it can put you in a competitive and crowded field. So really what is good advice for making a living to financially support a family or just do okay, is to focus on your strengths that you have, your skills that you have and maximizing your earnings potential. So also, this kind of correlates with don’t go to school for a stupid degree that isn’t going to probably have high earnings potential. That’s going to set you behind financially.

Now, that does not mean there is no point and no place in your life for your passions, because you can be really passionate about something and not work in that field every day. Do it on the side, do it as a side hustle, do things like that. But it’s definitely not worth going into debt for something that does not have high earnings potential. And it’s okay to have a job that you just do, to do well financially, and you can enjoy your passion separately.

Josh Robb:

And that’s where I think you and I sometimes differ in that I think following your passions is okay, as long as you’re open to finding a career that fits in there. So for instance, if basket weaving is your passion, you say, what careers can I utilize that type of action that also pay the bills? And that’s really what you’re saying, but I don’t think you need to just find a job that pays the bills and then basket weave on the side, I think you could say, well, if that’s the thing, what else is there out there that is close to that passion that may cause me similar enjoyment?

Austin Wilson:

Laundry basket manufacturing.

Josh Robb:

But that’s crafting with your hands. So maybe there are some things you could do as a career that say I get to build things, I get to create things, but I also earn a living that’s enough to make me happy with that.

Austin Wilson:

The examples that come to mind that I think are challenging is the people that go to a four-year degree, maybe plus Masters, at a private school to have a degree that pays 30 or $40,000 in something after school. That is not a financially wise move. So that’s what I would caution against.

Josh Robb:

For sure. And I agree with you in that once you find out what that career is, make sure that your cost to enter that career, whether it’s education or whatever, are less than what you’re actually going to earn in there. or you’ll be able to pay that off and still have a living.

 

[18:52] – Bad Advice #8: You NEED to Own Your Own Home 

Austin Wilson:

Yes. Number eight, you need to own your own home.

Josh Robb:

Own somebody else’s home.

Austin Wilson:

Home ownership is a great thing. We own our homes. It’s a good thing to do for general people. However, is it for everyone? I don’t necessarily think so. And I think that there are actually a lot of financially savvy people who don’t ever own a home. And because they think of things like the hidden costs, the expenses and burdens that come along with property ownership. So things that you might not think of, like the common thinking might be, and I remember thinking this when I was 22 or 23, was, well, all this rent, I’m just throwing down the drain. I’m not building any equity. I’m not owning anything at the end of it. The good side of that is you don’t have to pay things like property taxes because the landlord or the owner of that property is paying it.

Homeowner’s insurance ain’t cheap. That’s one. You might have renter’s insurance, but that’s a lot less than owning the home itself. All the maintenance and utilities and stuff that you probably don’t have to pay as much of, if any of if you’re renting, is definitely a piece of that. So a lot of people actually may be better off renting. And especially if you’re looking at something where you’re only going to be in X, Y, Z place for a few years, it’s probably worthwhile to just consider renting and not worrying about that.

Josh Robb:

Yeah, you’re right. That’s one of the main ones when we’re talking with people as an advisor is to say, freedom and flexibility are a factor in homeownership. When you own a home, you can’t just pack up and leave and walk away, you have an obligation. And that can impact you if you do try to do that. Whereas if you are renting, when your lease is up, your choice, what do you want to do? And you could go anywhere you want, you could stay. The other thing too is, for some people, and we actually had this conversation just recently with a client, they were a little bit older in age and the maintenance and upkeep were becoming a problem, as well as the need to potentially move into maybe some sort of assisted living.

Well, if they needed to locate to another state for that to be closer to family, renting became a lot more appealing in that you didn’t have to maintain the home, the costs weren’t there. You also had flexibility if one or both of them had to go into a care facility, you weren’t stuck maintaining or trying to sell a property as well as taking care of that. There was a lot of reasons where that, and the third one is, there are actually cities where it’s cheaper to rent than to own a home, and so just from a budget standpoint, sometimes that makes more sense.

Austin Wilson:

I definitely think that bookends make a lot of sense from renting. So early on where you don’t know where you’re going to settle down forever and all, you don’t know how long you’re going to be, what job you’re going to be in, all that stuff, renting makes most sense there, I think. I did it myself.

Josh Robb:

Yeah, I did too.

Austin Wilson:

The other end, I think it also starts to make more sense as well in that situation as well where, hey, you don’t know what the future might look like, you don’t want to keep up with a property and all this stuff.

Josh Robb:

Or if the home has no sentimental value and no one in your family would even want it, sell it, utilize the equity for yourself instead of passing on, because they’re going to sell it too, and it gives you more freedom and flexibility.

Austin Wilson:

I think in the middle, it makes a lot of sense to own your home. If you’re going to be somewhere for a while and you can afford it financially, putting money down and getting a nice reasonable mortgage and stuff like that, you can make a home. And I think that’s a great thing. And I think that’s also something we’ve done, but I definitely think it’s not for everyone. It’s not for everyone.

 

[22:21] – Bad Advice #9: Stocks Are Too Risky to Invest In 

Austin Wilson:

Number nine, popular financial advice that’s terrible is that stocks are risky.

Josh Robb:

Risky.

Austin Wilson:

Now, you have to define your term of risk, but really everyone, not everyone, but a lot of people who think, I’ve never Invested in the stock market, that just goes up and down all the time, good way to lose some money because it’s really risky, don’t really understand long-term thinking about stocks. Looking at stocks in the short term, you would think that. But looking at stocks over the long term, they’ve actually provided a higher rate of return than other asset classes, especially like bonds, especially like cash. And we have to keep thinking that over a longer term, the stock market has always, always, always, always recovered from downturns.

Now there are downturns, but over the long term, stocks have been rewarded with recovery over time. So investors that are holding for long periods are also going to see positive returns, historically speaking. Now, how does this risk get mitigated? Well, that’s all about diversification. You have to diversify, get broad exposures to different asset classes, different industries.

Josh Robb:

That would be good ticker for some sort of highly …

Austin Wilson:

YOLO? I think it is one.

Josh Robb:

Is it?

Austin Wilson:

I think YOLO is a ticker. Look that up.

Josh Robb:

I’m going to look that up right now.

Austin Wilson:

But I think YOLO is a ticker, but that is how you mitigate some of that risk and balance out your exposure over time. So really the thinking may be and should be that it’s actually more risky, not.

Josh Robb:

Yep, it is a cannabis ETF.

Austin Wilson:

YOLO.

Josh Robb:

No recommendation on that one, but I did look it up.

Austin Wilson:

No, but we do have a dedicated podcast episode on investing in cannabis.

Josh Robb:

Yes.

Austin Wilson:

Not a recommendation either.

Josh Robb:

Nope. But listen to it.

Austin Wilson:

Listen to it. We’ll link that in the show notes.

Josh Robb:

I do recommend you listen to it.

Austin Wilson:

I would recommend that, yes. It’s interesting, anyway. So going back to my point is it’s actually more risky not to own stocks than to own stocks in terms of…

Josh Robb:

Like you said, it’s defining risk.

Austin Wilson:

Exactly. Because it’s all about long-term savings potential, return potential, and purchasing power. So we’ve actually had some really high inflation over the last couple years, but inflation historically has really made cash and bonds even worth a lot less over time, especially cash, because you buy a lot less as that purchasing power goes away. Meaning that those instruments, cash and bonds, are going to have lower returns, if not negative in real terms, than equities. So equities have really proven to be the only main asset class that can outpace inflation over a long period.

So there’s a lot of opportunity cost then for not owning them, because you’re just going to have less and less purchasing power over time with all of your assets. So, there’s actually more risk, in my opinion, over the long term, not the short term, but over the long term, for not holding stocks than there is for holding stocks.

Josh Robb:

And that’s the question, what risk are you most worried about? And then that’s how you define what I need to use. If your risk is short-term volatility, then yes, stocks are risky. If your risk is not having enough money to cover your living expenses, then stocks are not the risky asset in that case, historically. So you’re right, it’s just defining what risk are you actually worried about.

 

[25:34] – Bad Advice #10: You Need Whole-Life Insurance 

Austin Wilson:

Number 10, and this will be where Josh would love me to stop because it’s a nice round even number, but it’s not. Number 10, terrible financial advice that’s very popular is that everyone needs whole life insurance. And there’s a couple of reasons for this, but generally speaking, can you just take 30 seconds and talk about what whole life is.

Josh Robb:

So whole life policy, I’ll define it by explaining what the alternative is to that. Because there’s different things, there’s universal life, all these different ones, but I’m going to kind of drop it in one bucket of whole life meaning for your whole life you have insurance, hence the term whole life.

Austin Wilson:

Life insurance.

Josh Robb:

And then the opposite is term insurance, meaning for only a set term you have insurance. So the difference between whole life and term is the length that it’s available or valid. And so whole life insurance means you pay a premium for as long as you want and as long as you pay that premium, that insurance policy is in effect. A term insurance, while you do have to pay the premium to keep it in effect, we’ll have an end date. And so that’s the difference between those two. And so having said that, saying that everybody needs whole life, you’re right, is that that’s a bad, bad statement to make. Because there are some people, depending on their situation, for instance, most retirees, because they’re retired, if they did a good job of financial planning, their assets are enough to keep them through the rest of their life. That’s why they’re retired because they don’t need it anymore. They’re in a sense, self-insuring for the rest of their needs. So whole life or term life in general are no longer relevant.

Now, some do keep a small policy just to cashflow, funeral expenses, things like that. That’s a whole nother story. But you’re right, whole life tends to be a little more expensive, tends to carry on additional pieces to it that is more than just a pure life insurance policy.

Austin Wilson:

So yeah, there are really three main reasons why it might not be for everyone and why if someone tells you need it, I would take that with a major grain of salt. Number one, like you mentioned, it’s expensive. First of all, because of its term, meaning none, it’s forever, it’s your life, it is more expensive than term. But also there are a lot of hidden expenses and fees often in those contracts, because it’s what it is, it’s a contract. Another reason is they’re very complex. So you really have to speak like legalese to kind of understand what the coverage is, how to get it if you needed it. And another one is very limited flexibility. So permanent policies might not fit those who only need coverage for a limited period of time. And changing that might be very difficult or even very expensive. So those are kind of three main reasons. It might not be for everyone. So generally speaking, and we’re not putting a blanket over it, but we’re saying almost always it makes most sense for, especially younger people, to look at term policies instead of whole life.

Josh Robb:

Yeah, whole life, those type of policies do have some estate planning reasons as well as for very high net worth people, there are some planning and some savings things you can do with those. But for, especially young people starting out, cost-wise, term insurance is a whole lot cheaper and sometimes budget-wise makes the most sense. So not a big blanket, but in general, most people, especially young people starting out, a term policy is probably your best bang for your buck.

 

[28:53] – Bad Advice #11: Take the Guaranteed Return or Pension 

Austin Wilson:

And 11th, and final piece…

Josh Robb:

Oh man, the bonus one.

Austin Wilson:

… of terrible financial advice that’s actually quite popular, is to take the guaranteed return or take the pension is kind of what you’d be thinking around retirement age. And this is a very popular thing, you work all these years, you either have a massive 401K or a pension built up, and at the end when you retire, they give you an option. You can either take, A, a lump sum, take your full amount, and take it with you and do what you want. We’re going to get to that. Or B, take the annuity or the pension where you get a guaranteed payout with maybe adjustments here or there depending on what’s going on in the markets or inflation or whatever, and then you’re just going to get that all the way through the end of your life, or depending on how you set it up, maybe through your spouse’s life, and all of those things.

So two options there, lump sum versus annuity, or things like that. So why are we saying that it’s not necessarily always great financial advice to take the pension? That really comes down to a couple things as well. Number one, control. When you have that annuity, that pension and it’s payout over a long period of time, that’s it. You have really no control about how that’s invested, or maybe you could get higher returns also through putting it in different asset classes that are not offered through that. Well, if you take that as a lump sum, you can work with a financial advisor or do it yourself, but we’d recommend with an advisor, to choose the right asset allocation for you that can actually probably do better for you in a lot of cases. There are fees in it, it’s very expensive oftentimes to keep that annuity too, where it’s not free to work with an advisor, but often can be a value-added benefit there.

Another one is annuity payments might not even keep up with inflation. You have to look into the contract, because again, it’s a contract as well, and see what sort of adjustments can be made over time. So, you’re losing purchasing power if you’re not keeping up with inflation in a lot of instances. So again, with that control and flexibility can set an asset class allocation to allow you to hopefully achieve returns to outpace inflation.

And then finally, piece of why that might not be the best financial advice is just flexibility. When you have a lump sum and you roll that into an IRA, you have a lot of flexibility about when you want to take it, how you want to take it, what it’s Invested in, and obviously there are things like RMDs to worry about. But, generally speaking, you have a lot more flexibility that can allow you to respond to unexpected financial situations that you wouldn’t necessarily be able to if you’re just stuck with the monthly payment for the rest of your life. So those are a couple of reasons why taking the pension, taking the annuity, is not necessarily always great financial advice. Anything to add to that, Josh.

Josh Robb:

It really comes down to what options do you have, and which one best fits your needs for your situation. We run an analysis and we compare those every time. There’s not default, oh yes, this is what you need. There are quite a few where we say the pension is your best choice, because maybe they do have a cost-of-living adjustment or they’re tied to inflation or something like that. Or just the payout number is a lot higher than the lump sum and you could really never catch back up. But then there’s other times where that payout amount is static and there’s a long timeframe where you’re right, inflation is going to eat away, or the lump sum is just a nice benefit, or they don’t need the cash flow.

But yeah, don’t just default to, oh, this is a pension, so I take the payout. No, run the analysis, say what do I need and what are the options that provide that. For sure.

Austin Wilson:

So that was 11 pieces of financial advice that are very popular and also not very good. Hope you enjoyed them today. Thanks for listening. As a reminder, if you had someone who maybe had heard some of this financial advice, go ahead and send them this episode and hopefully we can help point them in the right direction. As always subscribe, leave us a review on Apple Podcasts or Spotify. Be sure to follow us on social media. We’re active on Instagram, Twitter, and Facebook. Otherwise, until next Thursday, have a great week.

Josh Robb:

All right, talk to you later.

Austin Wilson:

Thanks. Bye.

 

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management.

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.